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Six ways to reach the highest possible prosperity

It’s the bottom line that counts.

That’s the firm’s profitability. And maximizing it calls for more than bringing in new business.

The keys are several – a plan to follow, a strong managing partner to enforce it, a shrewd client acceptance process, partner compensation that rewards cash in hand, lots of leveraging, and culling out the deadwood clients.

Those items are outlined here by Colin I. Cameron, CA president of Profits for Partners in Vancouver, BC. The company advises small and midsize firms on optimizing profitability.

First, dream a little

Even the smallest firm needs a strategic plan covering the next three to five years, Cameron says.

That’s the blueprint for expansion and change and for growing the business. With it, the firm has a longterm focus and is better able to survive the ups and downs of the money.

There are two major advantages of setting out a plan.

The first is that it keeps the firm’s portfolio balanced so the partners’ individual practice areas complement each other.

Balance is a necessity. When the economy is down, there needs to be a practice area such as receivership or bankruptcy that can pick up the shortfall. That way, “when one practice is struggling, the other can carry the load.”

Conversely, when times are good, there need to be areas such as commercial transactions that allow the firm to take advantage of the top revenues.

With balance, no matter what happens, “the partners get paid, there’s decent profitability, and everyone is working toward the same goals.”

The second advantage of a plan is that it puts all the partners on the same page. Their individual goals are aligned with the firm’s goals, and as a result, “everybody makes the pie bigger” and everybody gets a bigger piece of that bigger pie.

To devise the plan, the partners have to answer questions such as

  • What are we trying to become?
  • Who and what are we today?
  • What are our goals?
  • What are the goals for each practice area?
  • What is our profitability now, and what do we want it be?
  • What is our culture? What type of culture do we want to have?
  • What’s preventing us from achieving all our goals?
  • Where do we want to be in five years?

Answering those questions forces them to “dream a little bit” and open their minds to discover what they really want to accomplish.

No managing partner? Get one

Every ship needs a captain. And that’s the managing partner.

Only with someone at the helm will the partners’ activities stay in line with the strategic plan so there’s continuity in client selection, marketing, business development, billing, collections, and so on. Without one person in charge, nobody is held accountable, and the plan is fruitless.

Many firms view themselves as too small to need a partner in authority and so operate with all the partners doing what they please, Cameron says. They call themselves firms, but they are actually just a group of solo practitioners sharing office space. Even if they have a strategic plan, there’s no way to get anybody to follow it.

The MP needs to meet with the partners regularly and call them to account on “what have you done in business development to help our strategic plan move along?” Without that, the partners will never work together, and the firm can never optimize its profitability. And partner compensation will always be a fight.

Search out the quality clients

To increase its profits, a firm has to increase the quality of its clients. And to do that, it has to establish a new-client approval system, because any new client “will either add to the profitability or take away from it and be in conflict with what the firm is trying to achieve.”

Evaluation needs to come from several viewpoints.

  • Does the client have the wherewithal to pay the bill? Check the credit history and financial standing. A struggling business may not be able to afford the legal work.
  • Will the matter be profitable? A partner may present a client who can bring in $1 million, but don’t count the money before estimating the cost of doing the work. It too could be enormous, which means the bottom line will be a wash.

Insurance work, for example, might produce a great number of billed hours, but the profit is going to be cut by the firm’s administrative costs as well as by ongoing rate pressures from the client. Similarly, securities work may bring in exceptional profit, but the firm may have to put in an incredible number of staff and attorney hours and not get paid until the IPO goes through.

  • What are the conflicts of interest? Go beyond checking for current conflicts, Cameron says. Take a hard look at the strategic plan to see what clients the firm wants to target. A small business prospect could ruin the chances of getting a big-league prospect the firm is trying to recruit.
  • Does the prospect fit the firm’s image? Business begets similar business. If the plan is to build a client base of Fortune 500 companies, spending a large amount of time on a one-time matter for an individual could hamper that goal.

Count the cash before the hours

The way the firm compensates its partners also affects the profitability.

A lot of firms focus on the number of hours billed. They look at the billings instead of the money realized and reward the partners for work that’s being done but hasn’t been collected on.

The reward should rest not on what gets billed but on how much cash a partner brings in “and how quickly the firm gets that cash.”

The partners who get their clients to pay fast should get a greater piece of the pie. And compensation for the partners who are slow to bring the money in “should be adjusted accordingly.”

A rough industry standard, he says, is 105 days. However, work such as personal injury can by nature lock up the receivables for several years. So if some partners are doing personal injury work and the others are doing business transactional work that gets paid regularly, the reward system needs to be set up to account for that.

But overall, no one should be rewarded for work that should have been paid for but hasn’t.

One partner, 40 paralegals

Leveraging the work is yet another profit enhancer.

The more the firm can hand over to the lower-paid billers, the better. The most successful firms “operate with high amounts of leveraging,” often as much as four associates and staff to one equity partner.

That leaves the partners doing only the work that requires their expertise, which in turn gives them time to spend recruiting high-profit clients, “which is what an equity partner should be doing.”

Leveraging’s greatest return comes from fixed-fee arrangements, Cameron says. And in terms of staff, the best return comes from paralegals, whose the ratio of billings to salary is sometimes as high as 4 to 1. It’s even been said that the ideal firm has 40 paralegals to one equity partner.

Making full use of its associates and paralegals as well as its secretaries, a firm can usually lower a client’s bill by 10% to 20% and still see a higher profit than if a partner did all the work.

He adds that clients not only want leveraging but expect it. As long as the work is done efficiently and effectively, they don’t care who does it. They want a reasonable bill.

Grow the top 20%; kill the bottom

Cameron further recommends staying constantly aware of the far ends of the business hyperbola.

General thinking is that the top 20% of the clients account for 80% of the profits. Meet with them regularly – and on the firm’s dime – to determine their level of satisfaction and also to ask if there are additional legal needs the firm can service.

It’s the managing partner who needs to do the talking: “Are we effective at what we do? Are you satisfied? Are we on budget? Are we on time?”

On the opposite end, evaluate the bottom 20% to see if some or all of those clients could be dropped.

Firms don’t think that way, he says. They take the approach of “we have 100 clients, and we’re going to allocate a bit of our time to each one.”

But the focus should be on maximizing the profitable work by getting all the business possible from the top 20% and replacing the bottom 20% with more from the other end of the curve.

He recommends classifying the clients according to how much profit each is producing as compared to the number of hours worked and the cash at the end of the day.

Then rate them perhaps as A, B, C, and D, with the D clients being the least profitable. The firm likely doesn’t want any more work from them.

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