Monday, 12 October 2009

Confident Guessing

I read a story in "Legal Week" today which said that "Law firm business confidence has recovered for the second quarter in a row with more than half of partners now expecting revenue growth at their own firms over the next 12 months" - see the full story here.

Hmm. I would love the economy to recover and would be delighted to hear that the majority of partners were expecting growth - if I really thought that some analysis and research had gone into the partners' statements. Sadly I suspect that the same level of care will have gone into these announcements as went into planning for this year's budget in most firms.

I spoke with a number of firms, large and small, as they developed and then started to work on new budgets. The development process in law firms is not the same, boring, routine used in most commercial organisations. Analysis of past expenditure together with a detailed study of the requirements for the next period are undertaken, but are generally overtaken by "gut feel". I was astonished to watch large companies set a budgeted revenue figure based on "assessments" by the department heads - assessments which had no scientific basis and which had often been arrived at following an evening's worth of discussion between the partner leading the department and his team (occasionally I saw the team discussion phase ignored as unnecessary). The accounting staff were not called on for input and it was rare for the marketing or business development team to be asked for their help. I saw firms forecast 25%, 30% and 40% drops in revenue based on a personal assessment of "difficult times".

I would have been less concerned with this had it not led to a desire to see a similar drop on the expenditure side of the budget. "My goodness" the partners would say, "our revenue is dreadful - we will have to cut, cut, cut!", and expenditure budgets would be savaged - capital projects cut, staff cut and day-to-day expenditure on small items cut "to show willing."

Now, less that 12 months on, "confidence is high" apparently. That's fine for the revenue side of the equation - the firm will just exceed budget. What about all the people who have been removed, however? What about the hiatus in capital projects? My perception is that the same partners who made short-term, knee-jerk, decisions for this budget year have now got bored with the whole "downturn thing" and, finding that their own forecasts have been hopelessly pessimistic have decided that everything will now be fine and are confident that their revenue, and so their profit, will soon recover.

They were wrong before and they may be wrong now. Some forecasters will undoubtedly be speaking from a position of strength - they will have done the analysis required to be confident that their assessments are sensible. Most partners, sadly, will not. At the very least, the economy will be different and the "playing field" changed. If partners believe that, having weathered the downturn they now need only weather the recovery (for a maximum of another 12 months) before returning to business as before, they will be sadly mistaken. Clients have been given power and will be reluctant to give it back. Hourly rates are under attack as never before, and few firms have a sensible defence for them. More importantly, those running law firms have been exposed as never before. It is becoming apparent that few law firms are run in a business-like manner and clients are starting to ask why they should pay for this inefficiency.

I'm glad that confidence is returning to the sector - but will be more glad when that confidence has a sound basis. I'll wait to hear from those members of the profession that I know and trust before I too relax into confidence.

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