Having survived the disruption caused by the recession the economy is starting to improve. But clients are still very cost conscious and there is more competition than ever. Most practices have taken the opportunity to adopt flexible working practices and remove the obvious costs by reviewing their profit and loss account. But this only takes you so far.
Productivity is traditionally defined as being recovery, which is work billed and paid, or expected to be paid, divided by capacity, which is standard chargeable hours multiplied by standard hourly rates. This is typically in the range of 75% to 95% depending on your policy of setting hourly rates. The average for the ten firms taking part in this survey was 81% with a low of 68% and a high of 91%.
Many of the factors contributing to this formula are hidden because they do not have a specific line in the profit & Loss account. In my experience almost all professional practices have failed to leverage process improvement to its fullest extent. To do this you need to seek out any activity that does not add value to your client. This is done by looking at the whole of your business process from acquiring the client through delivery to collecting the cheque at the end of the job.
My approach to lean process is just as applicable to a professional service firm as manufacturing. It’s all about doing more with less. I use a continuous improvement approach by harnessing your team’s knowledge through project teams operating on an eight week cycle. Imagine what your business would look like in twelve months’ time if a new problem was even partially solved every eight weeks.
As the economy starts to grow again the working capital needed to support additional work in progress, debtors and people can be release from your working business cycle by improving your business processes. Profit and cash need to be locked in. Banks are still concentrating on building up their balance sheets and continue to be risk averse.
An independent review of process, overheads and operating costs is essential before the growth of the economy accelerates as we progress through 2014.
I have recently completed a Productivity survey of ten law firms in the North West. The fieldwork was carried out from April to August 2014.The results that follow are anonymized but I would like to thank all the participants. The firms varied in size from ten fee earners to one hundred fee earners and operate in diverse sectors including Personal Injury, Crime, Corporate, Property and Family.
The survey showed that the average lost profit per fee earner was £16,000 and ranged from a low of £5,000 to high of £31,000.
The top ten issues arising from the survey are:
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- Doing too much work on a case Most firms are giving a Rolls Royce service for the price of a Mini. There needs to better feedback from over runs to improve scoping the assignment and pricing the job
- Cost of poor technology Many firms are using off the shelf software but this approach is restricting the way they would like to do things
- Under delegation Work is not always passed down to the lowest capable person
- Rectification of Errors and Mistakes Too much senior management time is taken up with investigation and then putting right errors and mistakes
- Accessibility of fee earners to clients Balancing accessibility with having the time to do the work is a problem for all professional service firms
- Training of staff to properly use the practice software Users often use less than 5% of the capability of standard software but there are some people in our office who understand more than we do. It’s all about identifying and then promoting best practice
- Soft skills training Technical staff often find it difficult to communicate both internally and with clients. In my opinion the answer lies in group role play exercises.
- Waiting for information Professionals often wait for information because they are governed by other people’s priorities. What incentive can we give to the other party to hurry them along?
- The financing cost of excess work in progress and debtors – By reducing the level of lockup we reduce the financing cost of the practice and also release valuable cash
- Management time dealing with complaints – Too much senior management time is taken up with investigation and dealing with complaints
Henry Ford had a saying about his advertising spend. He said that half was wasted and if he knew which half he would cut it. I have the same thought about productivity in professional service firms. My rule of thumb is that half cannot be touched but the other half can be addressed with the help of process review and using internal project teams to drive the changes. According to the findings of this survey, if you are the average legal practice in Greater Manchester, then you could generate £8,000 of additional profit for each fee earner per annum, recurring every year. What would the impact be on your firm of addressing these areas?
Your management team may not be able to spend the necessary time this project needs. Their role is to make decisions, establish consequences, and deliver on your projections. There is a clear cost benefit to your firm and remember the savings you make will be there year after year.
The question to ask yourself is “What barriers are there stopping me from making a start on a productivity improvement programme”? If you don’t start soon you probably won’t start at all. If you do, more profit, increased cash flow, reduced risk, and the ability to fund your future growth will be your rewards.
Published in the Manchester Law Society Messenger in November 2014
Alan Hyams BSc FCA CF
Business Performance Coach
Growth Accelerator Coach
07860 813444