The Sustainable Profits Rule Page 5

Part of the lpc series The New Economic Rules

Maximising the value of the practice: Fattened by the good times over the last ten years or so, many professional practices have allowed themselves to become a sum of less than their total parts. Legal services are often based on individuals or groups of individuals providing services to their clients rather than the legal practice itself having a clear "identity" or brand.

While mega firms may have been able to spend their way to create such an identity (not always successfully), medium size and smaller firms find this very difficult. The net result is that the different parts of legal practices often fail to maximise, for the practice as a whole, the “halo” benefit from any notably successful part of that practice, In addition adopting "joined up thinking" across the practice often proves elusive.

Famously Jack Welch when he was leading GE, a huge conglomerate, advised his managers that the worst performing 10% of the company would be closed down with the capital employed more advantageously elsewhere. While such a threat may not endear Mr Welch to a softer more inclusive corporate governance, it would certainly focus the mind.

It would be fascinating to see Equity Partners apply the same rule among themselves. They would find it difficult because, as the Partnership Structure Rule explains at length, they do not generally adequately separate their roles of ownership and their active role within the partnership.

Understanding the changes in feeing: standard feeing arrangements have been changing for years but the areas which have so far been somewhat sheltered will face the full force of a new commercial reality. Clients will to an ever increasing degree demand certainty of feeing arrangements and will be uninterested in hourly charges or the fact that their lawyers have provided a small battalion of support staff. Fixed arrangements will be the norm where hourly charges currently prevail. This transition will mean that legal practices will need to adopt (a) a more scientific approach to feeing (b) assessments methods to replace time recording and (c) internal disciplines that are often missing especially with senior lawyers.

In ten years time, feeing according to time recording ledgers will be viewed with the same quaint amusement of those recollections of an earlier generation who would fee by a combination of the thickness of the file and what "the client would bear".

Feeing will require to be properly transparent and will no longer be able to mask the current cost models of many legal practices which sometimes belong to the "voodoo economic" school of accounting. The focus on effective feeing will in turn renew a focus on costs but this time structural costs. If, as lpc predicts, there will be an effective reduction in fee levels as well as volumes, how will legal practices manage? Realistically productivity and return will improve by looking again at the use of technology, delivery of services and at the remuneration packages existing at the top of practices. Some are totally deserving of the share of profits they receive but many are not. Practices will no longer be able to afford the dead weight that remains.

So the main emphasis of the structural strata are likely to be as follows:-

• considering and discerning the intrinsic qualities within the business, its natural client base, its technology, its knowledge management, its internal synergies and particularly the sustainability of its profits
• considering and discerning the degree to which the sustainability of profits can be increased by technical issues such as the business's IT evolution and other technological issues
• looking at and discerning the value provided to the partnership or legal business by Equity Partners, Partners, qualified staff and unqualified staff. (lpc use advanced matrix concepts to assist measuring these values.)

Although it is not certain in every case, the likelihood is that there would be recommendations that some Equity Partners no longer have that status, that some Partners no longer have that status and some senior employees no longer have that status. Legal businesses (partnerships particularly) are funny animals where the laws of business often appear to be suspended. It may well be that, even with the benefit of this second structural strata, some businesses choose not to implement the changes. The decision that their personal bonds to each other have a cost but are worthwhile is entirely reasonable. But such a decision has to be made in the full knowledge of the facts rather than there being dissension within the organisation. Such a view is more likely in a smaller legal practice than a large one but the point remains valid.

Knowledge and understanding are key to maintaining Sustainable Profits and too often these are notable by their omission. It is not difficult to understand why; the nature of legal practices is that one person's gain is necessarily another person's loss and personal relationships, communication problems and inchoate internal structures mean that there is a lot of “dancing round issues”.

This is where lpc can assist. Firstly in the current whirlwind of issues it is difficult to see the direction a practice should follow. When a business is in a fog it cannot know the right direction to take

lpc are able, not only to identify and diagnose the issues faced by the partnerships, but they are also able to offer a moderation facility to allow changes to be implemented. It is often easier for someone totally independent to suggest changes and their underlying reasoning than to come from “within”. The important point, as stated elsewhere, is to provide information – whether that information is acted upon is up to that business.