This is the last of this mini-series on law firm profitability and how to effect serious improvements in Net Profit.

The previous articles illustrated that there was only one sound way to improve law firm profitability, which is to improve fee earner productivity.

You can increase profit by doing “more”: or by doing the same volume more efficiently.  In a law firm, that means either employing more fee earners or getting your existing fee earners to produce more income per annum.

Actually, we are farmers

I liken this to the dilemma of the farmer, who can either increase their profit by farming more land or by increasing the yield of wheat, oilseed rape, sheep or milk, etc from the land that they farm at present.  To farm more land, (employ more people), requires more capital.  To farm more efficiently, (improve income per fee earner), usually requires better management techniques and rarely so much in the way of additional inputs.

However, in real life, staff numbers ebb and flow, (although if you have a strategic plan to grow, one hopes staff numbers – broadly – expand), fee earner performance fluctuates, as the economy and their personal circumstances varies and overheads rise inexorably, while firms try to keep a lid on them.

Real life

So, in real life, how do firms increase their profit, (which is an absolute value, measured in £££’s), and profitability, (measured as a percentage of Income)?

The first thing to ensure is that you have a plan.  At the very least, this should be a Budget and a Cashflow Projection.  The plan should outline what the firm is expecting to do: and, in truth, it will undertake a mix of all the techniques we looked at in the previous three articles.

Some areas of the firm will grow their fee earner numbers.  Other will have a look at their returns and decide that they should – and can- achieve more from their existing staff complement.  Perhaps they will have some pricing training or maybe it will be time-recording or an excellent case management package, that saves loads of time and allows the fee earners to do many more matters in the year.  And, of course, the firm may well look at its overheads and decide that there are areas for cost savings.

I might have just told a white lie

Budgets and cashflow projections are needed because you need to be sure, that if you grow fee earner numbers, that you have the working capital to do so, or if you want to go down my recommended route of improving fee earner profitability, that you have the appropriate training or IT budget because, although I said that improving fee earner profitability had no impact on overheads, it might require some small investment, be that in e.g. training courses or IT: but spending £- say £10k – to recoup – say £500k per annum in perpetuity, seems like a great investment to me.

The key message

In our model, we increased staff numbers by 25% to increase Net Profit by 60%.  To achieve – broadly – the same Net Profit by improving fee earner performance, we only need to improve productivity by just over 7%.  That illustrates that increasing fee-earner productivity is the more achievable way to increase profit.

One other dimension we need to add is time.  We can achieve increases in fee earner productivity and eventually we may have the most productive fee earners in the whole legal profession, and we will reach a limit in how productive our staff can become.  We cannot then grow further.  So, in the longer term, assuming we want to expand our business, we will have to increase fee earner numbers.  The top law firms have thousands of staff and nearly all of them are highly productive.

We saw in the first article in this series, that growth costs cash: but that cost can be reduced by better financial management, (billing quicker, collecting debts more quickly etc.).  If you want to grow, the first step is to generate cash by making your fee earners more profitable and then using that cash to grow the firm through adding fee earners.  The order of events is critical if you don’t want to create a spiral of low profit and cash shortage.

A bit of fun

But what if we could do all of these at once, how would that leave us?

In the table below, our firm has gone to town and:

• Increased staff numbers by 25%
• (With a resultant increase of overheads of 10%)
• Increased fee earner productivity by 10%
• Reduced “Other Overheads” by 10%

The impact upon profit is impressive!

But what if we could do all of these at once, how would that leave us?

In the table below, our firm has gone to town and:

• Increased staff numbers by 25%
• (With a resultant increase of overheads of 10%)
• Increased fee earner productivity by 10%
• Reduced “Other Overheads” by 10%

• Income up by £1.9M
• Fee earner staff costs up by £750k
• Total overheads increased by £52k and consequently
• Net Profit increased by over £1M

Conclusion

Before everyone runs off to start embarking on a plan to do it all at once, please remember:

1. Additional Fee earners gives potential financing and cashflow challenges see 1of 4 in this series
2. Improved productivity requires great culture and management see 2 of 4 in this series
3. Cutting Overheads may be a Fool’s Errand and not achieve much see 3 of 4 in this series

You should look at doing 2 first, to maximise the cash and then look at 1. Leave 3 for a rainy day.

Plenty of firms manage profit improvement. It all comes down to culture, strategy and management.

Read more from this series…