Most fee-earners fail at Business Development because the typical sales process involves a combination of constant networking, fishing for introductions, and some direct marketing. This can be an exhausting and demoralising road to travel, and ultimately leaves an insecure pipeline of often small, one-off invoices – not to mention the high cost of sale and the time this takes away from other fee-earning work.
Repositioning Professional Services
However, you can avoid Business Development failure by changing tactics. The crucial tactic in transforming business development is to position yourself so that clients seek you out, rather than the other way around. This does not happen overnight, but the rewards will be worthwhile. The most important criterion in this strategy is that fellow professionals must be able to identify who your ideal clients are. We outlined five key strategies to this end in Sustainable Business Development Post-Recession.
Soliciting Referrals
Getting referrals from satisfied clients should form a key part of any professional’s business development pipeline. However, many find it difficult to hold the conversation – whether through lack of confidence or simply not finding ‘the right moment’. The timing of the conversation is important, as the perceived value of a service diminishes after the service has been delivered. Therefore, during delivery or immediately after successful completion (over lunch) are favourable times to ask for referrals.
Strategic Allies
Just as professionals can expect to achieve more by operating in a niche market, so the benefits of allying with strategic partners in niche markets can be considerable. There is, of course, the danger of relationships becoming unequal or falling by the wayside. However, when nurtured properly, strategic alliances can bring financial rewards to both sides, as well as the ‘kudos’ of introducing a trusted service provider to a key client and, of course, excellent service for the client.
Approaching Business Development in this way will bring a far lower cost of sale and will help to feed a sustainable pipeline of new instructions. Moreover, this approach will free up more time – for chargeable work; for business management; and, ultimately, for life.
Friday, 16 April 2010
Tuesday, 13 April 2010
“We Never Used To Have An Overdraft”
One of the most common complaints we hear from managing partners is ‘we never used to have an overdraft, but . . .’
In recent years, reliance on overdraft funding has become so widespread that many firms now operate on near-permanent facilities, prompting the accusation from some quarters that banks are seen as providers of ‘quasi-equity’. This dependence on bank funding is one of the (numerous) problems that has emerged from the industry’s single-minded focus on Profit per Equity Partner.
Profit is an Opinion . . .
Focusing purely on PEP has led to the booking of ever-increasing amounts of Work in Progress – which would be fine, if all WIP was billed. However, as WIP contributes to profits before the work is billed, there has been no disincentive to prevent firms from increasing WIP (often only to write it down at a later date). By this time, however, the profits have been posted – and, in many cases, distributed to the partners. Furthermore, the generation of WIP creates a tax liability to be paid. In this way, partners have been drawing on unrealised profits, and the only way to fund this and meet tax obligations has been through increased borrowings.
But Cash is a Reality
The flip side of this coin is that equity partners come to expect a certain level of drawings – especially when the firm is achieving stellar levels of profits ‘per equity partner’. The cycle is thus self-perpetuating, and this has an undermining effect on the firm’s cash flow and balance sheet (an issue to which we will return).
Our repeated mantra is that ‘What Gets Measured Gets Better.’ Until firms get off the treadmill of ever-increasing targets for PEP and learn to focus on measuring cash generation, financial management in law firms will be a continuing uphill struggle – and lenders will not become more sympathetic.
In recent years, reliance on overdraft funding has become so widespread that many firms now operate on near-permanent facilities, prompting the accusation from some quarters that banks are seen as providers of ‘quasi-equity’. This dependence on bank funding is one of the (numerous) problems that has emerged from the industry’s single-minded focus on Profit per Equity Partner.
Profit is an Opinion . . .
Focusing purely on PEP has led to the booking of ever-increasing amounts of Work in Progress – which would be fine, if all WIP was billed. However, as WIP contributes to profits before the work is billed, there has been no disincentive to prevent firms from increasing WIP (often only to write it down at a later date). By this time, however, the profits have been posted – and, in many cases, distributed to the partners. Furthermore, the generation of WIP creates a tax liability to be paid. In this way, partners have been drawing on unrealised profits, and the only way to fund this and meet tax obligations has been through increased borrowings.
But Cash is a Reality
The flip side of this coin is that equity partners come to expect a certain level of drawings – especially when the firm is achieving stellar levels of profits ‘per equity partner’. The cycle is thus self-perpetuating, and this has an undermining effect on the firm’s cash flow and balance sheet (an issue to which we will return).
Our repeated mantra is that ‘What Gets Measured Gets Better.’ Until firms get off the treadmill of ever-increasing targets for PEP and learn to focus on measuring cash generation, financial management in law firms will be a continuing uphill struggle – and lenders will not become more sympathetic.
