Following on from the publication of the 2019 NatWest Legal Benchmarking report, David Weaver, Commercial Head of Professional Services at Natwest spoke to tmgroup to share his advice on how law firms can make themselves more profitable.
1. Benchmark your own firm’s performance on a regular basis
Firms want to be the best at everything, but this is clearly unrealistic. Firms tend to talk about what they are good at and try to get even better at this –rather than focussing on areas of under-performance where improvements might more easily be achieved.
So when you benchmark your own firm, focus on the areas where your firm is currently below the upper quartile figure and think about what needs to be done to achieve better results.
Reports, such as the NatWest Legal benchmarking report, allow you to determine how your firm is performing when compared with firms across the UK, firms within your region or firms of a comparative size.
2. Always measure profit – instead of focusing on fees and time
Profit is the most important measure, as it is the profit that is shared amongst the partners. Many firms focus too much on fees and time recorded and not enough on profit.
Historically, this has been because firms have always found it easier to measure fees billed than to calculate the profit earned for different types of work for individual matters and for different fee earners. This has resulted in some strange behaviours – with many partners being too focused on the size of their fee portfolio and with less focus on the profit being made.
It is clearly important that growth is profitable growth – and not arising from poor quality and unprofitable work. There are too many firms who make the mistake of thinking that if they continue to grow they are bound to become more profitable.
It is important in all firms that there is constant measurement between the fees generated per fee earner with the salary cost of that fee earner. The danger is that as fees increase, the cost of the fee earners will grow at the same or an even faster rate – and there will be no improvement in profitability.
3. Stop letting fee-earners get dragged into non-fee earning
One of the issues that will influence profitability is the relationship between the number of fee-earning and non-fee earning staff. Fee earners need to do the fee earning and should not be dragged into more non-fee earning work than is necessary.
Maybe firms should be looking to increase support numbers or employ some more business development professionals to help fee earners to become more productive. Fee earners will never be fully productive if they have to spend too much time doing business development activities – even if they happen to be good at it.
4. Review your gearing and put some rules in place
Gearing is the total number of fee earners per equity partner (total fee earners – including equity partners – divided by equity partners). Clearly, if a partner can manage a larger team, then they can bill more and make more profit through that larger team, while if the partner just works alone there is a limit to the billings that can be generated, and the profits earned.
Gearing has generally increased year on year in the legal sector and whilst it’s encouraging to see this number rise, this figure should not be increased until everyone is working at capacity – as it’s always better if additional work can be resourced with the existing fee earners before recruiting new people.
If gearing is to improve, then perhaps there needs to be a rule that when a file is opened at least two fee earners must be allocated to the file.
It is too easy for one person to do everything – and the consequences will be lower gearing and poor efficiency. Often the senior lawyer is personally incentivised to do the work on their own, as they need to achieve a certain number of recorded hours. Incentives need to be linked to the desired behaviours.
5. Invest in your recruitment and retention
It is important that everyone in the team is very good, so that everybody can trust everyone else. Partners therefore need to commit more time to recruiting the best people, to developing these people further and to ensuring that they remain at the firm for longer.
Many managing partners comment on how they can attract and train good people, but who then often move on after qualification. Developing your own people and keeping them for longer should improve both client service and profit margins.
Want to find out more about making your law firm more profitable?
Take a look at the 2019 NatWest Legal Benchmarking report