Five Tips to Better Align Budgets with Firm Strategy

Posted on October 18, 2013 by Sterling

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.

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.

CO-CREATION OF UNIQUE VALUE WITH CLIENTS: A Strategy Tool for Winning the ACC Value Challenge (Part Two)

Posted on June 20, 2013 by Sterling

Our last post introduced the principles underpinning a valuable strategy tool – co-creation. We noted that co-creation is a tool particularly well suited to sophisticated legal practices for two reasons. First, in many respects co-creation principles align well with attorneys’ instinctive approach to managing client relationships. And second, co-creation is proverbially “just what the doctor ordered” relative to having an effective tool to respond to the Association of Corporate Counsel’s (ACC) Value Challenge.

As we noted in that last post, co-creation is built on four principles: open dialog; access to information; shared risk assessment; and transparency (especially on costs and pricing practices). We promised to share a few real world examples of how those principles were put into play by forward-thinking law firms and partners – working collaboratively with clients. We share three real world cases below (disguised sufficiently to protect both the identity of the law firms and their respective clients).

Managing A Large, Growing Patent Portfolio

A global technology company, spending well into the seven figures to manage and expand their patent portfolio in the U.S. (exclusive of litigation costs), approached their leading intellectual property law firm looking for an approach that would save money, while effectively supporting a core business strategy that highly valued a strong and growing portfolio. The existing relationship was long-standing and strong. The law firm currently supported more than 60% of the company’s patent portfolio. Further, the primary relationship manager was predisposed toward open dialog, access to information, and shared risk assessment.

Supported by solid financial analysis on the law firm side and progressive thinking in the general counsel’s office (including the associate GC for intellectual property), the following solution was crafted

An open dialog regarding the full scope and nature of the company’s patent portfolio – and the law firm’s technical capabilities – led to a realization that efficiencies could be gained by having one firm support the entire portfolio in the U.S. (as well as much of the rest of the world). Essentially, consolidating the work with a single firm would free-up resources in the GC’s office and the law firm and would streamline docket management.

The law firm already provided real time visibility to the client’s patent docket. By consolidating all the work in a single firm, it also became feasible to have secure access to the underlying documents (e.g., applications, USPTO responses, etc.) across the law firm’s and the client’s networks.

Real savings emerged from shared risk assessment. The company had a highly sophisticated strategy for its patent portfolio. They had a very clear sense for which patent families were most valuable and/or integral to that overall strategy – and the law firm became a valuable partner in helping to assess both value and risk. That in turn enabled the firm and the company to deploy the right level of resources to each element of the patent portfolio – especially in areas driving the greatest costs (e.g., the application docket and management of the pipeline of new technologies and patents).

Entrusting the entire portfolio to a single firm enabled the company and the law firm to create a rational budget for managing the entire portfolio (i.e., via transparency on costs and pricing). That budget included meaningful insights into what work should be done in the GC’s office and what should be done at the law firm – in the process optimizing total costs to the company. And, because the right work was being done in the right place by the right people (including administrative support), the law firm was able to maintain profit margins even as the company’s total spending on outside counsel declined.

Controlling Costs on Recurring Litigation

A large petro-chemical company with recurring litigation in the toxic tort arena was looking for a way to gain greater control over the costs associated with that litigation. Costs ranged from the mid-seven figures to the low eight-figures (excluding judgments and settlements) in any given year.

The company’s general counsel started a dialog with the lead partner of a range of litigation matters for the company (across multiple sub-specialties – including some toxic tort work). He was open about his objectives: to save money overall; and to introduce some predictability in his budget for this recurring work.

The relationship benefited from an established set of tools that provided access to documents (via a secure document management system) and to regular status reports on all open cases.

The partner was well respected for his ability to understand the risks associated with complex litigation – and his ability to cut through complexity to put a value on cases. That included an ability to assign solid ranges to the potential outcomes for any given case, as well as an ability to develop litigation strategies to manage cases toward controllable outcomes. This provided a dual ability to better manage ongoing litigation costs and achieve agreed upon outcomes vis-à-vis judgments and settlements. Settlement decisions could be made more strategically as a result – better managing risk and reducing the company’s total cost of litigation (not just the cost of outside legal counsel).

