Hi, Finance – February 2021

“Our issue is, very simply, that we should be making more money than we are, given what I see going on within the business. How do I turn this around?”

This problem, or variations of it, is something that I hear almost every week.  It goes something along the lines of “We just need to get [named department] running right and we shall be on Budget.  I just don’t know why it is isn’t”.  Or it might be “Everyone is really busy, but I don’t know why we are not yet making the profits you would expect as a result”.

There is so much that comes out of this.  Broadly speaking though it all boils down to knowing WHY “you are not on budget” or WHY “the profits are not yet coming through” – indeed if they are even going to.

To know ‘why’ you need to have information.  This is not just data and it is certainly not gut-feel or instinct.  Information is the right data organised to focus attention onto the areas that matter.

No mention is made here of overhead costs because these tend to be longer-term changes.  One can only tweak fee earner performance in the short term.  I shall come back to that a bit later.

To know why you are not making money, you must have information on each of these key factors.  Without it you cannot know which of them is underperforming.  Only when you know which it is, will you know which one you have to tweak to improve profit.  Unless there are systems and processes that produce information highlighting how the fee earners, departments and firm are performing in these key areas, you cannot know the answers to the first question.

For example:

• One can see that everyone is busy because they have full desks, are working hard and recording above-target hours: but fees are not reflecting that (Do you have information about how much you are recovering per hour for each fee earner?) Or
• Fee earners are billing well on each matter but are not hitting fee targets (Do you have information about how many hours each fee earner is working per day/week/month?) Or
• The firm is getting plenty of work in, but the fees are not coming out at the other end (Is there information on new matters, work allocation, hours worked and recovery rates?).

Unless you have this information, you are not going to be sure what changes you need to make to get the results you want. In fact, without the right information, you could make the wrong tweak.  Making the wrong tweak can make things worse. 

Getting the right information should not be difficult.  There are plenty of ways of preparing the data quickly and easily, whether as a static Excel spreadsheet or an on-line dynamic business intelligence tool.  There should not be any excuses for not having the information.

While the information can tell you the right tweak to make, making those changes is often quite hard.  If your fee earners have worked in a specific way for several years, getting them to work differently, is hard.  You may need help with that.  For example, they may be very busy but not charging the maximum that the client is happy to pay.  Therefore, they will not be generating the fee levels required.  External training may help them improve their fee recovery rate but often internal discussions and using role models to tell you how they do things is the solution.  The point is, you would not have known what to do without the right information.

Now I return to overhead costs.  Typically, fee earner costs will be 30% – 40% of a firm’s costs.  If you want to have a profit of about 30% of fees – which should be the aim in most law firms, then the overheads must be 30% – 40% of fee income.

I challenge you to reduce those overhead costs by more than 5% in a year, unless you radically change how you support fee earners.  If you reduce them by 5%, overhead costs remain 28.5% – 38%.  That is a 1.5% – 2.0% increase in profit.

But if you increase fee earner performance by 5%, then profits increase by well over 15%.  That is why information about fee earner performance is everything and should be your key focus.

If you would like a quick chat about how to get this right and what information you need, please feel free to contact Richard at Baskerville Drummond on 01908 595 575 or at richard@baskervilledrummond.com.