achieving a client focused strategy - the route to a more profitable business

IR GLOBAL ANNUAL CONFERENCE27TH – 29TH SEPTEMBER 2015

“Achieving a Client Focused Strategy: The Route to a More Profitable Business”

Alan Hodgart

THERE ARE SEVERAL ASPECTS TO A STRONG CLIENT FOCUS

• Law firms rarely distinguish themselves from their peer group by their technical expertise– Buying decisions are usually based on other criteria

• At the heart of a strong business is the relationship with clients – the degree of strength and depth is crucial– The social aspects are less important than other factors

• Industry knowledge – especially trends

• Knowledge of the business• Able to discuss these as a part of the client team• Able to look at likely outcomes given trends and see issues coming up

• Able to develop solutions to issues before they become problems

• Strong relationships are built outside of doing the work– Less about social meetings - more about ‘business meetings’

• Many clients have little time for lunches and sporting events with no serious purpose

• Requires partners to devote significant amounts of time to focusing on a small group of core clients

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…and clients generally believe law firms are bad at all aspects

© Hodgart Associates 2015. All rights reserved

ADOPTING A DEMAND APPROACH TO THE BUSINESS MODEL IS A KEY ISSUE TO ADDRESS STRATEGICALLY (1/2)

• 95% of firms operate with a supply side model while the market changes require a shift to a demand focused model– Marketing materials and selling approaches are supply focused– Professionals focus on their technical expertise rather than their client expertise

• A demand side focus is where client needs are understood and work types and processes are developed to suit these– A supply side focus means that the work types are developed from the professional firm

perspective and then an attempt is made to accommodate client requirements • The result is that firms present themselves as ‘department store’ for professional services

– Everything laid out waiting for clients to match their needs to the law firm offering– Whereas a demand focus does the matching for the client

• Finding a balance between the supply side and demand side is crucial– Increasingly firms are realising the need to approach their business with a strong client

approach– Focusing on the issues as the client sees them then adapting their ‘product’ to these

• A demand focus will change the role of the partner – including a reduction in the billable hours per partner

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Then matching the supply elements to the demand issues


ADOPTING A DEMAND APPROACH TO THE BUSINESS MODEL IS A KEY ISSUE TO ADDRESS STRATEGICALLY (2/2)

• Business development will be more successful through the adoption of a demand approach– Clients do not buy practice areas – yet the business development of most law firms focuses on

these

– Clients have a business or personal issue – a firm’s practice areas are the channel through which a solution is reached

– Understand the client issue first – then consider the legal skills needed to resolve it

– Focusing on the legal skill first tends to lead to a technical – not a commercial- solution

• Building deep and wide relationships between the Firm and the client helps in understanding issues form the client side– Helps to understand the business and the industry

– Take a proactive approach to issues arising – address them before they are problems

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Then matching the supply elements to the demand issues


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DEVELOPING A COMPETITIVE ADVANTAGE THROUGH INDUSTRY GROUPS REQUIRES DETAILED ATTENTION TO SEVERAL ISSUES

• The first two issues are common to any legal service but are worth restating given that client feedback is that many firms do not address them adequately– An appropriate level of expertise and experience in the legal services to be provided

• The emphasis is on the words “expertise” and “experience” – the higher is the perceived value of a service the more important is a real depth of expertise and experience

– A broad and deep relationship with the client• The client knows all team members and values highly the service and attention they give

• The third issue covers the specific competitive advantage of a focus on industry sectors– A depth of knowledge about an industry and its trends such that a lawyer is able to foresee

potential problems and can provide advice that prevents them becoming an actual problem• Requires a deep understanding of an industry sector as well as the client’s business and

position in the sector– Requires a significant research capability in the firm and a standard template in which the

industry analysis is conducted


With industry knowledge being the primary issue

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IT IS ESSENTIAL THAT INDUSTRY GROUPS BE A PART OF THE FORMAL ORGANISATION STRUCTURE OF A LARGER FIRM

• The industry groups must be accountable within the reporting structure of the Firm– The Heads of the industry groups will report to the Chair of Industry Sectors– There will be an Industry Sector Board of which the Heads of Industry groups will be members– The Chair of Industry Sectors chairs the Board and the Board has the overall management

responsibility for the industry sector initiative• The Chair reports to the Managing Partner and the Management Board