The relationship was characterized by a high level of trust (and transparency). Thus, when the company approached the partner looking for savings and predictability, he suggested putting all of the recurring work on a single fixed annual budget. Time would be tracked against the budget and the budget would be reset annually – some years up and some years down (a real reflection of mutual trust). As a means of saving the company significant legal fees, the partner suggested staffing routine, but labor intensive aspects of the ligation with low cost contract attorneys (rather than his firm’s higher priced associates). That took money out of the law firm’s hands, but created additional credibility and trust – as well as substantial cost savings.

Innovative Financial Services Products

One of the largest banking and financial services companies in the U.S. was searching for innovative product ideas to respond to the post-financial crisis banking environment (e.g., low interest rates, higher reserve requirements, more stringent regulatory oversight, etc.).

General Counsel at the bank began a dialog with partners at one of its most forward thinking law firms. The bank and its competitors were responding to the low interest rate environment by adding a substantial quantity of government bonds (in particular municipal and other tax advantaged government bonds) to their balance sheets. However, the process through which those assets were traditionally created (e.g., underwriting and disclosure by investment bankers, public offerings and market making, etc.) was both cumbersome and costly. The bank was looking for a creative solution to simplify and streamline that process.

That initial dialog led both the bank and the law firm to open access to the key stakeholders at the bank (e.g., investment bankers, commercial bankers, law department, etc.) and to subject matter experts at the law firm (e.g., securities, public finance, banking/bank regulatory, etc.). The combination of dialog and access led to the development of what amounted to a new product in both the banking and public finance world – direct purchase by the bank of newly created government bonds.

The success of the product was strongly influenced by the ability of the bank and the law firm to effectively manage risk. That included strong risk assessment of the municipalities and other entities originating the bonds (i.e., no distressed municipal debt in this product mix). It required effective documentation of underlying disclosures by the issuing entities, as well as other regulatory compliance (another form of risk mitigation). And, to manage the longer run balance sheet risks, it required the creation of products with appropriate durations to protect both the borrower’s and the bank’s balance sheets.

Creating what amounted to an entirely new product (both for borrowers and lenders) raised critical transparency questions. Should this product be considered highly proprietary (which in the world of financial services meant it would take a few quarters before other banks figured out their own way of offering the product) or should it be trumpeted as a new industry standard (enabling faster followers)? In addition, having created a product that was essentially a winner for all stakeholders (borrowers, the bank and the law firm), how repeatable and predictable could the process become? Direct purchase of municipal (and other public) debt has been moving rapidly toward industry standardization (answering the first question). There are tremendous efficiencies in the product/process, however the unique qualities of each asset (i.e., municipality/project/etc.) limit how entirely repeatable the process can be (partially answering the second).

Hopefully these three examples – across markedly different legal specialties and markets – help to provide some insight into how you might adopt and apply a co-creation strategy in your own firm and/or practice. At a minimum, co-creation ought to be in the “strategy toolbox” of every law firm of reasonable size and capability.

As always, we welcome your comments below and via telephone (312) 543-6616 and email (jsterling@sterlingstrat.com).

Implementing Law Firm Strategy Using a Balanced Scorecard

Posted on January 30, 2013 by Sterling

We have seen a spike of interest in the Balanced Scorecard since our December 2012 strategy question of the month focused on what kinds of measures law firms are using. As regular readers will recall, the only measures firms are using with a high degree of consistency and reliability are financial measures. Other areas – client satisfaction/client relationships; people/professional development; operational improvement – are generally not measured.

The balanced scorecard, as originally described by Kaplan and Norton, envisions a balanced set of goals, objectives and measures in four areas (as depicted in the graphic below). Those goals and metrics should ideally be focused on advancing the achievement of the firm’s vision and strategy. While these four categories are logical and work for the majority of organizations, the authors (and experienced managers) recognize that measures should be aligned with the strategy (rather than aligning strategy with the generic scorecard categories).

The concept is easy enough to understand, but how does one go about implementing some version of the balanced scorecard in a law firm environment? In our 2009 book on the topic, we highlighted the range of barriers law firm managers might encounter when trying to use this very powerful tool to facilitate strategy implementation. We will leave those challenges for another post so we can focus on how to use the balanced scorecard in a law firm setting.

