This is the second of two articles on fixed and capped fees. In this one, we will look at some of the steps firms need to take to improve their financial performance in the fixed fee world. First a couple of reminders. ‘Fixed fees’ covers more of legal business than might appear at first sight. For fixed price work, the firm has a number of financial levers it can pull. A useful mnemonic is P-R-I-C-E-S. Price, Repeats, per Item variable costs, Capacity, Expertise and Speed. There is a full explanation in the first article.
So what does a firm need to do?
Work out whether you do fixed and capped fee work
This sounds obvious. But there are firms that think they do no fixed price work, who actually do quite a lot.
Perhaps part of a job is fixed price or capped fee. Perhaps the job looks like hourly charging because the draft bill is based on time worked but partners always adjust the bill downwards to reflect what the clients expect or what other firms are charging. Perhaps, in practice, however much they keep time records, partners always charge a regular client the same fees for the same kind of job on a ‘swings and roundabouts’ basis.
If any of these apply to you, you are operating in the fixed price world, possibly without realising it. If you are, then the sooner you face up to it, and grasp the new levers of profitability for the relevant types of work, the better.
Why does this matter? An illustration.
Question: Is it good for profits for a partner to encourage assistant solicitors to do more work on a job, in the sense of charging more hours?
Answer: (As long as it’s going to bring a better result and in the clients’ best interests, of course), when hourly charging, yes it’s good for profits. When working on fixed fees, it’s a disaster as the firm can charge no more if more work is done – the partner needs to discourage assistants from doing more hours and instead find ways to get the work done well – and the fixed fee earned – in the shortest possible time. Suddenly the accelerator has become the brake.
Identify the levers of profitability and train people to pull them
Work out what levers people are supposed to be pulling and teach them what to do.
Lawyers are notoriously uninterested in figures. So, the key thing to do is not to give the impression that this is some sort of accounting exercise where numbers in reports dance and flicker to the beat of some inaudible financial drum. This is about their behaviour – what they do, day in day out. Certain behaviours improve financial performance and others ruin it. Let’s assume that most of your people want to see the firm prosper. The only questions are what do they need to do and how can they learn to do it?
How do you get people to understand how behaviour affects profit, and how to behave to improve profit? The way I do it is by means of a law firm finance simulator. For years, my colleagues and I have used a simulator that is based on hourly charging. More recently, I have developed a simulator for the new world of fixed and capped fees, along with the training exercises and materials that go with it. These are designed to help people grasp the significance of the levers of profitability and give practice in using them. It is very important that partners get beyond abstract figures to make the connection between the normal activities of their working days and the financial performance that results. The exercises require partners to explain and plan out what they will need to do, who they will need to speak to in order to make happen in real life the things they can see happening in the simulator.
The advantage of a simulator is that no real money is lost, no real staff made redundant, and no partner is left looking stupid in real life. Also the same situation can be replayed to try different approaches, unlike real life.
Build expertise in the right places
One of the new levers is Expertise. Start by identifying who in the firm has a hand on each of the levers, and see that they are suitably experienced, trained and supervised. Simple really. There isn’t space here to go into a lot of detail, but the key roles and the expertise you need from the people filling them are clear.
The critical tasks of Top Management (in your firm this will be the managing partner and team, or the equity partners acting together, or a chief executive) are strategic and long term.
They must steer the firm into attractive markets where the firm’s services are in demand and where the prices are good. This is a difficult and time consuming task, and there are risks involved. This is pulling the Price lever.
They need to make sure that decisions to take on work and agreements on fees are made by senior people, and that these people are informed about and familiar with the financial consequences of the decision they make. They will need to train them to do this. This is training the people who pull the Price lever
They need to build capacity in some areas and reduce it in others, by setting up and closing down areas of work or even whole departments, based on how much work the firm can sell. This is pulling the Capacity lever.
They will need to deploy expertise in the most useful places – such as selling, pricing, financial management and process improvement. This may involve winning round or overruling influential partners who traditionally have seen this as their turf. This is pulling the Expertise lever.
Senior managers (in your firm this will be partners, and senior non-legal professionals, like the marketing, finance, IT and HR managers) need to focus on pulling the Price, per Item variable cost and Speed levers. They need to step back to see the whole picture of what the clients expect, what the firm agrees to provide and what outcome the clients value and will pay for.
They need also to become skilled pitchers for business, fee negotiators and trouble-shooters, to make sure jobs are completed to agreed specification, on time and on budget.
Put good measures in place and use them
In addition to choosing the right levers, you need the right gauges. Someone once said you get what you measure. So you need to measure what you want to get.
It’s no good encouraging people to believe that, for example, the Price lever is important, if what you measure and report on is gross fees billed. You need to measure and report on average price/fee by specific types of matter. For the Repeats lever, it’s no good reporting on chargeable hours. You need to watch matters completed, broken down by team.
Where to start
If all this seems daunting, perhaps you should start with a single step. Tell your managing or senior partner that his or her top priority for the coming area is to think about and then equip the firm to compete effectively in a market where there is less and less true hourly charging, and that you will support what comes out of it.
Contact Julian Boardman-Weston
This article first appeared in Managing For Success, the magazine of the Law Society’s Law Management Section, and is reproduced with permission.
