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Law Firms as a Business: 3 Areas Small Law Practices Fall Short

Many lawyers (including my wife – who has been practicing for over a decade now) insist that practicing law is first and foremost a profession. Early on in her training and education, she came to appreciate the mental rigors, ethics and professionalism required to think, act and behave like a lawyer.

However, whether lawyers choose to work at a firm, go in-house with a company or start their own practice, those who approach their profession in this manner miss the bigger picture. As a result, far too many lawyers fail to understand the operations of the firm as a business (e.g., work flow, budgeting, collections, target marketing and profit and loss). Perhaps even more compelling is the fact that business savvy lawyers have a huge leg up on their competition.

In the course of my research on and consulting within the legal industry, I’ve discovered several gaps between how the traditional business world behaves and what happens in small law firms. This is not to say that the business world has it all figured out – far from it – but perhaps sharing some of these gaps might help someone out there get a firmer grip on their industry and their own business.

GAP #1: Actively Listening to Customers

In the business world, companies regularly keep their finger on the pulse of their customers. This includes understanding who their customers are, how they buy, how they think and how satisfied they are with the company’s products or services. Two quick examples:

  1. In the summer of 2011, Netflix ignored their customers by splitting their DVD and streaming businesses and effectively increasing prices by 40%. As a result, they lost a whopping 800,000 subscribers, their stock price fell to less than half its previous value, and the company became one of the 10 most hated companies in America.

  2. Who remembers what products Apple originally made? For two decades it made really ugly computers. The late Steve Jobs was not only incredibly effective at understanding what customers wanted, but also at innovating and providing a product to meet customers’ needs didn’t even know they had. Hence the disruption of the consumer electronics market in the early 2000’s with the iPod, iPhone and iPad.

In small firms this same effort is ad hoc at best and ignored at worst. Tangible data and insights are replaced by anecdotal stories and guesses. The problem here is the age old analogy of flying a plane blindfolded. Sure, with enough practice, you might get to where you are going. But it’s not sustainable in the long term, you can’t grow profitably and (worst of all) you cannot adapt to what your customers want.

Tips to Bridge Gap #1:

  1. Start with your existing client roster and determine your A-List/Top Tier – list them from best to worst by asking five basic questions:

  • How well do you know their business/personal situation?

  • How often do they call/meet with you?

  • How quickly do they pay bills?

  • How frequently do they refer you good business?

  • How profitable are they to you?

  1. Conduct one-on-one’s with your top tier clients and document your findings – meet face-to-face (if possible) and walk through a standardized list of questions for all, including

  • What is working/not working?

  • How and why do they buy from you?

  • What needs to improve?

  1. Make collecting feedback part of your routine – if it’s not routine, two things will happen. First, it won’t get done and second, you will get minimal (if any) benefit from it. Some prefer to collect feedback at the conclusion of every matter. Others make it a regular part of closing out their books – monthly or quarterly.

GAP#2: Consistently Evaluating the Health of the Business

In the business world, the norm is 10Ks, benchmarks, metrics, analysis and action plans. These are part of the daily routine. Publically traded companies are required to analyze their numbers but privately held companies are just as dedicated to knowing their numbers and learning from them. It’s not difficult to streamline key metrics and it saves them time and money in the long term.

In small firms, there are two main shortfalls – a lack of data and a lack of insights from the data. Some firms (by no means the majority) do generate regular P&L’s, but there is usually a lack of consistency in reviewing or acting on the information. Moreover, there are other important metrics to track outside of revenues and expenses. Work in progress, cycle time of cases, marketing ROI and realization rates are just a few. The core problem I see is by not looking at (and improving) the key drivers of your business, you are leaving money on the table and you have a high probability of not seeing a problem before it’s too late.

Tips to Bridge GAP #2:

  1. Understand the drivers of your business – there are literally hundreds of metrics and benchmarks that businesses point to as economic drivers. While there are several common drivers in law (e.g., profit, realization rate, profit per partner/resource, etc.), you must analyze your business and determine the three to five drivers that matter most to you. These vary by practice type, customer type and work flow.

  2. Make sure you have quick access to the right data – not just in terms of what technology you use, but how it is set up. There are far too many reports available from Quickbooks and virtually every accounting software package available. Knowing which ones produce the right data and automating the reporting features in your software make all the difference.

  3. Create focus with a dashboard – once you have the right data, spend the time to put it into a digestible and actionable format. This really combines the first two tips above: limiting the data you review to what really matters and getting to it quickly. Analyzing trends, benchmarks and forecasts are key to success.

  4. Schedule it on your calendar – once again, building a routine is essential. Treat your review of the business like a client meeting. It’s that important. Schedule monthly reviews for a quick pulse check and quarterly ones for more in depth analysis and insights. Act on what you learn.

GAP#3: Efficiently Handling Waste

In the business world, waste is a common adversary. In May, we discussed the most common types of waste and how to focus on efficiency using resources and maximizing value. Executives constantly ask “how can we maximize the value we bring and minimize the wasted effort or materials we produce?” Through well documented processes, a relentless pursuit of efficiency and robust measurement plans, companies leave no stone unturned when it comes to reducing waste. In support of this effort, there are a massive number of tools at play. From Six Sigma to process mapping software to templates, checklists, workbooks and program management offices, these tools are abundant and required.

In small firms, matter management often takes an informal and, in some cases, haphazard approach to managing tasks and resources. The goal is usually just to get the project or product out the door as quickly as possible. But for the past several years the discipline of project management has been creeping into larger firms looking to improve results and reduce waste.

Even in solo firms, as the business grows it will reach a point where multiple matters are happening on different timelines. This inherently creates waste in the process. To be as efficient as possible with time, resources and money, consider adding structure to the management and flow of projects. There are lots of low cost and free tools out there – you could even start with just a basic excel based project plan. But tools are only part of the solution.

Tips to Bridge GAP #3:

  1. Set clear objectives and define the scope – a laser focus on what the client needs and what you are trying to accomplish is the first (and often over looked) step to bridge this gap. Every lawyer utilizes an engagement letter of some sort, but how many take the time to document the client’s objectives, the scope of activities included and how a budget will play out over time. Not many.

  2. Create legal project management “light” that works for you – this includes picking tools you are comfortable with, mapping out what will be done when and by whom, and how one matter flows alongside other matters currently under way. Find the sweet spot between too much project management and not enough. You don’t have to over-engineer it and you usually can see results in as little as a few months.

  3. Over communicate – with your team, your client and yourself. Thinking several steps ahead and communicating issues and milestones in advance will dramatically reduce the waste created along the way.

  4. Manage scope creep; negotiate accordingly – if you’ve clearly defined what is included in your service, it should be readily apparent when you are headed outside of that scope. The best attorneys see this in advance and adjust expectations with their clients accordingly.

  5. Conduct end of matter reviews – discuss what worked, what didn’t, what needs to be automated/refined/improved. Successful businesses learn from their successes and failures. Document your learnings and use them in the next matter.

For the most part, small firms seem content to ignore some aspects that other businesses deem critical to survival and success. Perhaps it’s due to the already imposing pressures of running a small firm or perhaps it’s due to a lack of training. Either way, there are clear gaps between lawyers who treat their practice as a business first and those who practice as a professional first. It’s all about priorities and in the long run, focusing on the business is a strong point of differentiation.

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