Strategic planning more important than ever for law firms
INSIGHT ARTICLE |
For law firms, increasing partner income year after year is tough. Difficult economic times coupled with flat revenues and increasing expenses make success challenging. Without a clear plan and solid execution against it, growth is unlikely. Before you can plan for the future, however, you have to understand the present.
Step 1: Understand where you are
Start with a SWOT (strengths, weaknesses, opportunities, threats) analysis to gain a clear understanding of your current situation and competitive landscape. Don’t just rely on impressions. Dig for solid data. Understanding how your firm measures up to your competition on some key performance metrics can help you establish realistic and measureable goals for your strategic plan. Some metrics to consider;
- Revenue per partner and per attorney—looking at these numbers both firmwide and by practice groups and industry teams will help to identify your best performing practice areas and your highest performing people.
- Net profit margin—again, check at both the firmwide and practice group levels.
- Billing rates at all levels—how do you compare to your competitors? If your rates are too high, you may be losing out on business. Too low, however, and you may be missing out on the best professionals.
- Average chargeable hours—should you be expecting more from your professionals?
- Partner to associate leverage – the industry average is at least one associate per equity partner. Better leverage not only means better profitability for your equity partners, it also helps keep your overall billing rates at competitive levels.
- Attorney to support staff leverage—do you have opportunities to push some work down to paralegals? Are your overall support staff levels appropriate or could you do more to control payroll expenses?
- Business concentration—if more than 10 percent of your revenue comes from one client the firm could put itself in jeopardy. Your firm is at the mercy of that client. If they decide to leave, your firm could go under. You should consider diversifying to reduce risk.
Based on a solid understanding of your current position, evaluate your opportunities for growth. In today’s economic environment, organic growth is hard for most firms to achieve, which usually means growth through acquisition. That could mean expanding into a new geographic market, adding a new service area, targeting a new industry or deepening your penetration in current markets.
While the overall revenue picture for law firms is flat, some areas show promise. Real estate, health care, private equity, and international mergers and acquisitions show better than average growth. Maybe adding an ancillary service area, such as intellectual property or marital law, to your current mix would help you better support your clients and provide cross-selling opportunities.
But what’s the best move if you decide to add a new practice area? Buy a boutique firm? Lateral hires? Whichever route you choose, you have to understand the inherent risks and the time investment involved. If you buy a firm, be sure that professionals at both entities understand your expectations around the metrics discussed above. If your new professionals find your goals around key metrics like billable hours to be unreasonable, you could end up losing the talent you sought to add.
Understand too that growth takes time. For instance, a lateral hire may need at least six months to fill their pipeline with new business. Then, they have to perform the work, bill the work, and collect the fees. It will likely be months before you see a positive revenue stream. You must be prepared to weather that transitional period.
Step 3: Stay focused and accountable
Your strategic plan should focus on set results you plan to achieve over the next three to five years, but your goals should also allow space to respond to market opportunities. Goals should be specific, not vague. They should have:
- A set timeline in which the goal is to be achieved
- Specific measurements that track progress toward the goals
- Key leaders within the firm who are held accountable for progress toward each goal
Planning should be both top-down and bottom-up. The firm itself can set broad strategic goals, for example, breaking into new geographic or industry markets. The lines of business and industry teams within the firm should then have supporting plans to support those goals. Finally, individual partners should have personal business plans that roll up into the service line, line of business and firm-wide goals. By aligning personal, group and firm-wide plans, the firm can maintain an integrated focus on key goals with specific measurements and accountability at all levels.
In addition to your growth goals, your plan should also include specific targets to improve operational performance and efficiency. Every dollar you can save in costs adds to your bottom line. The top expenses for law firms are usually compensation, office space and technology. Address those categories in your strategic plan.
- Compensation—is your pay structure appropriately aligned with your strategy? As you sharpen your focus on key opportunities, you may identify some dead weight—or some key talent that you could be in danger of losing.
- Office expenses—if you’re looking at new markets, consider your office needs carefully. If a West Coast presence is vital to your strategic plan, what is the best location? For example, office space in San Francisco could be twice as expensive as a nearby suburb. If you’re considering acquiring a firm, don’t forget to evaluate any lease obligations you may be taking on.
- Technology—most firms invest about 4 percent of revenue on technology just to keep up. Are your systems doing all you need? A future consideration might be artificial intelligence (AI). Some firms are finding that new AI tools can handle tasks traditionally performed by paralegals and associates, thus holding compensation costs down.
The right strategy for your firm will depend on your unique facts and circumstances, but understanding your current state, choosing the right strategic goals and focusing on a clear plan can help your firm grow, even in a challenging market.