Opinion: Why managing change is a job for the professionals
27 October 2008
The legal market has gone through an unprecedented amount of change, which has resulted in a great deal of uncertainty in the profession. With a number of business challenges still to come to the fore, this uncertainty is set to continue.
Key forces driving change include far-reaching regulatory moves by the Government. The Legal Services Act, for one, will bring about a fundamental change for all those engaged in the legal profession. The traditional concept of a law firm as a partnership of qualified solicitors will no longer be the only way to provide legal services and firms will be able to utilise various business structures, including having non-qualified lawyers as owners of the business.
A central plank of the Carter reforms of legal aid is to stop paying public defence lawyers on a hourly basis in favour of competitive tendering for block contracts and fixed-price defence work. It has been suggested that 63 per cent of firms offering criminal legal aid services might be below the threshold of 200 cases a year that would be required to tender for the contracts. As a result, these firms would either have to merge or give up such work.
The impact on firms’ cashflow and working capital since January 2008, as a result of accounting tax changes, means that work in progess will be subject to tax.
Add to the mix the fact that technology is developing at such a pace that only the most profitable will be able to afford the investment required to remain competitive, as well as the growing economic slowdown and the changing requirements and demands of clients, and it is clear that change and consolidation is set to continue.
It is more important than ever for firms to start managing their practices as modern-day businesses. Legal practices need to have a stronger grasp of the mechanics of their business, understand what drives profitability, what affects cashflow and the effects that drawing out significant sums that have not yet been earned has on the business.
A firm should have an overall short to medium-term strategy, with detailed annual budgets for financial control and rigorous, user-friendly management information systems to ensure it is clear on how the firm is performing against its core business and financial objectives.
Creative thinking and formal business training are increasingly important skills in law firm management. Professional advisers to the firm, such as their main relationship bank, will be able to help the practice in this arena by introducing such thinking and encouraging the absorption of new skills.
For example, law firms need to invest in longer-term focused strategies to service the needs of their clients by providing cost-effective and value-for-money advice. Firms need to consider billing practices based on the value delivered to the client and not purely based on time spent.
Equally, they need to review client lists and analyse the true profit derived from the bottom 10-20 per cent of their clients. Where value is not derived, the firm needs to consider fully what its options are, including the possibility of divesting themselves of those clients and focusing on the profitable areas.
Legal practices are beginning to recognise that they can no longer be
over-reliant on a few key people, but need a team equipped with the relevant leadership and management skills to take the firm forward. They should leverage skills and resources external to the firm to help them move forward in today’s changing environment and market.
Clear and realistic objectives, supported and understood throughout the firm, will still only be achieved if action is taken to deal with issues impeding progress. Unless decisive action is taken, the obstacles will continue to hinder progress.
Banks are regularly concerned with designing financial models to forecast cashflow/profitability projections. This proficiency should be leveraged by the progressive legal practice. Equally, banks develop tailored solutions to address specific customer issues and this expert knowledge should be sought by the practice to help better understanding and improve performance.