The real key to the process (and this is equally true in a corporate setting and/or a non-profit organization) is to ensure the strategy is aligned from the firm level to the practice (and administrative department) level – and from the practice level to the roles individuals play in strategy implementation.

Obviously, this graphic assumes the firm has a strategic plan. For those who might have missed it, our June 2012 strategy question of the month focused on best practices in law firm strategic planning. Some examples of how this cascading works across the categories of a generic balanced scorecard follow.

A firm with clear objectives for profit improvement (could be margins, could be PPP, could be some other reasonable proxy) might ask each practice group to identify the profit driver that offers the most promise for improving performance in their area. In this example, the practice has identified realization improvements as the most promising area. They would then set a target for improved realizations and adopt initiatives to drive that improvement. Individuals in the practice would then move those initiatives forward. In this example, individuals would focus on getting invoices out on a timely basis, with higher levels of accuracy. Thus, the firm’s goal for improved profit margins cascades to a practice’s goal for improved realizations, which in turn cascades to individual’s committing to more timely billing.

Our second example focuses on the client dimension of the balanced scorecard. At the firm level a goal might be adopted to broaden client relationships where ever possible. This might be translated into an objective measure that tracks how many clients are served by multiple practice areas and/or partners from different practice areas. At the practice level, this focus might translate into a set of target clients for whom the practice wants to expand its relationships (either bringing other practices into their relationships or by beginning to serve clients originated by other practice groups). At the individual level, that could lead to specific plans to introduce colleagues to selected clients (or conversely to seek introductions to colleagues’ clients).

Our third example focuses on cascading for people oriented goals and objectives. A firm level goal focused qualitatively on having the best people in the market could be measured via the number and nature of external recognition(s) the firm’s people get (e.g., Chambers, Best Lawyers, Super Lawyers, etc.). At the practice level, that could translate into initiatives and measures focused on getting people professional (or industry) certifications. In turn, individuals can adopt specific plans to build certification into their professional development plans.

Our final example focuses on how operational improvement goals might cascade in a law firm. In this case, imagine a firm that has adopted a goal to reduce costs related to delivering client services. A litigation practice in that firm might adopt an initiative to engage project managers on some or all of their matters. At the individual level, partners/engagement leaders would commit to actively partnering with those same project managers to capture the benefits of project management discipline on matters.

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These are obviously generic examples. However, if you have clearly defined firm level goals, those can (and should) be translated into measurable objectives so progress can be tracked and the firm can make adjustments if the strategy is not working. With clear firm level goals and objectives, practice groups and administrative departments can align their plans with key goals. Note, not every department and practice needs to align with every firm level goal – but, every practice has some valuable role to play in the implementation of the firm’s overall strategy. Finally, this cascading approach enables every individual to take meaningful action that contributes to the achievement of practice and firm level goals.

SURVEY RESULTS – Goals, Measures and Balanced Scorecards – December 2012 Strategy Topic of the Month

Posted on December 26, 2012 by Sterling

Our final strategy topic for 2012 focuses on what law firm management is doing relative to setting objective measures for their strategic plans. More specifically, what do law firms measure and are those measures in any meaningful way connected to their own strategies?

What we learned – in short – is that law firms measure financial results with real consistency. Beyond financial results, measurement is relatively limited and is often unconnected to firms’ strategies. That puts law firm management roughly 15 years behind corporate management – where balanced scorecards enable companies to translate strategies into measures in four primary categories:

Balanced Scorecard Graphic

The balanced scorecard idea was novel when Robert Kaplan and David Norton introduced it in the mid-1990’s. Essentially, they recognized the peril in having a company focus only on financial performance – without consideration to its performance vis-a-vis customers, employees and underlying business processes. Since then, research has demonstrated the positive impact of adopting measures in key areas beyond financials. For instance, a 2008 study published in Advances in Accounting found that “firms that adopt the balanced scorecard significantly outperform firms that do not (including financial returns).”

No one responding to this month’s survey has formally adopted a full scale balanced scorecard approach. However, roughly 40% of the firms responding to the mini-survey have either adopted portions of the balanced scorecard (25%) or are working with an informal version of the balanced scorecard (15%). This is consistent with what we found in early 2009, when we were putting together case studies for Balanced Scorecards for Law Firms – namely, very few firms have formally embraced a balanced scorecard approach to strategy implementation and/or performance measurement.