Tuesday, 6 April 2010
“Thinly Capitalized Workers’ Cooperatives”
Back in November of last year, we wrote that the upturn would present significant difficulties for overstretched firms, in terms of working capital and funding requirements (see The Growth Imperative). As far back as May 2009, we commented that surviving the downturn would require a re-prioritisation of cash flow above profits and other traditional measures of success within the sector (see Cash is King in Recession).
So we may perhaps be forgiven for feeling a little smug on reading this piece in the Times a couple of weeks ago, which describes the huge increases in borrowing right at the top end of the market. It seems that even the top firms in the country are still shying away from tough conversations with the partners about the level of capital they have invested in the business – and that, for now, the banks are still prepared to fund firms playing at this level.
Two of the banks have been repeatedly telling us that their lending to the legal profession has increased over the last year – and we have taken that to start with a much greater use of facilities by the good risks.
What is not clear to us is whether this uptake at the top of the market potentially squeezes the amount available to others – or whether there is still plenty of lending capacity for ordinary firms.
An Alternative Approach
For many firms going back to the bank manager for yet more overdraft funding is simply not an option today. As the Times article suggests, firms in this category will find it difficult to fund growth in the recovery, and (perhaps even more pertinently) will be a wholly unattractive prospect to investors when external capital enters the market in the next couple of years. There has to be an alternative approach for the “Thinly Capitalized Workers’ Cooperatives” that make up the majority of the profession.
There is really only one viable alternative approach: become a better managed, financially stronger business.
. As we have written before, since the balance sheet must balance, reducing lock-up will reduce correspondingly the level of debt (or equity) required to fund the firm’s assets. This is no longer just a desirable approach; it is an essential one for any firm hoping to succeed in the next couple of years.
. Partners must learn to recognise that they are business owners – and must behave accordingly. Decisions must be taken by the firm’s management, in the interests of the firm as a whole. The days of partners running their own personal fiefdoms, with ‘their’ clients and ‘their’ staff, are gone in any serious business.
. Business development should be accorded the priority it deserves. Steady income streams will not come from haphazard initiatives, and staff must be given the requisite training to ensure they can manage a sustainable pipeline of regular instructions.
Taking Responsibility
This approach does not remove the necessity for increased contributions from the partners. A well-managed, financially successful business is one in which the owners (i.e. the partners) have a significant stake, and for which they take responsibility. This means that prosperous law firms can no longer afford such thin capital ratios, especially in an increasingly competitive market. It’s high time for tough conversations – as well as a tough approach to financial management and business development.
So we may perhaps be forgiven for feeling a little smug on reading this piece in the Times a couple of weeks ago, which describes the huge increases in borrowing right at the top end of the market. It seems that even the top firms in the country are still shying away from tough conversations with the partners about the level of capital they have invested in the business – and that, for now, the banks are still prepared to fund firms playing at this level.
Two of the banks have been repeatedly telling us that their lending to the legal profession has increased over the last year – and we have taken that to start with a much greater use of facilities by the good risks.
What is not clear to us is whether this uptake at the top of the market potentially squeezes the amount available to others – or whether there is still plenty of lending capacity for ordinary firms.
An Alternative Approach
For many firms going back to the bank manager for yet more overdraft funding is simply not an option today. As the Times article suggests, firms in this category will find it difficult to fund growth in the recovery, and (perhaps even more pertinently) will be a wholly unattractive prospect to investors when external capital enters the market in the next couple of years. There has to be an alternative approach for the “Thinly Capitalized Workers’ Cooperatives” that make up the majority of the profession.
There is really only one viable alternative approach: become a better managed, financially stronger business.
. As we have written before, since the balance sheet must balance, reducing lock-up will reduce correspondingly the level of debt (or equity) required to fund the firm’s assets. This is no longer just a desirable approach; it is an essential one for any firm hoping to succeed in the next couple of years.
. Partners must learn to recognise that they are business owners – and must behave accordingly. Decisions must be taken by the firm’s management, in the interests of the firm as a whole. The days of partners running their own personal fiefdoms, with ‘their’ clients and ‘their’ staff, are gone in any serious business.
. Business development should be accorded the priority it deserves. Steady income streams will not come from haphazard initiatives, and staff must be given the requisite training to ensure they can manage a sustainable pipeline of regular instructions.
Taking Responsibility
This approach does not remove the necessity for increased contributions from the partners. A well-managed, financially successful business is one in which the owners (i.e. the partners) have a significant stake, and for which they take responsibility. This means that prosperous law firms can no longer afford such thin capital ratios, especially in an increasingly competitive market. It’s high time for tough conversations – as well as a tough approach to financial management and business development.
Subscribe to:
Posts (Atom)
