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    The Revenue Revolution for Law Firms
    The Revenue Revolution for Law Firms
    The Revenue Revolution for Law Firms
    Ebook183 pages2 hours

    The Revenue Revolution for Law Firms

    By Matt Schlyder

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    About this ebook

    Hope is not a strategy….

    In Australia 95.6% of private firms operating are 1-4 partner practices.

    How is your firm positioned within this highly competitive market? What are you doing to
    stand out?

    The Revenue Revolution for Law Firms is designed to guide your legal practice to achieve
    long-term PROFITABILITY and CASH FLOW success.
    LanguageEnglish
    PublisherBookBaby
    Release dateOct 16, 2013
    ISBN9781925086232
    The Revenue Revolution for Law Firms

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      Book preview

      The Revenue Revolution for Law Firms - Matt Schlyder

      Thought

      Chapter 1

      HOPE IS NOT A STRATEGY – SETTING THE SCENE

      The future influences the present just as much as the past.

      – Friedrich Nietzsche (1844–1900), German Poet and Philosopher

      STOP BEING INSANE

      Albert Einstein defined insanity as doing the same thing over and over again and expecting a different result. For the vast majority of law firms, and for that matter, lawyers, they do the same thing over and over again and hope that the results will be different. In fact, I would say that most professionals are insane. After all, I’m a Chartered Accountant, so it takes someone who is insane to recognise the insanity in the masses. Please don’t be offended, we live in a busy world and I often find myself going through the motions of what I need to do in a day, feeling like I haven’t achieved too much whilst driving home. The law is complex and open to interpretation. There is always more than one side to every matter, deadlines to meet, expectations to manage and work life balance to maintain. No wonder we just get by. No wonder we often seek the path of least resistance. Sometimes we find comfort in doing the same thing day in day out. After all, most principals of law firms don’t know any different. Their firms are designed to function the same way that they were trained themselves, which was by another lawyer in another law firm, or by the firm they are in.

      Did you ever play Chinese Whispers as a kid? You’d get a line of friends together and the first in the line would tell the second a short story, who in turn would tell the third and so on until it gets to the end of the line. The last person would recite what they heard and everyone would laugh because the story changed so much. The longer the line, the greater the deviation from the original story.

      If you are a younger partner in an older firm, have you ever heard the older partners talk about the good old days, when life was easier, profits were higher, cash flow was better. I wonder how much of the current performance of the business is as a result of Chinese Whispers. How the firm has aged and the processes have evolved so that they end up significantly deviating from the original purpose of why they exist. This is true for the methodology of earning revenue in law firms. For those who can remember, revenue for a file may have been determined on the basis of weight, or thickness. It has evolved a long way since then. Let’s take a look at the basis upon which most firms calculate their revenue: time costing. Before I start, don’t you think it odd that the system upon which firms calculate their revenue is called a time cost system? Also, don’t you think it odd that the amount a law firm will charge their client is referred to as the cost? Isn’t it bizarre that a file gets costed? Cost isn’t revenue, it’s an expense not income. Apologies again for being an accountant. Surely that’s a hint in itself that something isn’t right. I’m not saying that time costing systems are not required, what I am saying is that you need to understand why they exist. They are a key element to a profitable firm, but more on that in Chapter 2: Charging Hours is Only Part of the Revenue Equation. Originally, time costing systems were used to measure the cost of labour incurred to produce revenue. This is why it is called time costing. You would take the labour cost and apply it to the different matters (sales) based on the time spent, and the result will give you the margin you made on that income (revenue - share of the labour cost = margin). Once again, apologies for the accountant coming out in me. Then some clever guy, probably an accountant, apologies in advance again, said, If we are going to measure the time that it takes to do the work so that we can determine how much it costs us, why don’t we build a formula that can provide with certainty, the revenue that we will make. The time costing system then became the benchmark for determining revenue. Yes, a very sound model, but as the game of Chinese Whispers progressed, like a drug, it had side effects:

      • I couldn’t possibly charge the client that rate for this work.

      • That new solicitor is inexperienced so they must have been inefficient, I’ll write some of that time off.

      • I worked on this file for 10 hours today, but I only need to charge 6 hours, so I’ll just put down 7.5 hours on my timesheet and I’ll still look good to my partner.