Unsurprisingly, 100% of law firms report having and using financial measures. In fact, the overwhelming majority of them consider their financial metrics to be either “solid and reliable” (24%) or “excellent and highly informative” (72%). To the extent firms have measures linked directly to their strategic plans, those measures are predominantly financial. Asked specifically if they have measures linked to their strategy, only about half of responding firms reported make any effort to link measures (financial or otherwise) to their strategic plans.

A summary of how prevalent measures in each of the four balanced scorecard categories are within law firms underscores the overwhelming reliance on financial results as a proxy for everything else.

Survey Table

The most striking thing here is that although over 95% of all firms have solid or excellent financial measures, 80% of firms have limited (or no) measures of client satisfaction. This is consistent with our October 2012 strategy topic of the month. In that study we found that relatively few firms have structured client feedback programs focused on their top clients. Frankly, this is both a huge missed opportunity and a potentially critical mistake. Even if you never seriously evaluate or adopt a balanced scorecard – at the very least augment your financial metrics with systematic feedback from clients.

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As always, we thank you for your input and willingness to share your insights via these brief monthly surveys. We will return next week with a recap of the top ten insights gained from the 2012 strategy question of the month surveys.

Best wishes for a healthy and prosperous 2013.

Goals, Measures and Balanced Scorecards – December 2012 Strategy Topic of the Month

Posted on December 13, 2012 by Sterling

Our final strategy topic of the month for 2012 focuses on what law firm management is doing relative to setting objective measures for their strategic plans. Peter Drucker famously said, “you can only manage what you can measure.” The question is, do law firms measure progress against the key elements of their own strategies (i.e., are they measuring what they are managing)?

Kaplan and Norton put systematic rigor behind measuring key elements of strategy with the Balanced Scorecard. The essence of the balanced scorecard involves adopting a set of measures that allow management to track whether strategies (and strategy implementation) is working. We take a particularly keen interest in the topic, having written a book for Ark Publishing/Managing Partner on applying balanced scorecard principles in law firms. A generic balanced scorecard adopts measures in four broad categories.

Balanced Scorecard Graphic

This month we explore the extent to which firms are using measures in these categories and the extent to which they are linking those measures to strategic goals.

As always, the survey is very brief (should take less than two minutes to complete) and all responses will remain confidential. If for some reason you do not see the survey in the window immediately below, click this link to be taken directly to the survey. Deadline for responses is end of business PST on December 21, 2012. Questions can be directed to info@sterlingstrat.com. Thank you for your insights and candor.

IMPROVING THE BUDGET PROCESS – September 2012 Strategy Question of the Month

Posted on September 30, 2012 by Sterling

Our September Law Firm Strategy Question of the Month focused on the budget process. Specifically, this month’s quick survey identified the budgeting practices that are most useful in real world settings in law firms. As in past months, we also looked for differences between firms reporting the greatest effectiveness in their respective budget processes from those reporting less success.

Unlike previous Strategy Questions of the Month (see for instance the June survey on strategic planning or the February survey on practice group management), there was not a tremendous difference between the most effective budget processes and others’. That may in part be a function of the generally high level of effectiveness law firm leaders reported in their respective processes. As you can see from the chart below, very few firms consider their budget process to be ineffective (or even of limited effectiveness).

To the extent there were differences between the “very effective” firms and others, the differences were very much on the margins. For instance, the budgeting approaches rated “absolutely essential” at firms with the most effective processes, were similarly rated “absolutely essential” by their peers in firms experiencing somewhat less success in the budget process. Nevertheless, there were a few notable differences (again, on the margins):

The most successful firms were more likely to build-up budget projections at the practice group level (in addition to doing so at the individual attorney and administrative department levels);
The most successful firms were somewhat more strongly focused on ensuring the budget reflected growth plans, whereas less successful firms were moderately more focused on ensuring their budgets reflected cost cutting commitments;
Finally, the most successful firms were more likely to focus leadership attention on aligning the budget with strategy (at the firm and practice group levels).

