Growth in a Downturn - Revenue or Cost Driven?

It's results time again, when the legal press focus in minute detail on short-term results - thereby increasing lawyers' focus on results in the last 3 months, 6 months or 12 months, all of which are too short term.

The news this time round is continuing revenue falls in some of the big players, headed up by Simmons who posted a 16% fall in revenues (see the full story here). A&O also show a fall - Norton Rose and Lovells are expecting flat results. All of these firms have been cost cutting, and it will be interesting to read the results of the mid tier firms where cost cutting has been the most savage. The evidence would seem to suggest that cost cutting hasn't helped enough - or perhaps they will suggest that it was going to be much worse. By focussing on cost cutting, some firms will have dropped the ball with regard to business development, which, I suggest, is the real way out of the downturn.

It's not been all bad news. Dentons posted a 3.5% rise in revenue in the same period (see here) - for which they thanked not savage cost cutting, but rises in international revenues.

The message has always been - the best way out of a downturn is a focus on revenues not on const-cutting. This article gives an interesting take, and sums up by saying "...do not sacrifice the future [by one-shot cost reducing savagery]" and encouraging firms to concentrate on cash efficiency and revenue growth. In another part of the same article, the author tells firms not to retreat - no matter the temptation, do not hide from the storm, but instead aim to work hard to grow your revenues. The author quotes a Harvard Business Review article which states:

Of the firms that made major gains in revenue or profitability during the last recession, more than 70% sustained those gains through the next boom cycle. The corollary was also true: fewer than 30% of those that lost ground were able to regain their positions.

Growth in a downturn is driven by revenue, not by cost cutting. I am not suggesting that any firm should ignore costs. Have a sensible policy to manage costs sensibly - but have the lawyers doing what they do best which is to provide high quality business advice, manage their clients, find new clients and find new work. Costs are important, and client & matter partners must have a very good understanding of their costs in order to be sure that their work is profitable - but their responsibility is to drive forward the revenue side of profit, while letting the managers of the business manage the cost side of profit.

Manage the costs, but work for the revenue - it's the only way forward.

Why search for growth?

Growth - most law firms are at it. I have yet to speak with a law firm of more than six partners which was not focussed on growth - ideally in PEP (Profit per Equity Partner) but most often also in revenue, profit, number of partners, number of offices, etc etc.

Why? My light reading over the last day or so has been the "The Lawyer UK 200 Annual Report 2009" (available as an active PDF here). One of the lead articles is entitled "The Power of 10" and examines the top UK firms in 2009 compared to the first year of "The Lawyer Annual Report" in 1999. As the article states:

"But with all these changes during the decade [mergers, european expansion, referring work to cheaper parts of their organisation], the most astonishing thing about the top 100 in May 1999 is how similar the pecking order is to today's leaderboard. Although most firms have doubled or even tripled in size, they have been running to stand still."

All that trouble, all that expensive growth, and all that has happened is that, so far as this particular ranking is concerned (and see here for some other thoughts about rankings), most firms have stayed still. "The Lawyer" holds Linklaters out as a success story since it managed to claw its way from the bottom of the "Magic Circle" - that it, from the bottom of a group of four. The article does admit to "difficulties" at Linklaters over the decade - with two major restructurings.

What would have happened a firm had decided in 1999 that it was large enough, or that the partners earned enough, or that they saw no need to expand into Germany? It would have fallen down the rankings - that's what. My point here is - so what? I would argue that a group of partners who had agreed on a strategy that did not include growth might well have been more profitable (on a percentage basis) and are likely to have had more contented staff and partners. It's likely too, I think, that clients might well be more content. They will not have lived through a decade in which their legal advisers grew more quickly than they did and so in which they became a smaller and smaller client.

The last decade for law firms has been a little like the decade before for commercial companies - one of expansion followed by contraction. This was matched - as it is now for law firms - by swift hiring and firing of staff, outsourcing followed by insourcing followed by outsourcing. Management along the lines of "if it's done in-house, let's outsource it. If it's done externally, let's bring it in-house...". I can see these cycles repeating themselves now.

Growth for growth's sake is a strange idea - I'm not sure who it benefits. It tends to drive an aggressive culture in a firm and in an industry. I do not pretend that any large firm will read this blog entry and think "he's right, you know, we should be happy as we are...". Partners in smaller firms - this appeal is for you. Think carefully about the strategy you want and consider whether you need to add growth to it. Perhaps a strategy which includes excellence in service to clients, and a fair reward for effort is good enough?

It is more important to be sure of a strategy that all the partners are comfortable with rather than to automatically assume that everyone wants growth.

Growth, Association and New Links

Growth is an unusual thing at the moment, particularly in professional services and consulting. For that reason, and for many others, I'm delighted to be linking up with Geotrupes, the specialist legal consultancy.

James Dunning, the Director of Geotrupes, has a great deal of hands-on experience of working with and for law firms and that combination attracted me to working with the team at Geotrupes. I'm sure that we can work together to provide real value for law firms. I'm going to be concentrating on the risk side to begin with, but I think that one of the real strengths of the association with Geotrupes will be the facility to provide law firms with experience, knowledge and insight from both the legal and support sides of the business.

I'm looking forward to it.