Surviving the crisis – financial risk Franco Azzopardi
Twin Cities law firms say they must shrink their staffs -- including attorneys -- to bring expenses in line with decreasing revenue. The recessionary forces that have battered law firms on the East and West coasts have reached Minneapolis and St. Paul. The problem is that clients aren't doing as many transactions, companies are cutting their outside legal expenses, and business is just drying up. StarTribune.com
"In this challenging economic environment, we have got to stay lean, highly productive andfocused” [Randy King, chief executive and managing director of Merchant & Gould.]
"Every company in this economy is looking at its budget and expenses. We are a revenue business," said Cooper Ashley of Maslon Edelman Borman & Brand. [Bill White , publisher of Minnesota Law & Politics]
The current economic downturn poses a dilemma to professional services businesses like yours. Do you wait and see what happens with the recession? or do you take pro-active measures to make your business more agile to adapt to market conditions?
• If you're struggling to get the work in, you need to learn more about marketing. • If you're struggling to keep up with the work you already have, you need to learn more about practice management. • If you're struggling with attrition rate, unpaid client bills, or unpredictable cash flow, you need to learn more about financial management and put systems in place to protect yourself.
Today we touch on 3 key arguments: Controlling time is key to effective billing!!?? Feeding the marching army in time of quiet... Cost or Investment??? Big deal... Budgeting is after all just transposing numbers in a spreadsheet!!!???
Traditional paradigms attached to Law firms: We only have timeto sell So is this our only income generating asset, or is it our stock in trade???
Profit=Revenue – Personnel costs – O/heads where Revenue = Time available x efficiency x charge rate
Some other common metrics... Charged hours/Paid hours (efficiency) 65 – 75% EBIT / Sales between 15 – 20% Investment policy – mainly in office premises ROIC – ???
Looks simple... “Challenge assumed constraints!!.” [Ken Blanchard, ‘Leading at a higher level’]
Hmm! that changes the whole chemistry of financial equations. IndustrialAge or Information Age ...to start withwhere is the knowledge and the human element in the profit equation??
So how do we integrate Knowledge and the Human element into our budgets and metrics?
In actual fact, revenue of a PSF is much more complex than just the above algebraic equation as it involves the interplay of: human capital(capital that leaves the elevator at night) structural capital(knowledge repositories, databases etc) and social capital(customers). This is the make-up of our investment
This brings us to ROIBut how do we assess our RETURNS when we write off our most significant investments immediately!? If only we could attach a value to these like a manufacturing business would capitalise assets
Theodore W Schulz, Nobel Prize-winning economist, theorized in 1961 in American Economic Review, that investments in human capital should be accounted for in the same manner as investments in plant and machinery.
‘Knowledge worker productivity requires that the knowledge worker is seen and treated as an asset, rather than a cost. [Peter Drucker, 1999, Management challenges for the 21st century] Knowledge worker productivity
So the emerging paradigm is: Profit is the applause of the level of: motivation of your knowledge workers and the robustness of your client relationships. Hence the Triple Bottom Line.
Controlling time is key to effective billing!!!??? Revenue = Time available x efficiency x charge rate For decades, Law firms have genetically encoded its members with the core belief that they sell only time. Surely professionals are not successful because they sell hours, since no customer buys hours!
Park your brains at the door dude!!! [industrial age adage] ...Stick with the time sheet and hang the stopwatch round your neck!!!... In a PSF it is not ‘working harder that counts, but working smarter... It is not how long it takes but what we give within time constraints’ Lagging timesheets versus Project management Time billing versus Value based billing
So what leads to effective billing? Client’s purse? Client’s requirements? Matching talent pool? Brand equity? Market conditions? Client’s perceived value (PV) of service offering? Ability of firm to quote close to PV? Clear terms of business?
Hang on!!!!! What about time-sheets? Surely we can’t just ignore the core of our PM! Time-sheets are essential for: Building experience To administer staff costs To support in Project Management To budget for lapsed time To build job cards
Measure what counts Select the right KPIs that increase partners’ value... focus on Leading rather than Lagging Indicators. Simplify your dashboard Timesheets – lapsed time% SCR = (payroll+o/h)/pd hours x(1-lapsed time) SRR=(Total costs +profit)/billed hrs WIP-Debtor-Cash cycle
Feeding the marching army... Cost or Investment??? Only if you think there is a mismatch in the skill sets on inventory and the requirements of both the contracted and pipeline legal work.
Part of staff costs are the investment of the firm! What are the skills that are required?(Brand promise, Market demands) Personal Competencies Development, Knowledge Elicitation, Leadership Development
Budgeting is after all just transposing the numbers in a spreadsheet!!!??? SW OT Contracted and pipeline projects Forecast targets and conversions Expected SRR Expected level of activity Investment budget Dividend policy Staff costs Overheads
What about the Support Structures? Do we have clear O&M suggesting procedures from RFP, to Client Acceptance, to Project classification, to Project management procedures, till sign-off, billing and converting to cash? Support structures should be as robust as the speed that is expected in reducing customer conversion to client and project acceptance to cash.
Administrative departments... Which functions could be simplified without a loss in performance? Marketing departments... “cutting down on marketing to save on costs is like stopping the watch to save on time!!” (Henry Ford)
Conclusion People and Knowledge are the revenue generating assets of the firm. The Client is the BOSS with the purse. Management seeks to attract and retain both The Culture of the firm is the what glues these together.
‘Knowledge is the business fully, as much as the customer is the business. Physical goods or services are only the vehicle for the exchange of customer purchasing power against business knowledge’. [Peter Drucker, 1964, Managing for Results] Drucker’s foresight