Firm leaders were asked to share how they approach the process philosophically (intentionally conservative, aggressive or “as accurate as data and projections will allow”). Roughly 80% of firms are striving for accuracy (over 90% of the most successful firms’ intent is to develop as accurate a budget as possible). We view that as a positive sign for the industry as a whole. In the depths of the recession (fall of 2008 and again in 2009), a majority of firms were taking a decidedly conservative approach to budgeting. The swing toward developing accurate budget projections is a healthy sign that leadership has greater confidence in the future.

The core question this month focused on which practices and approaches were most useful and helpful in the budget process. The top three approaches (each considered “absolutely essential” by over 60% of respondents) were:

Building-up projections at the individual attorney level (i.e., salaries, draws, working attorney receipts, etc.);
Developing administrative department projections from agreed upon priorities and strategies; and
Reviewing all attorney, practice and/or departmental projections via a comparison with the previous year (budget and/or actual).

A relatively high percentage of firms do not even try to build-up projected revenues at the client level (e.g., projected revenues from the top 100 clients) or at the practice group level. Slightly more than half of all firms build-up client level projections and fewer than three-quarters of firms develop practice level projections.

Finally, while the distinctions between the most effective budget processes and the moderately successful processes were only found at the margins, law firm leaders shared a number of important ideas, insights and advice in the open-ended comments. Among the most insightful input were the following:

Accuracy is important to us…final result of budget is cash flow to partners (who) plan their own lives around the draws and distributions. Also, variance explanations that are based on inaccurate budgeting rather than on real differences from our expectations are viewed with suspicion.
(We) do intensive capital expenditures budget, plus detailed monthly cash flow (which is NOT an income statement), plus zero-based approach to all expenses.
We also do both pessimistic and optimistic models based on individual attorney performances.
We update budgets every 6 month in rolling 18 month program of forecasting.
Expenses are easy and we can plug them in and hit them within one percent annually. Lining up expenses with strategies and goals is simple and straight forward. Predicting revenue and cash flow is the hard part; we are usually successful in estimating and in the last couple of years have had done well with monthly cash flow projects. Nonetheless, cash receipts are always a bit lumpy and make budgeting a challenge.
Formula for best shot at success — balance realization with utilization and monitor expenses closely. Be efficient and effective and take nothing for granted.
Our attorneys are very reluctant to forecast much more than 3-6 months ahead, so trying to get them to project for a full year has proven impossible. We base (the year) on trends, knowledge of practices and their short range projections.
(Relative to client level projections, we do a) case by case analysis of all contingent cases…review three year averages of attorney productivity…and review any large non-repeat type cases or situations.
(We) have found it useful when presenting the expense budget to management to sort (accounts) in descending order on dollar value. This helps to ensure that major items are discussed, and that time isn’t wasted debating the lobby magazine subscriptions.
(We use a) bottom up process. The Finance Committee and Board review budgets, ask for justifications and will require a bottom up revision to get the final budget in line with long range goals. (It is) time consuming but effective in getting buy-in at all levels.

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As always we thank the many, many law firm leaders who took the time to share their knowledge and insights on this month’s strategy question. The comments section is open for those who want to continue the dialog and we welcome your calls (312-543-6616) and emails (jsterling@sterlingstrat.com) as well.

Improving the Budget Process – September 2012 Law Firm Strategy Topic of the Month

Posted on September 21, 2012 by Sterling

The budget process is right around the corner – at least for the vast majority of firms that are on a calendar year cycle.

These quick monthly surveys are primarily intended to build a foundation of useful information and benchmarks for law firm leadership. While budget development may not be viewed as strategic, for many organizations it is a vital tool for allocating resources in ways that are consistent with and supportive of the overall strategy. At any rate, we can all benefit from learning about what is working best in budget processes around the legal industry.

With that in mind, let’s learn about what approaches are proving to be most useful and most helpful in the budget development process in law firms. As always, individual responses will remain entirely confidential. The survey should take less than five minutes. Aggregate responses will be reported at the end of the month on this blog. Deadline to respond is end of business PDT on Thursday, September 27, 2012. As always, thank you for your help and participation.

If for any reason you do not see the survey in the box below, click here and you will be taken directly to the survey host site.

Sterling Strategies

Tag Archives: Budgeting