Thursday, 12 November 2009

Don't Panic!

I've spent the last few months speaking with law firms who seemed almost oblivious to the need for a new model for law firms. Yes, they have noticed a downturn and believe they have reacted to it - but in response to my asking about strategic change and a leaner business model, the response has usually been "Oh we're fine now - busier than ever..."

We - result are out now and suddenly, in the last few days, I'm starting to sense a bit of panic. "Revenues are down!", "Partner profits are down!" are the cries - now taken up by the legal press (see "The Lawyer" for example).

Now is not the time to panic. It is, as I have been saying for some time, important to examine any result in context. Let's look at the short report from "The Lawyer" referenced above. Pinset Masons revenues for the half year are down 7% (year on year). Sounds bad? Well last year in the same period there was a year on year growth of 6%. On average, most top 50 firms have experienced nearly a decade of double digit annual growth in revenues. Is 7% therefore that bad? Note too that the firm stated that it was "broadly what we were expecting". Not a reason to panic then.

How about "The Times" this morning? I quote "Partners at the firms ranked 11th to 25th by revenue saw earnings drop to an average of £444,000" (see here for the reference). The article goes on to suggest doom and gloom for mid-tier firms - and goes so far as to say "...profits could fall again if work does not pick up dramatically in the second half of the financial year. Many are likely to seek a merger to survive...". Oh dear.

A report from PWC quoted in the article states that mid-tier firms have been slow to react. I agree  - they have. Many, however, have also reacted badly - they have concentrated on the cost side of the profit calculation and have, in many cases, dropped the ball with regard to the revenue side. I quoted this site in my last post, but have no problem with repeating it here - "MANAGING IN A DOWNTURN: BEWARE OF COST-CUTTING CAMPAIGNS". Partners in particular need to be focussing on their own areas of expertise. I do not suggest that costs should not be cut - merely that it should not be done (operationally) by legal staff, in most cases, but by professionals trained in management. Partners can help  by increasing revenue - or, more importantly, increasing profit by engaging with clients and securing new, profitable, work.

The firms that panic now will be the first in the M&A queue (and they won't be "buying"). Specialise - get the partners concentrating on the revenue and profit side and get professional support management controlling costs and adding efficiencies.

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