Monthly Archives: October 2013

Five Tips to Better Align Budgets with Firm Strategy

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Most law firms are deeply in (or about to enter) budget season.  We surveyed law firm leaders last year regarding best practices around budget development.  As a seasonal follow-up to that survey, we offer the following five tips to improve the alignment of law firm strategy with annual budgets.

Engage Practice Group Leaders Directly in the Budget Development Process

A surprisingly high percentage (44%) of firms in last year’s survey reported that they do not build budget projects from the practice groups up (i.e., direct costs, gross revenues, realizations, etc.).  The budget development process provides an excellent opportunity to cascade firm strategy (and strategy implementation) to the practice group level.

Engaging practice group leaders in budgeting – in thinking about cost drivers, revenue drivers and factors that contribute to client satisfaction (which often translates to realizations) – helps to “connect the dots” for people.  It highlights how strategies are being operationalized in the practices and makes those connections tangible in financial terms.

Budget for R&D

What does the average partner (i.e., the partner not involved in management) think about budgets?  Mainly, he/she wants the firm to beat its budget so that distributable income is higher than projected – creating a pool of funds that can pay partners more than their “expected compensation.”

By explicitly budgeting for R&D (both time investments and direct costs), the tension between partners’ desire to distribute all income at year end and the firm’s need to invest for the long term is mitigated.  Essentially, R&D projects should be prioritized along with other investments (see the next section).  At year end, assuming the firm had a good year, everyone is happy.  The firm has made needed investments for its future.  The partners get distributions above what was budgeted.

Prioritize Budgets in Financial and Strategic Terms

Law firm leaders (especially COOs and CFOs) are very comfortable thinking about projects and initiatives in financial terms.  Projects with high returns on investment (ROI) and/or fast payback are a higher priority than low return projects – a blinding glimpse of the obvious (a la Barbarians at the Gate).

In addition to the financial perspective, we recommend adding consideration of the expected strategic impact of a project to the prioritization process.  Essentially, projects that contribute to multiple strategic goals (i.e., that are more “mission critical”) are higher priority initiatives.  For example, a Knowledge Management project may contribute to achieving goals associated with client satisfaction; improved efficiency/value; and improved predictability.  Contrast that with a project to reconfigure office space – which may have a high ROI, but relatively little strategic impact.

 Priorization matrix

Prioritization across both dimensions (financial and strategic) yields added clarity on what the priorities really need to be across a range of projects – and may even lead a firm to delay or spike selected projects.

Validate Revenue Projections by Taking a Client (bottom-up) View

Revenue projects are (more often than not) built on the basis of headcount, anticipated hours, and rates (i.e., FTE x Hours x Realized Rates = Gross Revenues).  That is entirely logical and appropriate.  However, a nice check on that approach is to look at revenues from a client perspective.

At many firms, the top 50 clients (plus or minus) represent a substantial share of total revenues (often well over 50%).  By asking relationship partners what those major clients are expected to do in the coming year, a firm can help to validate its revenue projections.  If most of the major clients are expected to continue to generate similar or higher revenue streams, great.  However, if revenues from important clients are expected to fall (e.g., a major case has been resolved, the company has been sold, etc.), it may lead the firm to make important adjustments to its budget.

Align with Other Metrics – Financial and Non-Financial

Last December we asked law firm leaders where they had reliable metrics and where they did not.  Over 95% of firms have solid, reliable financial metrics.  Metrics associated with client satisfaction, people development, and business processes are more spotty – though those kinds of metrics do exist on at least a limited basis.

The budget process provides an opportunityfor firm and practice group leaders to think about and revisit financial and non-financial metrics.  Essentially, it is an opportunity to ask the question, “If we make or exceed this budget, will we also achieve our other measurable objectives?”  Similarly, it is an opportunity to ask, “Are the financial and non-financial metrics we have adopted to track the success (or lack thereof) of our strategy consistent with the budget we are about to propose and approve?”

Essentially, the budget process becomes another tool to help a firm and its practice groups effectively use a balanced scorecard to monitor and drive strategy implementation.

