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Law firm management #1: how to manage law firm costs and performance

how to manage law firm costs and performanceIn this, the first of a series of two articles covering legal business management fundamentals we shall take a look at how to manage law firm costs and performance.

As the summer holiday period approaches and business slows a little, it is an ideal time to take a hard look at the performance of your legal business to strengthen it for the future. Let’s begin with costs.

Costs.

Each year it is essential that you review all significant costs to your business. This involves analysing any growth in specific costs compared to earlier years and any new trends that have developed. In addition to this, take a look at the root causes of the increases. Are they avoidable? Can you do anything to mitigate their impact? Are they necessary?

Take a long, hard look at the activities that generate costs. This means assessing their contribution to income generation. The results of this assessment should leave you with three types of cost:

  • Essential costs.
  • Required costs which should be examined for more cost-effective alternatives.
  • Costs which have little impact on income generation and can be eliminated.

Obviously, essential costs such as office space, heating and lighting are difficult to avoid. However, it is worthwhile examining them to see if there is a more cost-effective way of managing them.

Required but non-essential costs demand a slightly different type of analysis. A large number of marketing costs fall into this category. Herein lies a great difficulty. It is easy to determine return on items such as direct mail or email campaigns. Other branding related elements such as advertising or PR are more difficult to quantify. Just be aware that if you cut branding and PR you may adversely affect response rates to more direct marketing methods. Direct and indirect marketing usually support each other.

So, what can you cut?

You can eliminate many low impact / low return costs without too much fear. Many different costs fall into this category. Temporary staff taken on during a surge in demand or additional practice management software licences bought at these peak periods are good examples.

However, the golden rule for this type of cost is to ask two simple questions:

  • What would happen if we cut this cost?
  • What would we do instead?

The first is the more important. For example, making savings by keeping staff salaries as low as possible may seem obvious. However, if this leads to higher staff turnover, you could be faced with a much larger bill for recruiting and training new people.

For a full list of business costs, take a look at this article from Chron.

Legal staff performance.

This one is always something of a pot-boiler. All businesses, let alone law firms, should review staff performance. Start with the partners as they are the costliest and their underperformance makes the biggest impact on the bottom line.

An unambiguous definition of acceptable performance levels is the starting point. This should include:

  • The key roles each team member should perform.
  • The secondary roles each team member should take on.
  • Measurable, achievable, realistic and time-scaled targets for both of the above.

Remember, if you can’t measure it, you can’t improve it.

So, what is underperformance?

how to manage law firm costs and performance

Start by asking a different question: “What are the criteria for partnership?” Oh dear, I’ve opened a real can of worms with that one! My answer is simple. Partners should be able to generate fee income, find new clients and create new revenue streams. Those are the minimum requirements. Underperformance is failure to do one or more.

Partners with fee incomes below average due to unfavourable economic conditions may be underperforming. They are not if they are putting effort into marketing, client relationship management and mentoring colleagues. Underperformers are those whose fee incomes are down and are doing nothing to correct it.

There is also another type of latent underperformance. On the surface, the partner may be generating reasonable fee income. If he or she does this by handling lower value work that would normally go to more junior solicitors, then profitability takes a hit. This is just as bad as not trying to develop new clients.

During economic downturns, all fee earning members of the team should come under scrutiny. However, let’s be blunt here. Greater cost savings will be made by removing an underperforming partner than an underperforming associate. It’s a tough bullet to bite.

Finally, a word about lockstep…

Managing performance is a key indicator of how remuneration should be handed out. In firms that reward based upon merit alone, it is the obvious mechanism. However, for firms using lockstep or hybrid lockstep / merit compensation systems, it can get tricky.

In an economic downturn, tensions can rise among partners over differing levels of performance. High performers might tolerate some degree of underperformance in a merit-based system or even a hybrid lockstep / merit one. They are much less likely to tolerate it in a purely lockstep system.

In the second of this series of two articles on law firm management, I shall look at business strategy and marketing.

Mike O’Donnell, July 2018.

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