Planning for uncertainty

 

Figures from Legal Business’s latest LB100 show continued financial resilience in the legal profession. But that doesn’t mean that all is plain sailing in law. Take away merger activity – for example, the headline-grabbing transatlantic mergers of Bryan Cave Leighton Paisner (BCLP) in 2018 and Womble Bond Dickinson (WBD) in 2017 – and the magazine argues that revenue figures are far more subdued.

Amid increasingly uncertain economic and political conditions, long-term planning in law is hard. As one Senior Partner told Legal Business, nobody is seeing the pipeline for next year as fantastic – everyone is ‘looking in chunks of two to three months’.

Gordon Brown, Management Consultant and Director at Client Savvy, describes the future as lumpy.  ‘Off the record, firm leaders say they did not predict where growth in their business ended up coming from and looking forwards, they are equally uncertain,’ he says. ‘Profits will continue to be squeezed with pressure from clients, while demands only grow to further stretch resources. Law firms may have had good years, but with the on-going need to invest in talent and technology, working capital is stretched to the max.’ According to recent research by Smith & Williamson, the total monthly wage bill for top 50 firms is £610m, but these firms have net cash at their year-end of just £410m (see ‘Lock-up: a stubbornly persistent problem’).

Such figures are further pressed by the competition for talent brought about by US firms operating in London. As US firms are beginning to reach beyond the magic circle and recruit partners from mid-tier firms, salaries are sky-rocketing. ‘We’re seeing newly qualified salaries of around £100k,’ says Brown. ‘That’s a huge cost that will empty the coffers.’ As a Managing Partner told Legal Business magazine, how can you provide value services when you’re paying 23-year-olds 100k?

 

Market beating strategies

 

In this environment, Brown advises that firms need to reconsider how they are creating client and wider business plans that actually prioritise and deliver growth. Traditionally the annual planning cycle is limited to a live-or-die exercise in allocating budget for the next year. ‘This blights the process of thinking constructively about bold improvements and for longer term growth,’ says Brown. ‘It does not encourage the best and bravest ideas onto the table.’

The need for firms to distribute profit each year not only stymies longer term strategies to build business, it also stops them from taking risks necessary to push business forwards. ‘Firms expect a return on all investments,’ says Brown. ‘The best corporates have a better understanding of risk – they know that not every initiative can or will pay off.  At the same time, they will support, at an opportunity cost to other initiatives, the best and bravest of those ideas and flood resource to particular areas of opportunity. Law firms, by contrast, try to cover far too many bases preferring to grow in lockstep rather than through break-out market-beating strategies.’

On this basis, it is perhaps not surprising that the firms that performed best in the LB100 are also those that are specialists, not generalists. According to Legal Business, this is a group that has more than doubled its collective revenue in the past decade, from £2.84bn in 2009 to £6.27bn today. Ashurst is cited as a particularly strong example of the rewards of a focused strategy – it posted one of the strongest sets of results in the LB100 thanks to its re-focus on infrastructure, energy and TMT.

Brown’s advice has always been that firms need to transform themselves and focus on core strengths, aligning these to a deep understanding of the unique issues each client faces (see his earlier article, ‘Getting to the crux of real change in law’). He still says BD and marketing teams can play a significant role in helping firms to improve their planning and client strategy models and create new avenues for engagement between lawyers and clients. There are challenges to this, however.  ‘There are still far too many decisions made on uninformed assumptions, which deliver the same old, unthinking, self-serving outputs. Everyone is looking for ways to differentiate themselves; if you can’t inspire clients with the plans and initiatives you have for them, then think again.’

A new framework – rolling agile plans

 

He also thinks that firms need to take collective responsibility to generate better, new business ideas: collective agreement at the board creates shared ownership and a commitment to see ideas through to success. ‘This stops partners seeing plans as ‘ropes they get strung up by’ and stops sandbagging,’ says Brown. ‘Lots of little sandbags can add up to a big obstacle that will get in the way of a step change.’ He advises:

  • Rethink your client propositions now – be realistic, what do you need to change? What is achievable with your client?
  • Engage in more analysis to focus the business effectively.
  • Get rid of the pointless jargon – words and phrases that are meaningless and unmeasurable.
  • Move to plans that are rolling journeys of initiatives that are constantly reviewed and updated.
  • Don’t fix and allocate all budgets – have a budget line for contingency.
  • Move away from allocating annual funds.
  • Factor in risk and failure.
  • Hold back a contestable fund to encourage the best ideas to the table.
  • Be prepared to change – clients’ challenges are unique, they are dynamic, they change.

‘What sets the most successful companies apart is, when an unplanned opportunity reveals itself, they are able to mobilise, execute new plans and transform with agility,’ says Brown. ‘Agility wins.’ Behind this, he argues, is an accepted wisdom in the corporate world that what you budget for in Nov/Dec, for implementation after April 1st, only taps into 55% of the opportunities available to the business at that point of time. The numbers of lost opportunities increase as the year progresses – ‘which begs the question,’ he asks, ‘how much business are law firms missing out on, because they stick to, or won’t change, their fully costed and allocated budget?’

There are signs that firms are changing. More firms are holding back some capital each year to invest into the business. Others, most recently DWF, have publicly floated to generate new capital for investment. There are now 10 firms in the LB100 that do not operate conventional equity partnerships. If nothing else, it shows a willingness among a growing number of firms to think and act differently.

Firms that continue to operate a model that pays out each year will continue to face the uncertainty of year-to-year cashflows and squeezed profit margins. Coming together to rethink the business model and implementing better planning that both supports longer-term investment and firm-wide agility, must be a priority for law firm leaders and business services functions alike.

Gordon Brown is a management consultant who helps firms develop their strategies, plans, programmes and conversations for their ‘bet the ranch' clients. Gordon has more than 20 years’ experience in the professional service sector and was previously BD and marketing director for PwC, both in the UK and the Middle East. He can be contacted at [email protected] 

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