Franco Azzopardi

SURVIVING THE CRISIS – FINANCIAL RISK

Twin Cities law firms say they must shrink their staffs -- including attorneys -- to bring expenses in line with decreasing revenue.

The recessionary forces that have battered law firms on the East and West coasts have reached Minneapolis and St. Paul.

The problem is that clients aren't doing as many transactions, companies are cutting their outside legal expenses, and

business is just drying up.StarTribune.com

"In this challenging economic environment, we have got to stay lean, highly productive and focused”

[Randy King, chief executive and managing director of Merchant & Gould.]

"Every company in this economy is looking at its

budget and expenses. We are a revenue business," said Cooper Ashley of Maslon Edelman Borman & Brand.

[Bill White , publisher of Minnesota Law & Politics]

The current economic downturnposes a dilemma to professionalservices businesses like yours. Do

you wait and see what happenswith the recession?

or do you takepro-active measures to make your

business more agile to adapt tomarket conditions?

• If you're struggling to get the work in, you need to learn more about marketing.

• If you're struggling to keep up with the work you

already have, you need to learn more about practice management.

• If you're struggling with attrition rate, unpaid

client bills, or unpredictable cash flow, you need to learn more about financial management

and put systems in place to protect yourself.

Today we touch on 3 key arguments:

Controlling time is key to effective billing!!??

Feeding the marching army in time of quiet... Cost or Investment???

Big deal... Budgeting is after all just transposing numbers in a spreadsheet!!!???

Some background to tune in...

Traditional paradigms attached to Law firms:

We only have time to sell

So is this our only income generating asset, or is it our stock in trade???

Profit =Revenue – Personnel costs – O/heads

whereRevenue = Time available x efficiency x

charge rate

Some other common metrics...

Charged hours/Paid hours (efficiency) 65 – 75%

EBIT / Sales between 15 – 20%Investment policy – mainly in office premisesROIC – ???

Looks simple...

“Challenge assumed constraints!!.” [Ken Blanchard, ‘Leading at a higher level’]

...to start with

where is the knowledge and the human element in the profit equation??

Hmm! that changes the whole chemistry of financial equations.

Industrial Age or Information Age

So how do we integrate Knowledge and the Human element into our budgets and

metrics?

In actual fact, revenue of a PSF is much more complex than just the above algebraic equation as it involves the interplay of:

human capital(capital that leaves the elevator at night)

structural capital(knowledge repositories, databases etc)

and social capital(customers).

This is the make-up of our investment

This brings us to ROIBut how do we assess our RETURNS when we write off our most significant investments immediately!?

If only we could attach a value to these like a manufacturing business would

capitalise assets

Theodore W Schulz, Nobel Prize-winning economist, theorized in

1961 in American Economic Review, that investments in human

capital should be accounted for in the same manner as

investments in plant and machinery.

Knowledge worker productivity

‘KNOWLEDGE WORKER PRODUCTIVITY REQUIRES THAT THE KNOWLEDGE WORKER IS

SEEN AND TREATED AS AN ASSET, RATHER THAN A COST.

[Peter Drucker, 1999, Management challenges for the 21st century]

So the emerging paradigm is:Profit is the applause of the level of:

motivation of your knowledge workers

and the

robustness of your client relationships.

Hence the TRIPLE BOTTOM LINE.

Controlling time is key to effective billing!!!???

Revenue = Time available x efficiency x charge rate

For decades, Law firms have genetically encoded its members with the core belief that they sell only time.

Surely professionals are not successful because they sell hours, since

no customer buys hours!

Park your brains at the door dude!!! [industrial age adage]

...Stick with the time sheet and hang the stopwatch round your neck!!!...

In a PSF it is not ‘working harder that counts, but WORKING SMARTER...

IT IS NOT HOW LONG IT TAKES BUT WHAT WE GIVE WITHIN TIME CONSTRAINTS’

Lagging timesheets versus Project managementTime billing versus Value based billing

So what leads to effective billing?

Client’s purse?Client’s requirements?Matching talent pool?

Brand equity?Market conditions?

Client’s perceived value (PV) of service offering?Ability of firm to quote close to PV?

Clear terms of business?

Hang on!!!!! What about time-sheets?

Surely we can’t just ignore the core of our PM!

Time-sheets are essential for:Building experience

To administer staff costsTo support in Project Management

To budget for lapsed timeTo build job cards

Measure what counts

Select the right KPIs that increase partners’ value...

focus on Leading rather than Lagging Indicators.Simplify your dashboard

Timesheets – lapsed time%SCR = (payroll+o/h)/pd hours x(1-lapsed time)

SRR=(Total costs +profit)/billed hrsWIP-Debtor-Cash cycle

SNAPSHOT DASHBOARD

Jan-09

Feb-09

Mar-09

Apr-0

9May

-09Jun

-09 Jul-09

Aug-0

9Sep

-09Oct-

09Nov

-09Dec-

09$0.00

$200,000.00

$400,000.00

$600,000.00

$800,000.00

$1,000,000.00

$1,200,000.00

$1,400,000.00

$1,600,000.00Cumulative Costs vs Forecast

Jan-09

Feb-09

Mar-09

Apr-0

9May

-09Jun

-09 Jul-09

Aug-0

9Sep

-09Oct-

09Nov

-09Dec-

09$0.00

$1,000,000.00

$2,000,000.00

$3,000,000.00

$4,000,000.00

$5,000,000.00

$6,000,000.00

$7,000,000.00

Cumulative Fees vs Forecast

(…CONT)

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09

$(900,000)

$(800,000)

$(700,000)

$(600,000)

$(500,000)

$(400,000)

$(300,000)

$(200,000)

$(100,000)

$0

Monthly Cash Burn Budgeted Cash BurnLinear (Budgeted Cash Burn)Actual Cash BurnLinear (Actual Cash Burn)

Feeding the marching army... Cost or Investment???

Only if you think there is a mismatch in the skill sets on inventory and the requirements of both the contracted and pipeline legal work.

Part of staff costs are the investment of the firm!

What are the skills that are required?(Brand promise, Market demands)

Personal Competencies Development, Knowledge Elicitation,

Leadership Development

Budgeting is after all just transposing the numbers in a spreadsheet!!!???

SW OTContracted and pipeline projectsForecast targets and conversions

Expected SRRExpected level of activity

Investment budgetDividend policy

Staff costsOverheads

What about the Support Structures?

Do we have clear O&M suggesting procedures from RFP, to Client Acceptance, to Project classification, to Project management procedures, till sign-off, billing and converting to cash?

Support structures should be as robust as the speed that is expected in reducing customer conversion to client and project acceptance to cash.

Administrative departments... Which functions could be simplified without a

loss in performance?

Marketing departments... “cutting down on marketing to save on costs is

like stopping the watch to save on time!!” (Henry Ford)

Conclusion

People and Knowledge are the revenue generating assets of the firm.

The Client is the BOSS with the purse.

Management seeks to attract and retain both

The Culture of the firm is the what glues these together.

Drucker’s foresight‘Knowledge is the business fully, as much as the customer is the

business. Physical goods or services are only the vehicle for the exchange of customer purchasing power against business

knowledge’.

[Peter Drucker, 1964, Managing for Results]