Seven pillars of wisdom

Sometimes itís a good idea to just take a step back and take a look at the very fundamentals of good business practice. Success is not always down to inspiration and the big idea ñ more often itís down to doing the basics well. Commonsense, commitment, effort and a bit of nous can take you a long way and in these current testing times, itís vital that firms maintain their discipline and are not diverted down byways or distracted by ephemera. If you focus on nothing else, focus on these seven areas:

Marketing activity

Every firm needs to get clients onto its books and instrumental to that process is the sales and marketing activity being undertaken by the partners, marketing department and the firm as a whole. Although my former marketing partner would probably not be able to believe his eyes at this statement, marketing is a very important indicator of how well a firm is doing. It must, obviously, be targeted, robustly managed, and honestly measured against previously set objectives, but it is vital that it happens. Whether it is low or no-cost activities or a full-blown marketing campaign it has to be done in order to maintain a constant flow of client opportunities.

New instructions

It is important to examine the number and quality of new instructions on a regular basis. In bulk areas of work this can be shown by introducer as well as work type, but in low volume/high margin work it is very important to examine closely the size and quality of the new clients. Is this business worth having? You should know whether interim billing has been agreed, how long to billing, and estimate of ultimate bill for each key client. It is also important to know which new files are opened for existing clients and which for brand new clients. For the latter category you must have a method of measuring why they instructed the firm, perhaps by recording the source of work on the system when the file is opened.

Time recording

nWith time recording there are two elements that should be studied: utilisation and realisation. Utilisation is the amount of chargeable time each fee earner manages to squeeze out of every working day. Firms vary in the amount of time they will target their fee earners to record, and it also varies by department and work type. On average the goal should not be any less than 1,200 hours per year or 100 hours per month. This takes into account the fact that the fee earner will have holidays, sickness, training days etc so it is important to realise that in months where they have holidays they will probably record less than 100 hours, and so to achieve the average they need to be recording more than 100 in those months where they do not have holiday.

Realisation or recovery is the measurement of how much of that targeted chargeable time is actually turned into fees billed to the client. The target needs to be 100% or more but in my experience this is very rarely achieved. The charge out rate to the client needs to pay the overheads and provide the business with a reasonable profit above the cost of employing the fee earner. The cost rate will be the fee earner salary plus any other costs that can be fairly attributed to them including secretarial cost, training, library, marketing (including any referral fees paid) etc. Divide this by the annual hourly target (1,200) to get the cost rate per hour. The examination of this data is all about managing the business so that the right fee earner is acting for the right level of client so that as many of their recorded hours can be charged at their full charge out rate as possible. It also goes back to the need to monitor files opened to ensure that the firm only acts for those clients who can and will pay when billed.

Billing

Managing this aspect of the business is about educating and coaching the fee earners to manage their clientsí expectations from the moment they first see each other. By communicating effectively with clients about fees and billing from the beginning of the retainer, and throughout the life of the file, there should be no reason why the fee earner should not achieve that 100% realisation for the work that they do for the client. It removes embarrassment about billing and frequency of billing.

This also relates back to the need to monitor each new file opened and ensure that the clientís expectations about billing have been set correctly. Where possible interim and on account bills should be agreed with the client for any long running matters, and all disbursements should be paid in advance of the firm incurring them. Where possible obtain money on account of future fees and agree case plans with budgets with the client in advance of doing the work. There should be no excuse for a fee earner having to ësubí the client from office accounts for out of pocket expenses.

Cash Collection

It doesnít matter how many new files are opened for how many important and major clients, or how much time is recorded, or indeed how many bills are raised each month, if the cash does not get collected and put in the bank account the business will die. It is a truism, but cash is king, it is the lifeblood of all businesses. Extremely profitable businesses can go bankrupt for lack of cash. Nothing is more important for senior management than looking after the cash and I mean nothing. Have a good rolling cash flow forecast looking forward at least 13 weeks and measure performance against it on a daily basis. Make sure your credit control system is robust and give the job to your most tenacious member of the accounts staff giving them full power to knock on your door if any fee earners or, more likely, partners are obstructing the process of recovering cash. Involve the fee earners in the collection process and make sure they contact their client personally by telephone at an early stage if the bill is not paid within reasonable timescales. Ensure that the fee earners are targeted, measured, and rewarded on cash collected and not on bills delivered.

Lockup Debtors and WIP

Successfully managing lockup is again founded on ensuring that the initial retainer is entered into on the correct basis. If client expectations are managed correctly, if money is obtained on account of future costs and disbursements, and if time recorded is billed in a timely fashion, there should be virtually zero debtors in the business. An over simplification perhaps, but the principal is sound. Work in progress is a different story. Every legal business will have work in progress, whether it is recorded on a computer system or not, and depending on the mix of work types it can be quite high. For conditional fee personal injury, for instance, the work in progress can be the equivalent of a yearís billing or more, and there is nothing that the business can do to avoid that. However, for work types where interim billing is possible, it is important that the WIP is carefully monitored and billed at the earliest opportunity. Each month the manager should sit down with the fee earner and examine the WIP listings, ascertaining which files are capable of being billed and then doing so without delay. Once again, setting client expectations at the start of the file will make this process so much easier.

Direct costs and overheads

Fee earners can and should be targeted on direct costs such as training, library, marketing etc but they can do little about the general business overhead. However, there is no reason why management should not target departmental savings or enlist help from all staff in a bid to minimise expenditure, thereby helping the business maximise its cash retention.