During meetings with Law Firms, one of the phrases I’ve found myself using more and more is “The New Economy” (TNE) and more specifically, how things will be different in the New Economy (TNE). This difference will require different thinking, a different approach and different tactics; but done properly, it can result in different profits. Different bigger profits.
I’m not just talking about the new “Legal” Economy, there is also that to consider, but the whole Economy has changed and that has to be reflected in the way The Firm of The Future will do business.
To do business in TNE a business has to be relevant and being relevant requires constant change. At the moment many firms have a serious problem with any change never mind constant change but TNE will not tolerate you being irrelevant. And an old style law firm is increasingly becoming irrelevant to the needs of TNE consumers.
A decision to change should be followed by action. The marketplace won’t tolerate inaction. Nor will it accept lame excuses for inaction. Most old style law firms are defined by their list of excuses as to why they don’t need a ( add in your favourite) website, 24hr human answering service, twitter account, LinkedIn profiles, e-books, VOIP, legal docs, integrated cashroom, cms, files accessed through the cloud, customer lists, fixed price agreements and so on .
A resilience to constant change and an acceptance of it will be the difference between the successful and the unsuccessful firms, because in this New Economy, the internet, mobile devices and a demand for instant gratification (for a thing or knowledge) will cause more challenges, more disruption and more crisis to occur more often and quicker than ever before.
So if you’re in a firm that can make decisions (or makes them too slowly) or comes up with excuses instead of action, then be prepared for a shock because you aint seen nothing yet!
There are a lot of people out there looking for funding to get their new business off the ground. There are also a lot of small businesses seeking second round funding.
I was looking at a list of questions that investors should ask when considering investment and I wondered how many small to medium sized law firms would get investment if they decided to start-up today.
I then had a bit of fun and called up an investor that I know and "pitched" him the idea of a "new business" without telling him that it was a "traditional law firm model" that I was using.
Here's the questions and the answers:
1. What does your business do? - We employ trained professionals and sell professional services by the hour. The more hours we sell, the more money we make. We pay the professionals a salary regardless of whether we sell any hours or not, but the idea is to pay the professionals £34 per hour (inc NI) and sell their hours for £100-£150 (or more) per hour plus vat. The difference will be used to pay rent, heat the office, pay support staff and all other costs. The remainder will be divided up at the end of the year between the partners and then we will start all over again.
2. How many countries does and will your business operate in? - Just the one. But it will be more local than national.
3. Who currently owns shares in your business ? - No one owns shares, it's a partnership.
4. Are the partners investing any money in the business? - Yes, some of them will borrow from the bank and invest it in the business and we won't pay them any interest, so we score a bit there.
5. Tell us about your management team. - The managers will be the trained professionals. They don't know anything about management "per se", but hey, how hard can it be?
6. What will you do to fill the gaps in your management team? - There are no gaps. If we start losing money and are struggling we may decide to bring in some "consultants"...but only after a committee meeting, threatening letters from the bank, the loss of some good professionals and when we can't figure it out for ourselves....even then we will delay a little bit longer. Then we will ignore what the consultants say because they are not really trained professionals, are they?
7. Who are your customers now and who will be your customers in the future? - Our customers will be long standing friends of ours and our family and other business people that we have met over the years. Our services are in such demand that the 'phone always rings and people come in the door and our friends recommend us to their friends. I expect in the future it will be the same. We did have a marketing person(s) but we saved money by getting rid of them. That meant more for the partners to divide up at the end of the year.
8. What intellectual property do you have? - A name, (it's all our own names so no one can really use it but us) a logo that we paid a professional designer a lot of money for, so it sits as an Asset on our balance sheet, a brochure website and er..that's about it.
9. What is your business model? - I already told you, to sell hours.
10. What is your financial model? - To pay £34 for hours and sell them for £150.
11. What are your profit and cash flow projections for the next 12 months, 3 years and 5 years? - Well, if we employ 12 professionals we will pay out about £408,000 but we will bring in £1.8m. After costs we should have 30% profit or about £540,000 to divide up, so we will make lots of money in year 1. After that we predict in 3 years we will do the same and in 5 years the same again. Remember we don't invest the profits in the business, we divide them up and pay 40% (or 50%) tax.
12 What do you need the investment for? - A better website. To re-instate my expenses. To clear off the overdratf.
13. What is the valuation of your business? - Well, after year 1 we reckon that 6 times profit is what a professional services business is worth, so £3.2m but if you're really interested, we'll take £3m now and retire as we have no one to hand it on to.
14. How can you justify that valuation? - Because that's what it's always been.
15. What are your long-term hopes for the business? - I'll sell my share of the partnership to another professional and maybe some of the others will do the same and the business will carry on with my name over the door; that would be nice.
16. What are your long-term plans personally? - Same as 15. Then I'll play more golf...in Portugal. I hear that property will be cheap there.
17. How do you plan to exit from the business? - I already told you, same as 15.
18. When do you expect to exit from the business? - As soon as possible, selling hours is hard work...it never used to be...I'm getting to old for this...does anyone want to buy my share of the partnership? I'm willing to negotiate.
I asked my investor friend if he would be investing...can you guess what he said...?
