What got you here, will not get you there – Operational effectiveness at law firms in times of hypergrowthThe Grey Matter Team
By Archana Venkat, Chief Marketing Office, Trilegal
Indian law firms have been witnessing hypergrowth in the last three years, thanks to regulatory changes, proactive government led initiatives to favour cross border trade, and a consequent growth in the business landscape. A large part of this growth at law firms has been inorganic with frequent acquisition of rainmaker teams that can complement and supplement existing capabilities for better client engagement. The obvious upside in these acquisitions is the estimated growth in revenues. But the not-so-obvious downside is predicting when this growth will reflect in the books, and its impact on overall profitability and efficiency.
Why is this important?
Law firms have traditionally not imposed thresholds on operational effectiveness and allowed Partners to manage their operations (profitability, time billed, rates, collections) at their discretion. While this is good for Partners who are naturally fiscally prudent, it does not help those whose interests lie primarily in client service. As a result, different Partners may adopt different operational metrics that suit them. At a firm level, this can cause several challenges such as
- Impacting cash flow: If one Partner’s billing cycle is 30 days whereas another’s is 90 days, how does the delay in collections get addressed? Do you dip into reserves, delay salaries or raise funds by diluting equity?
- Affecting client experience: If Partners bill the same client different rates for fairly similar pieces of work done, it will raise a red flag in the client’s system forcing them to pull up the firm and seek blended rates. Further, if different clients are offered different rates for the same piece of work done, then word spreads in the market, creating animosity among clients and the firm. No one wants to be paying more for a service.
- Slow down go to market time, as cash may not be available to fund initiatives
- Influencing the talent pipeline: If junior lawyers emulate the behaviour of their seniors when it comes to daily operations, then they will suffer from the same challenges that plague the seniors. Further, as firms open up mobility between practices to junior lawyers, it will become challenging to re-learn a new Partner’s operating style, as an when talent moves between practice areas. This can add to the learning curve and slow the candidate’s performance, at least in the short term.
Onboarding new talent at senior levels without addressing underlying operational inefficiencies can only complicate this scenario further.
So what can law firms do?
- Educate lawyers on the importance of operational effectiveness – Being super specialists trained to address specific issues, one cannot expect all lawyers to understand the business aspects of running a firm. So a simplistic primer covering the following details can be shared with lawyers – how does the firm make money, what is the lawyer’s contribution in this process, how does client billing impact firm revenues, what are expenses and to what extent can they be managed, how to read your personal P&L statement, and why does one need to balance profits and investments. In my experience, it is easier to co-opt lawyers in the journey to operational effectiveness, than imposing thresholds on them.
- Identify thresholds for key operational metrics at a firm level – I like to look at not more than 3 indicators for firm health – Profitability, cash flow, and expenses. Each of these can be derived from other KPIs at a lawyer level, such as billable hours, resource utilisation, realisation rate (that contribute to revenues), billing cycle, billing accuracy, collections, (that contribute to cash flow), and BD costs, team salaries, employee engagement costs, OPE costs on client engagements (that contribute to expenses and impact profitability). It is equally important to factor in possible disruptors and exceptional circumstances that can affect these metrics. Some of these scenarios can include underutilisation (if you have hired more lawyers than what you need), little or no revenue recognition from new Partners (who usually take a couple of years to start bringing in distinct clients and generating revenues of their own), and impulsive BD initiatives with no clear return on investment. Once the preferred metrics are identified, thresholds must be assigned to them alongside a process for addressing exceptions.
- Leverage technology to help Partners stay effective – Retrospective analysis of operational performance data is not helpful for course correction. Partners often benefit from immediate triggers. This means implementing technology led solutions across the firm to support in the following activities.
- Pricing management system that can help ensure your pitch has the right rates before you send the proposal to the client
- Resource management system that works on your rates and suggests the ideal resourcing mix on a project
- Billing system that triggers reminders for bills to be raised. Some law firms are also experimenting with systems that automatically raise bills based on time charged by lawyers.
- Collections support: Through a shared services model, certain firms have allotted individuals who can follow up on delayed payments.
- RoI calculator: At a personal level, this is immensely useful for lawyers to understand where their efforts are being directed. For example, if you have spent 4 hours travelling to a client location, you may bill the client for the flight charges, but how do you factor in the time cost? Extrapolate this to long overseas trips, sponsored events, and lavish dinners with prospects, and one will realise how much time is spent on activities that are inherently low return in nature.
It is a common tendency for firms and people alike to not question the good times. It is also a reality that good times don’t last forever. So, while the going is good, firms can plan for how to better manage their operational performance and factor in future disruptions.
About the author –
Archana Venkat has over 17 years of experience in leading marketing and operations strategy. She has previously served as Chief Operating Officer for one of the business units at a Big 4 consulting firm. Views expressed are personal.