• The industry groups are a parallel structure to the practice groups– The practice groups are the primary profit centres of the Firm and have precedence in resource

and investment allocations– The industry groups are the secondary profit centres and receive their allocation of resources

and investment after the practice groups

• There is likely to be a need for some negotiation between the two and the managing partner and Management Board would agree the eventual outcome


Creating a matrix structure is the means by which this is done

© Hodgart Associates 2015. All rights reserved7

RetailBanking

High streetRetail

Oil & Gas

1. Market is well defined and therefore reachable

2. Sector has high growth prospects

3. There are distinctive external legal needs

4. We are not hindered by selection criteria

5. In-house work is not a barrier

6. It is not dominated by competitors

7. We are perceived to have a high level of industry experience

8. We have the capability to service needs now and in the future

9. We have the capability to market to this sector

10. There are opportunities for providing significant high value services

11. The potential to achieve our revenue target exists

Sub-total ScoreRank

25=3

30=1

30=1

12. Conflict issues are not significant

13. The sector strongly supports other activities

14. Low investment is required

Total ScoreRank

313

351

342

Not true

Barely true

Partly true

Mostly true

True

ILLUSTRATIVE ONLY

EXAMPLE: COMPARATIVE ANALYSIS OF INDUSTRY SECTORS

PRICING IS AN ISSUE FOR MOST FIRMS – ALTHOUGH FEW ARE DEALING WITH THE ISSUE EFFECTIVELY

• Clients are open to a variety of pricing methods but the trend towards more certainty in the end price is clear– Fixed or estimated pricing is slowly creeping in

• Partners in many firms are struggling with the move away from hourly rate pricing – easier to just discount the rates rather than make the behavioural change required– Discounting with no change in work processes simply erodes profitability

• Not all clients have made the shift – some still more comfortable with hourly rates• Partner resistance is hindering many firms in their efforts to achieve these changes• Fundamental changes are required to work processes if firms are to meet the price

constraints and maintain/improve profit margins• 80 % of engagements in many work types come out within a plus or minus 5% cost• Firms that fail to respond will find themselves losing business due to price or eroding profits

if they discount without being more efficient (or both)

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Tackling this requires a fundamental change in behaviour/working practices


CLIENTS ARE SEEKING CERTAINTY AROUND ‘VALUE FOR MONEY’

• Clients are not interested in the cost to the law firm but in the price they are expected to pay– We do this every day as consumers – law firm clients are no different– The price relates to the importance of the issue – to them

• The hourly rate is an arithmetic calculation that bears no relationship to ‘value’– Meeting budget hour, revenue and cost targets simply means the firm will achieve its budget

profit

– Rack rates must be seen simply as an average to be achieved over a period

• Most partners are dealing with engagements of varying value to clients every week/month– Applying a rack rate means that some work is over-priced and other work is underpriced

• Partners must manage pricing in order to achieve the budget hourly rate– Essential that a work group review actual pricing monthly and seek to adjust in line with work

type value

9© Hodgart Associates 2015. All rights reserved

THE MEANING OF ‘VALUE’ TO A CLIENT TENDS TOWARDS THE ABSTRACT

• We all know value for money when we receive it– Difficult to describe ahead of an event other than in abstract terms

• Hard for clients to assess value for money until they know the price (‘the money piece’)– Easier at low value levels

• Clients will have a view about the importance/urgency of an issue to them and their business– And the ‘value’ aspect will vary in proportion to the importance/urgency

– Also prepared to pay extra for ‘a brand’ in certain circumstances• Only determine ‘value for money’ by understanding the likely cost and the client’s value

perception– The lawyer needs to know the potential price and then obtain the client’s perception of value

– Might (often) need to work at reconciling the two

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Value for money is the aim but it needs a benchmark to assess value


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DETERMINING THE PRICE OF WORK REQUIRES ATTENTION TO A NUMBER OF CRITICAL ISSUES

• The start (and end) point is the value expectation of the client - must determine this

• Maintaining historical records of work types, pricing, cost and profit is essential