      • The firm charges me out at $350 per hour, am I really worth that?

      • The labour market is so tight, there is no way that we can grow our revenue because we can’t get any more people.

      • Our only measure of performance for our solicitors is for them to achieve and recover 6 billable hours per day at the pre-determined charge rate.

      A business coach of mine once told me that Structure Determines Behaviour. The side effects that a time costing, or time billing, revenue system causes are behaviours’ that are so estranged from running a successful business, it is almost ridiculous. To improve profitability there are many things that you need to do in a business, including improving client service and being more efficient. The behaviour that a time based revenue structure creates are: sit at your desk and charge out the hours, and the longer it takes the more you can bill. Whether the amount ultimately billed to the client reflects the work actually done, is another question. These behaviours are totally opposite to what is required in a successful business: they do not promote improved client service or efficiency. So why do it? Because it’s what everyone is doing? Does that mean it’s right?

      Why not just keep doing what we do, keep our fingers crossed, so that it will all work out, and next year we’ll get a different outcome? Because businesses are strategic and hope is not a strategy. Strategy implies action, and if your actions aren’t aligned to driving a better outcome, then they are merely hope. A series of actions designed to drive towards a better outcome is a strategy.

      Strategy is an overused word. You can study an MBA, you can put together a business plan, but ultimately a strategy is simply a series of actions to achieve an improved outcome. It’s the map that gets you from A to B. Unless you take an action, you will stay at A, or worse still move – backwards. There are no guarantees with strategy that you will get it right, in fact, you’ll probably get it wrong, but an error is only a mistake when you make it for the second time. So if you are not totally happy with the outcomes you have achieved in the last day, week, month, year or decade and you go into work tomorrow and do the same things again, then you are making a mistake. But what do you do instead? What’s going to be different? The reality is that it doesn’t matter, just do something different to get a different result. If you have cash flow issues in your business, change your billing and collection processes. If you aren’t happy with the margin you are making on your services you provide, change your prices. If you don’t like your premises, change your offices. If your employees aren’t performing, change yourself, after all, a fish rots from the head down. If your processes are outdated, change them. If your clients aren’t aligned to your service offering, change your service offering or change your clients. What I can guarantee is that if you aren’t totally happy with any aspect of your business talking about it won’t do anything, but taking an action will.

      In law firms, the overhead is reasonably fixed and predictable: administration labour, rent, IT, professional indemnity insurance, etc. The cost of direct labour is also relatively fixed and predictable: the labour cost of lawyers and legal support. What isn’t predictable is revenue, or is it? Is it only unpredictable because of the revenue model that we use (time billing) and the behaviours that it drives. Imagine what your business would be like if your revenue was predictable. Being able to predict your revenue is dependent upon the level of control you have over your revenue outcomes. Let’s take a closer look at this.

      THE SERENITY PRAYER

      You may have heard this as a saying or a prayer. You may have applied it yourself at different times in your life. In my view, it is the most powerful sentence when it comes to developing strategy in a business:

      Give me the serenity to accept what I cannot control, the courage to change what I can control and the wisdom to know the difference.

      When you look at your revenue model and you consider what you can and cannot control, you quickly realise that you are spending your days in an environment that produces unpredictable outcomes. Remember that you can really only control what YOU do.

      There are three different types of revenue in any professional services firm, law firms are no exceptions:

      Recurring revenue

      Reactive revenue

      Proactive revenue

      Recurring revenue is the revenue that you make from clients that is of a recurring nature. In a law firm, it is often a retainer for legal services. In most firms, they do not have retainer income, so the amount of income that fits into the recurring revenue bucket is small. Recurring revenue is revenue that you CAN CONTROL and you CAN QUANTIFY. You can decide whether you enter a retainer arrangement with a client or not. You can determine the amount that you charge them for a fixed period of time, so you can easily quantify the amount you will receive.

      Reactive revenue is revenue that is client initiated. It is earned from both existing and new clients. New clients generally walk in the door due to location, brand awareness, convenience, or referral. Reactive revenue is driven by market forces, the economy, client perception. Reactive revenue is revenue that you CANNOT CONTROL and you CANNOT QUANTIFY. You are totally reliant on clients identifying that they have a need and then you hope that they come to you. Remember, hope is not a strategy.

      Proactive revenue is

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