Tag Archives: Legal Update

The sooner the better

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It’s always struck me that there is often a disconnect or lack of understanding with fee earners between the time they charge on their timesheets and the funding of a law firm. In the majority of firms, time recording systems continue to be used and I’m not going to get into a discussion now about whether that’s out of touch, appropriate or useful – that can be covered another time. Fee earners, from day one, are taught to record time and quite often are driven to do this merely by a chargeable hours target.

The concept of meeting your annual budgeted chargeable hours to be paid a bonus at the end of the year is still quite common and it’s clear what kind of behaviour that will drive. Until a fee earner assumes billing responsibilities, it is unlikely that they will be aware of the impact of their recording of time either on the firm’s financial results, the consideration to the level of fees to be charged, the timing of that billing and, ultimately, of when the bill is paid. Further, it may even be that when a fee earner assumes such responsibilities, they are still not aware of the effect on all of those areas. The sooner they are made aware of all relevant factors and implications, the better.

  • Do they understand that 80% recoverability effectively means that for each week worked, one day is just not worth anything in cash or profit? In fact, it has a negative impact since the team are still paid for that fifth day but there is no income generated.
  • Do they understand that it’s impossible to tell what level a fee should be set at if chargeable hours aren’t accurately recorded?
  • Do they understand that it is difficult to gauge whether the team or firm is under (or over) resourced if chargeable hours aren’t reliably recorded?
  • Do they appreciate the time lag between time costs and indeed disbursements being recorded, the team and disbursements being paid until the bill is actually settled and therefore do they understand the impact on the firm’s funding position?

In my view, there is a significant training opportunity for fee earners to assist with the firm’s financial reporting and the firm’s profitability and funding position.  This training can be provided for more senior fee earners, sometimes even partners, where there has been a lack of financial training through their career or where a fee earner is just starting out. If you think that there is an opportunity for improvement in your firm or that a refresh would be helpful, please contact me at helen.clayton@pmm.co.uk or call 0161 641 8684.

Legal Update

shutterstock_299616494There have been, and continue to be, a significant number of factors impacting the legal profession.  Whilst not all factors will have an impact on every firm a number will, and will do so at any one time, making the running of a law firm to be a continuous challenge.  Even for the growing and historically profitable firms, current and future regulatory changes, for example, could turn the good old days into more of a concern.

Partner and board meeting agendas should be focusing on these challenges, deciding on the actions, with responsibilities and timescales assigned.  If a law firm does not currently operate in a corporate vehicle, it does not necessarily need to incorporate but the partners need to start treating it as a corporate entity; it is a business after all.

With such significant change and more on the horizon, is the legal profession in unprecedented times?  Is it really the case that never before has there been so many stakeholders in a law firm?  I would argue not; however I do agree that stakeholders’ priorities and areas of focus may have changed.

Partners
Remuneration, partnership politics and succession are emotionally charged.  Every firm must have a partnership or shareholder agreement that is reviewed on a regular basis.

Clients
Clients have a strong influence on the growth and profitability of a firm, not to mention its cash flow.  Fee pressures and service demands continue to reduce margins.  A firm’s focus on who does what type of work is critical to ensuring a quality but efficient service. Technology should play a significant part in achieving this.  Further, quality not only applies to the legal advice given but the management of the case too.

Funders
Funders are wiser to the profession and the number of lines of lending that there can be into any one firm.

Funders want to understand the firm’s strategy, business model, financial forecasts, markets and succession plans to name but a few to assess the financial viability of providing funds. Whether the debt is serviceable is a key question together with is it core debt or a true working capital and therefore a fluctuating requirement.

Insurers
The insurers are key stakeholders in any type of personal injury firm, whether acting for defendants or claimants.  The SRA, another key stakeholder of course, is currently undertaking a review to assess the impact of recent legislation on the profession.

Insurers will be stakeholders in all firms due to the requirement to have professional indemnity insurance.  Current consultations to bring PI policies into line with the Insurance Act will raise the standard of disclosures being made to insurers; improper declarations are a breach of the Code of Conduct.

Solicitors Regulation Authority (SRA)
As the profession’s current regulator, the SRA continues to evolve in his practices, focus and areas of attention.  Regular access of the SRA website provides insight into these areas and provides guidance on managing risk – a significant consideration to all stakeholders.

Competitors
Understanding competitors’ ambitions is key in challenging a law firm’s own strategy to ensure that it can continue to differentiate itself, whether in services or markets, client or geography.  Fee pressures can drive down the market rate of fees being charged; being proactive in this area will secure clients providing the quality of service matches the initial proactivity.

Transactional activity continues to take place in the profession, which changes the competitive landscape.  Firms converting to an Alternative Business Structure is likely to be a result of the firm seeking to differentiate itself.

Employees
Retention of talent in a declining market is difficult in being able to satisfy their demands; retention in a growing market, which the legal profession continues to be, is also difficult where firms are able to make snap decisions, where cash flow allows, to recruit the talent for the present and the future success of a firm.

In conclusion, whilst this list is by no means exhaustive, a law firm’s strategy cannot ignore a stakeholder group.  It is not the case that the partners are the only stakeholders.  Law firm succession should be on all partner meeting agendas; every stakeholder will have an impact.

Helen Clayton – Head of Corporate Services

Utilisation Rates Should Be A Key Focus For All Law Firms

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A recent survey by NatWest showed that the average profit per equity partner in a law firm had increased to £111,000, an increase of £4,000 from the prior year.  Much of this increase has been achieved through an improvement in rates, either through stronger pricing or improved recovery rates.

However, the hours recorded by fee earners remained flat. The average fee earner’s day consists of 4.4 hours being chargeable, which results in an average of 1000 chargeable hours per annum, leaving 700 hours being spent on non-chargeable activity (excluding holidays). I wonder whether law firms are actually looking at utilisation and profit or whether the focus remains on driving improved fee income through recruitment and price.

Increasing utilisation rates, ensuring these are billable of course, drives an increase in fee income which feeds straight into profit, enhancing profit per partner.  Assuming a recovered rate of £100 per hour and a fee earner group of 30 people delivering an additional half an hour chargeable a day, this equates to £345,000 of additional fee income and profit in one year.  The maths is easy; the challenge is unravelling what else goes on in each fee earner’s day to understand where that extra half an hour, or more, of chargeable time can come from. Does it come down to an under-recording of time or is work being done outside of the scope of initial engagement terms that is not being recorded and therefore not being recovered from the client through additional fees? Or are fee earners in comfort zones of recording the 4.4 hours per day as they just have not been challenged on this before? I believe that the setting of chargeable hour budgets does not lend itself to effective practice management; a balance of fee earner KPIs including billable (and recoverable) utilisation is more appropriate.

Additional profit, which in turn is additional cash, can only make life easier; for example, investment in technology, restructuring bank and other debt through earlier repayment of facilities thereby reducing interest costs, ability to better remunerate key employees not to mention attracting new talent to the firm through increasing profitability.

A focus on utilisation is a no brainer in improving productivity, fee income and profitability thereby helping to reduce the pressure of the day to day financial management of a law firm. It can deliver a higher performance and reward culture without impacting on work-life balance.

Helen Clayton – Head of Corporate Services