• Consider whether the work can be delivered within both the price band and profit margin requirement

• Break the work down into its component tasks - allocate people by skill/experience requirement

• Lower value and commodity work must be based largely on standard processes - and standard prices in many cases

• Ability to discuss average prices by type of work seen favorably by clients

• Requires a major change of attitude for most lawyers


PROFIT ‘LEAKAGE’ WILL OCCUR UNLESS AN ENGAGEMENT IS MANAGED EFFECTIVELY

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Timing: exceeds expected time and incurs extra costs

Client Payment

Client Engagement

Undertake Work

Carry as WIP

Raise Invoice

ClientQuestions Bill

Write off: time recorded judged to exceed value

Discount agreed

Leverage: planned leverage not

achieved incurring additional costs

Delays in raising invoice

Payment collected late

Poor pricing decision – initial

discount also given

Clear scope and client expectations

Time recordinginadequate


A STRUCTURED APPROACH TO ENGAGEMENT PLANNING, ESTIMATING AND MANAGEMENT IS CRITICAL IN TODAY’S WORLD

13

TaskPersonnel

TotalHrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £

123456789

Total

CLIENT EngagementCODE

CLIENT PARTNERENGAGE. PARTNER


PLANNING AND ESTIMATING THE ENGAGEMENT IS THE CRITICAL FIRST STEP

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Task

Personnel

Equity Partner

Junior Partner

SeniorAssociate

7-8Associate

5-6Associate

3-4Associate

1-2 Paralegal Trainee Total Budget

Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Hrs £ Complexity Hrs £

1 10 5,200 15 6,300 10 3,900 35 15,400 High 35 15,400

2 15 5,850 10 3,000 15 3,000 40 11,850 Medium 40 11,850

3 30 5,250 40 3,000 35 2,625 105 10,875 Low 105 10,875

4 15 5,850 30 9,000 30 6,000 75 20,850 Medium 75 20,850

5 50 8,750 60 4,500 50 3,750 160 17,000 Low 160 17,000

6 10 5,200 25 10,500 20 7,800 55 23,500 High 55 23,500

Total 20 10,400 40 16,800 60 23,400 40 12,000 45 9,000 80 14,000 100 7,500 85 6,375 470 99,475 Total 470 99,475

CLIENT MATTERCODE

CLIENT PARTNERMATTER PARTNER

FIXED FEE OF £!00,000


UNDERSTANDING THE COST LEVELS THAT ARE RELATED TO EACH TASK BY FEE EARNER IS ALSO IMPORTANT FOR PROFITABILITY

• This project will have a budgeted salary cost of $44,565, giving a cost multiple of 3.2• Changing the level of fee earner conducting each part of the task will provide different scenario’s

regarding cost

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15

Task

Personnel

Equity Partner

Junior Partner

Associate Senior

Associate Mid level

Associate Junior

Associate Trainee Consult. Support Total Budget

Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Complexity Hrs $

1 45 9,014 20 2,407 20 1,755 10 823 95 13,998 High 95 13,998

2 35 3,071 20 1,646 20 1,118 75 5,835 Medium 75 5,835

3 40 1,491 40 901 40 901 120 3,292 Low 120 3,292

4 30 2,632 35 2,880 40 2,236 105 7,748 Medium 105 7,748

5 35 1,304 40 901 30 675 105 2,880 Low 105 2,880

6 25 5,008 30 3,610 25 2,193 80 10,811 High 80 10,811

Total 70 14,022 50 6,017 110 9,651 65 5,349 60 3,354 75 2,795 80 1,801 70 1,576 580 44,565 580 44,565


PRODUCE A PLAN DEMONSTRATING WHEN EACH ACTIVITY WILL BE UNDERTAKEN

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• Assign the estimated hours for each task to the correct time period• This provides a plan for both the client and the firm to monitor

TaskWeek 1 Week 2 Week 3 Week 4 Week 5 Week 6 Total

Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $

1 45 19,066 20 8,474 20 8,474 10 4,237 95 40,250

2 30 8,700 25 7,250 20 5,800 75 21,750

3 55 5,500 25 2,500 40 4,000 120 12,000

4 15 4,018 30 8,036 60 16,071 105 28,125

5 20 2,000 30 3,000 55 5,500 105 10,500

6 15 6,234 15 6,234 50 20,781 80 33,250

Total 75 27,766 100 21,224 80 20,792 115 24,507 105 25,306 105 26,281 580 145,875