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As always we welcome your comments and insights – in the comment section below, via email at info@sterlingstrat.com, and over the phone at (312) 543-6616.

 

Strategic Thinking for Mid-Size Law Firms

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Last month we talked about mid-size law firms:  how best to define “mid-sized;” whether aggressive growth was the most logical strategy for mid-size firms; and alternatives to adopting an aggressive growth strategy.  We got quite a bit of feedback – including some asking whether we had any alternatives to rapid, merger fueled growth.  Part of the answer to that question was addressed in the second half of that article (a section entitled “winning strategies for mid-size law firms”).  This article advances that discussion further.

Last month we identified some important commonalities among successful mid-size law firms, including the following.

  •  Successful mid-size firms tend to be general service, business law firms (though not “full service” – that is unattainable even at 2,500+ lawyers).
  • A large number (perhaps a majority) of their clients are middle market companies – and that means that legal costs are essentially paid out of the owner/CEO’s pocket.
  • Successful mid-size firms have people and/or practices that are the absolute best in the local/regional market in their areas of expertise.
  • They have at some point (perhaps frequently) been approached by another law firm (probably a larger law firm) interested in merging.

There are important strategic implications associated with each of these traits, each suggesting potential sources of competitive advantage and vulnerabilities to competitive disadvantages.  Some generic strategic thinking can be applied to these common attributes – a few examples follow.

General Service, Business Firm

As a diversified law firm, a “general business firm” has an opportunity to build deep, multi-practice, multi-partner client relationships.

Potential Advantage – Partners at mid-size firms have a strong personal familiarity with (most of) their partners.  That should provide an advantage relative to introducing one another to clients as new needs arise (assuming partners have confidence in one another).

Potential Disadvantage – Every firm has practice capability gaps and those gaps can be pretty large at mid-sized firms (even in the strongest).  When competing against biglaw, mid-size firms need to avoid competing on the basis of scale or breadth.

Middle Market Clientele

Serving middle market companies has preconditioned many partners at mid-size firms to be value conscious.  The legal market has been moving decisively toward reduced costs and value, particularly since the great recession.  Many mid-size firms have been benefiting from that trend.

Potential Advantage – Generally speaking rates are lower in mid-size firms.  In addition, many mid-size firms are predisposed (temperamentally and practically) to staff matters with lean teams.

Potential Disadvantage – Biglaw firms are making substantial investments in knowledge management, project management, and financial management and that has the potential to close rate and efficiency advantages currently enjoyed by mid-size firms.  In addition, as Bruce MacEwen has noted here, some large firms are engaged in “suicide pricing” – it isn’t sustainable for a biglaw firm, but it is a real threat to competing mid-size firms.

Market Leadership

Strong mid-sized firms are often the best choice in their local or regional market for a number of legal issues.  Yet, they are rarely the largest or most visible firm in their own market.

Potential Advantage – Marketing and business development that supports market leading practices generally has the best return on investment.  That includes both investments intended to attract new clients and those intended to expand existing relationships across practice areas.  The key is being willing to make those investments.

Potential Disadvantage – Essentially, two can play that game (i.e., biglaw competitors will be pushing their own strengths forward in the marketplace) – and larger law firms have larger marketing and business development budgets.  In addition, that biglaw competitor may have a great option for the client sitting in an office 2,000 miles away (geography often isn’t a barrier for  work these days).

Merger Inquiries

Critically, you need to know what your firm’s general disposition is vis-à-vis merger.  Even if it is quickly dismissed by the partners, it is important to have that conversation from time to time at the Executive Committee or Board levels, as well as with the broader partnership.

Beyond that, as a general rule of thumb, mid-size firm managing partners should accept invitations to lunch from an out-of-town (merger seeking) peer.  At worst, you will learn a bit about a firm that is obviously interested in competing for clients and people in your market.  And, you will gain insights into what other people value in your market and in your firm.

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As always, we welcome your comments and insights below, via email at info@sterlingstrat.com, and via phone at (312) 543-6616.