20 May 2019
What drives profit and sustainability?
Profit is arguably the most important measure of all, because it is profit and only profit that is divided amongst the partners and is after all the reason why the vast majority of firms exist.
Achieving increased profit and financial stability in a highly competitive market, is increasingly challenging, and firms need to concentrate on profits and margins, rather than fee income growth. Increased competition from not only within the industry, but from outside the legal profession, means that concentrating on the drivers of profitability is a must for all practices. Without a solid understanding of them, firms will fail.
Fees and Chargeable Time
Production of quality chargeable time is key. Successful firms have a higher ratio of fee earning staff to non-fee earning staff, and understand that fee earners need to earn fees and not be side tracked into non-billable work. There is also an increasing trend in successful firms to automate and gain efficiencies from maximising the use of technology and up to date software.
Ensuring work is performed at the right level of staff also increases margins, but it is equally important that fees billed to clients are at the right level for the service provided. In a competitive market, there is often a desire to undervalue the service the firm has performed, and pass on all cost savings to the client.
It is vital that practices sell the value of what they are providing, rather than base the fee on what it costs. Successful firms are the most efficient at billing. Procedures are needed throughout a firm to ensure that time is entered and that bills are raised promptly, to ensure that clients see the value of the work that has been done. A fee has a maximum value immediately after a service has been promptly and efficiently delivered.
Staffing is normally the major cost and the staff are a major asset of the firm. It is vital that firms recognise this and spend time ensuring that the team works well together, is engaged and focused on the firm’s strategy and plans. A minor incremental increase in a team’s output can significantly improve margins and consequently profits.
Strategies to Increase Fees
As firms battle to increase profits, they strive to look after existing clients, and increase the average spend per client by providing them with more services or undertaking more of the same work for that client. Firms that are delivering the best profits are in possession of up to date management information, and understand which of their service lines and clients are the most and the least profitable. Some of the most profitable practices specialise only in a limited field, and add value to their work as specialists.
Cost Control – Overheads and Variable Expenses
It is vital that no firm loses sight or control of its overheads. The results of our survey show that all firm sizes have continued to keep a tight control of their overheads. Profitable firms have seen savings, taken as a percentage of turnover, in many areas including rent, Professional Indemnity Insurance (PII), and non-salary overheads which has a knock-on improvement on net profit.
Successful firms will understand the value of the services that they provide. With that understanding, they can provide client service effectively, and know how to target their profitable market. Firms that understand this will achieve value in their billing, and ensure their clients recognise and pay this value. Whilst also controlling costs, they can achieve the best profit levels and ultimately financial stability in an ever-changing profession.