Weekly cumulative

total 75 27,766 175 48,989 255 69,781 370 94,288 475 119,594 580 145,875 580 145,875


CLOSE MONITORING OF PROJECTS IS ESSENTIAL – 2 WEEKS INTO THE ENGAGEMENT

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• Tasks 1 & 3 are above plan therefore should be ahead of schedule• Task 4 has been started early

Task

Personnel

Equity Partner

Junior Partner

Associate 7-8

Associate 5-6

Associate

3-4Associate

1-2 Consult. Support Total Budget to Date Total Budget

Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ $

1 30 15,000 10 4,000 10 3,500 20 5,500 70 28,000 65 27,539 40,250

2 15 4,125 10 2,000 25 6,125 55 15,950 21,750

3 20 3,000 20 1,500 20 1,500 60 6,000 55 5,500 12,000

4 20 5,500 20 4,000 40 9,500 28,125

5 10,500

6 33,250

Total 30 15,000 10 4,000 10 3,500 55 15,125 30 6,000 20 3,000 20 1,500 20 1,500 195 49,625 175 48,989 145,875


CLOSE MONITORING OF PROJECTS IS ESSENTIAL – 4 WEEKS INTO THE ENGAGEMENT

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• Tasks 1 & 3 are now complete and have come in over budget• Is it possible to reduce costs on the other stages?• Tasks 4 & 5 are above plan therefore should be ahead of schedule

Task

Personnel

Equity Partner

Junior Partner

Associate Senior

Associate Mid level

Associate

JuniorAssociate

Trainee Consult. Support Total Budget to Date Total Budget

Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ $

1 40 20,000 20 8,000 20 7,000 20 5,500 100 40,500 95 40,250 40,250

2 35 12,250 20 5,500 20 4,000 75 21,750 75 21,750 21,750

3 40 6,000 45 3,375 45 3,375 130 12,750 120 12,000 12,000

4 10 3,500 20 5,500 30 6,000 60 15,000 45 12,054 28,125

5 5 750 20 1,500 20 1,500 45 3,750 20 2,000 10,500

6 15 6,000 15 6,000 15 6,234 33,250

Total 40 20,000 35 14,000 65 22,750 60 16,500 50 10,000 45 6,750 65 4,875 65 4,875 425 99,750 370 94,288 145,875


CLOSE MONITORING OF PROJECTS IS ESSENTIAL – END OF THE ENGAGEMENT

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• Overall the project was within budget• Review why tasks 1,3 & 5 were over budget• Consider whether these were foreseeable issues or if another approach could have been taken to reduce costs

Task

Personnel

Equity Partner

Junior Partner

Associate Senior

Associate Mid level

Associate

Junior

Associate

TraineeConsult. Support Total Budget to Date Total

Budget

Hrs $ Hrs $ Hrs $ Hrs $ Hr

s $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ $

1 40 20,000 20 8,000 20 7,000 20 5,500 100 40,500 95 40,250 40,250

2 35 12,250 20 5,500 20 4,000 75 21,750 75 21,750 21,750

3 40 6,000 45 3,375 50 3,750 135 13,125 120 12,000 12,000

4 30 10,500 35 9,625 40 8,000 105 28,125 105 28,125 28,125

5 30 4,500 40 3,000 45 3,375 115 10,875 105 10,500 10,500

6 10 5,000 30 12,000 40 14,000 80 31,000 80 33,250 33,250

Total 50 25,000 50 20,000 125 43,750 75 20,62

5 60 12,000 70 10,50

0 85 6,375 95 7,125 610 145,375 580 145,875 145,875


© Hodgart Associates 2015. All rights reserved 20

FINANCIAL RESULT IF BUDGET IS REALISED

Overall

Performance ($) Target/Cap ($)

Fee Income 145,375 145,875

Salary Costs 43,187 44,565

Overheads 48,453 48,620

Total Costs 91,641 93,185

Profit 53,734 52,690

Profit Margin 37.0% 36.1%

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