A new recipe for success...
By David J Bilinsky
I work all night, I work all day, to pay the bills I have to pay
Ain’t it sad; And still there never seems to be a single penny left for me…
Money, money, money; Must be funny, In the rich man’s world
Words and music by B. Andersson and B. Ulvaeus, recorded by Abba.
While working harder is certainly an old-time recipe for success, it is not the only recipe. Indeed, all of us have heard the catch-phrase "Work smarter, not harder." Like many bits of advice, it is easier to say than to apply. So what can you do to improve your bottom line without working all night and all day? The secret appears to lie in financial analysis of what you do and how you do it. Here are some suggestions put forward in this area and how they can be applied to your practice.
Steven Campbell, CA, a consultant with Thomson Elite recently told me that they had been running the numbers on law firms. While most firms work on the 80/20 rule (namely that 80 per cent of law firm income comes from only 20 per cent of the firm's clients), in some cases the ratio can rise as high as 95/5. The implications of this are profound – depending on your practice, you can drop up to 95 per cent of your client base and have a negligible effect on your bottom line – and work a whole lot less. Moreover, look at your clients in the bottom 20 per cent of your revenue curve and ask yourself – how many of these clients may be conflicting you out of acquiring another star client that would place in the top 20 per cent? The lost opportunity cost alone may drive you to start eliminating the bottom part of your revenue curve in order to provide the resources and the time to move your curve upwards.
Accordingly, to start your financial makeover, aggregate your income by client and rank it from largest to smallest (spreadsheets are useful here). Now create a column in your spreadsheet that lists the cumulative percentage of your total billings as you move downwards. Look at how many clients lie in the top 20 per cent and in the bottom 20 per cent of the listing. Decide what can be done in terms of finding new homes for the bottom 20 per cent of your client base (ethically, of course).
Here is another analysis tool. Take your accounts paid and rank them in terms of days outstanding to date of payment. Unless you charge interest on your unpaid accounts, you are losing money for every day your accounts are unpaid – in effect you are providing financing for your clients at 0 per cent interest. Again, look at the clients in the bottom 20 per cent of the list (and I would add in the clients with accounts outstanding here). Ask yourself – it is worth it to carry these clients?
A third analysis tool is to take your fees billed per client and divide it by the total hours put into the client's files (not the fees billed, but rather all time, billed or not). Rank order the results from largest to smallest. You are looking at your effective hourly rate per client. Again ask yourself what benefits you are deriving from any client whose effective hourly rate is less than your stated hourly rate. Concentrating on this type of analysis should lead you to implement fixed-cost billing where the stated cost/file is higher than the typical time to complete its file times your stated hourly rate.
Lever your Assets
Here, take your clients and break out total partners’ time spent on the client and divide it by total associate’s time logged against the same client. Again, rank the result from smallest to largest. This will give you an indication of which clients are high-users of partner time and which clients can be leveraged downwards to use less-costly associate time. You may also want to repeat this analysis but instead of looking at clients, look at each partner and take their partner billable time divided by total associate time that was logged to their files, and again rank the results. This will show which partners push work downwards and which do not.
Here, take total client billings and divide by total disbursements incurred on their files. Rank the results. This gives you an idea of which clients require large capital investments relative to the fees earned. Files with large capital requirements should be priced accordingly to provide a return on the capital invested in the file in addition to a return on partner and associate time.
Look at lifetime costs
When acquiring an asset in your firm, estimate the Total Cost of Ownership (TCO). For example, when acquiring a printer, determine the maximum expected number of pages that the printer will generate over its lifetime. Calculate the cost of ink for those expected number of printed pages and add the initial cost of the printer. Divide by the number of pages that you expect to receive from the printer. This gives you an expected cost per page. While inkjet printers have a low initial cost, their TOC is much higher than laser printers which have a much lower cost per page spread over their lifetime.
Build your Precedents
A solid business objective is to increase your margin on every file that you handle. Accordingly, build a set of continually reused precedents that minimizes your costs of handling a standard transaction to maximize your margin on every file handled after the first. Look at your files and invest capital in your document generation system to quickly and efficiently handle your routine transactions. A corollary to this principle is to avoid one-off projects that do not play to the firm's strengths or strategic goals.
If you are working towards firm financial strategic goals, you already know your desired billing and profitability targets. Accordingly, create a win-win situation for you and your employees by explicitly outlining what the targets are, when you expect to reach them and how financial results that exceed the targets will be shared. By outlining what the rewards will be if the targets are exceeded and how an employee can personally benefit along with the organization, you are helping align everyone's interests towards a common goal.
Rather than working harder, take steps to change the mix of files in which you invest your time and energy and make your work environment one that supports greater profitability. In this way, you should be able to avoid working all day and all night and still have some money left for yourself after paying all the bills you have to pay.
David J Bilinsky is the Practice Management Advisory at the Law Society of British Columbia. He can be reached on the Internet at email@example.com. The views expressed herein are strictly the author's and may not be shared by the Law Society of BC.
This article originally appeared in the June 2004 issue of BarTalk and is reproduced here with permission of both the author and the Canadian Bar Association, British Columbia Branch.