Currently in the legal sector in 2010 there are 145,000 solicitors in the UK working in 10,362 firms. This works out to an average of 14 partners per firm, but of course it's not like that; in reality:-
40% are sole practitioners
45% are in 2 - 4 partner firms
10% are in 5 - 10 partner firms and;
5% are in over 10 partner firms
I predict that the number of solicitors will fall to below 100,000 within 5 years but the number of firms will increase to over 12,000. An average of 8 per firm.
If gravity is the one law we all are forced to comply with, economic law comes a close second.
The law of supply and demand tells us that in an oversupplied market, prices will drop. The simple fact of the matter is that there are too many lawyers, so it naturally follows that those that remain in practice will start to earn significantly less in the immediate future than they do now.
The average salary of a UK solicitor in 2010 is £70,000 p.a. but of course it's not like that; in reality:-
sole practitioners earn £28,000
2 - 4 partner firms earn £33,000
5 - 10 partner firms earn £53,000
10 + partner firms earn £167,000
Of course, if we strip out the big London firms, then the average salary is much lower.
The question is, how low does it have to go before you decide that it's not worth it?
The answer to that is that at the moment, it's too close to call for a lot of practicing solicitors and there are some events coming up that will tip them over the edge. Such as:-
The Legal Services Act allowing new business models and competition
The Jackson Review (of personal injury lawyers)
Legal Aid Reforms
In addition there are:-
Tax bills due in January 2011 and July 2011
Increased indemnity premiums in England and Wales
Increasing amount of defaulting debtors
Changes in Personal Injury funding
Banks are restricting access to capital or demanding more security
In the last 18 months, numerous small firms have gone to the wall and other larger firms have failed such as:
Bus Merton LLP
Hammonds Direct LLP
Hextails LLP
Orchard Brayton and Graham LLP
Alexander Samuels LLP
Halliwells LLP
The reason for my "cheery" prediction is because this is the tip of the iceberg.
Here are some of the other events that will expose more of the unprepared firms:
Overtrading
Inability to retain key staff
HMRC will harden their attitude to law firms
Banks will remove or restrict overdraft facilities
An increase in interest rates
Stress within the partner model
What can you do about it?
As a sole practitioner, you can start to outsource and go from £28,000 to £60,000+ by making a few changes to the way you run your business.
In a small and mid-sized firm you can also outsource but you can also merge or acquire other firms.
If you're in a 10+ partner firm then you need to look at your partnership model
and prepare for the future as you could be best placed to make the most of the carnage.
But after 4 years at university, a year doing a diploma, two years as a trainee,
£28,000 is a low amount of money...but it's what the market will pay.
If you want to increase it substantially, either join a bigger firm (if you can),
re-train (if you can) or start your own firm giving customers what they want.
While fee income across the UK’s top 100 law firms increased by 1.4% in the quarter ended 31 January 2010, the top 10 firms suffered a decrease of 7.5% compared with the same quarter in the prior year.
Analysis of the latest Quarterly Legal Sector Survey, from business advisory firm Deloitte, highlights a large divergence in performance between the top 100 firms with the smaller firms (those in the 51-100 category) achieving fee income growth of 6%.
Interesting stuff, so the bigger ( and more expensive) firms are losing business to the smaller (less expensive) firms. Well isn't that what you'd expect in a recession? Of course it is and now we have the official proof. At least their conclusion is on the button. Not like the scientists who pulled the legs off a Grasshoper, slapped the table and when it didn't jump they concluded that it was deaf. You can read the full Deloitte report here (it's not long)
All the anecdotal evidence has been confirmed. As Private Fraser says in Dad's Army "We're all doomed!" However, like all cataclysmic events in nature, business or otherwise, the Darwinian "survival of the fittest" kicks in and those deemed ready to adapt and change to meet the new world will survive. Anyway, take a look at the full article here: http://thescotsman.scotsman.com/business/Legal-firms39-39year-of-turmoil39.6091530.jp
At last the votes are cast...and guess what, the sole practitioners didn't attend. Well of course they couldn't, they're too busy dealing with business, firefighting, answering the phone, doing vat returns and all the other small but necessary things that drains their time and reduce their ability to provide a better service.There is a better way and it's coming soon. If you are a sole practitioner or a lawyer wanting to start on your own, believe it or not, this is probably the best time in history to do it. And in these pages over the coming month I will be showing you why and how. If you've not read the article, it's here: http://www.timesonline.co.uk/tol/news/uk/scotland/article7005416.ece
What would you do if you were the Chancellor and you'd just announced that halving the UK's annual budget deficit was "non-negotiable"? There are a few things I think we'd all get sorted in a hurry. We'd cap all public sector salaries at, say, £175,000. We'd cut all benefits to the middle classes. We'd try and make the tax system flatter and less complicated (how hard can it be?). And we'd ban management consultants. But then what? Here's an idea. How about we increase the minimum wage by 30% or so, making one hour of basic work worth £7.50 and a year's work on the minimum wage (assuming a 40 hour week and four weeks paid holiday) worth £15,600, rather than the current £11,856. http://www.moneyweek.com/blog/its-time-to-raise-the-minimum-wage-00111.aspx
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