Facing the lean years

There are many disadvantages to getting older. Less hair, poorer eyesight, more of a  paunch…. There are however a few benefits, not least of which is the feeling, in the face of major crisis, of “seen it all before”. With the world seemingly on the edge of economic, political and social meltdown, some can remember the days of negative equity, the cold war and IMF fiascos. We realise that what we are now going through is just part of a cycle. As in the past, this is an opportunity to remember that no bull (or bear) market goes on forever and that however hard you throw something in the air, gravity always brings it back to earth, probably with an unexpected bang!

So, here we are again, faced in many fields of the law with falling income streams and increasing costs, both leading to ever-reducing bottom lines for many practices. The causes lie generally outwith our control: the international credit crunch, the end of the house price bubble, oil prices and inflation. In the short term I suspect that things will only get worse. With transaction levels falling we are faced with an oversupply of conveyancers and/or estate agents, and market forces will tend to drive down prices as firms attempt to retain business by reducing fees.

This article will attempt to look at some of the issues facing those in private practice in light of the decline in the conveyancing market in particular, and to offer a few suggestions as to how to adapt to current market conditions and prepare for better times in the future. There is no simple answer, and no two firms will have identical issues. It is hoped however that a few of the suggestions and insights offered here may be of assistance.

Multiple effect

A number of solutions can be implemented which individually may assist firms in maintaining profitability, and if used in combination will underpin longer term success. There can be resistance to large scale change; indeed there may be no need for it. Small changes are often easier, and may be more appropriate. Small changes in just one area may not be sufficient to turn a firm’s fortunes in a recession, but made in a number of areas they can radically improve performance.

I remember listening to a motivational speaker who asked “If you could increase your fees by 100%, your client numbers by 100% and the services per client by 100%, how much would your business grow?” Not being very good at arithmetic, I assumed 300%. The more numerate amongst you will have worked out that the answer is in fact 800%. The effect of changes can be exponential and therefore the best approach any firm can take at times like these is to look to make multiple beneficial changes.

Even small changes taken cumulatively can have massive effects. In simple terms, even if you improve the three areas we mentioned by 10%, the cumulative effect is a 32% improvement; 20% produces a cumulative 73%. Surely none of us run businesses so well that we can’t find that level of improvements!

Bottom line gains

Let’s look then at a number of areas where adjustments can be made. Some are easier than others, some may not be applicable to every firm, but for those affected by the current economic decline, all are areas that should already be under review. Most importantly though, improvements brought into practice now will reap huge benefits when markets improve.

Many businesses confuse the value of a pound earned and a pound saved. Faced with falling revenues, their first reaction is to try to increase them without understanding the value of each pound earned. If, for example, your firm has a net profit margin of 50% (extremely competitive in terms of the cost of time survey), each £1 earned would equate to 50p earned by the partners. Even if in these difficult times you are able to increase fee income by £100,000, the actual improvement to the bottom line is unlikely therefore to be any more than £50,000, and probably less. Increasing fee income also means the firm having to work harder, an increased possibility of claims, and possibly other unforeseen expenses (you outgrow your offices/computers/staff numbers etc).

On the other hand, if you can reduce your costs by £50,000, generally this all immediately impacts on the bottom line. In addition, savings are usually without risk, obtaining them requires effort but a lot less than transacting fee-generating work, and once implemented they generally show in future profit and loss accounts for little or no additional effort.

I may be preaching to the converted, and we will look at ways to expand your business in a recession, but it would be a foolish practice that would not first examine how costs can be cut. All it takes is a little time to look at your monthly outgoings and consider what can be improved or changed.

People matter

Let’s look at a few practical suggestions. Staff are usually the biggest single outlay. How can we either reduce staff costs, or preferably, obtain better value from the staff that we have?

Streamlining your staff requirements may be through natural wastage (not replacing those retiring or leaving), or the more drastic measure of redundancies. Consider reducing staff hours, flexitime or job sharing. All may reduce costs without necessarily losing important staff members. Redundancies I believe have to be a last resort. These are the same people who worked so hard to maintain our profits over the “glory” years. Not only are there costs involved; it may also strike at the heart of the ethos of a firm and weaken the bonds with the remaining staff. Likewise when times improve you may well be faced with large agency bills to replace those you let go a short while ago.

There are a number of options to consider. Can you make your existing staff more productive without increasing the cost base? The simple answer is yes: most people work not simply for the money but for a sense of self worth. There is nothing more damaging to staff morale than a quiet office with insufficient work. Wherever possible, find ways to re-train staff or train them to carry out duties over and above those they currently undertake. Could your senior paralegal undertake more complicated transactions? Could your office junior also be your junior typist? Indeed during difficult times couldn’t all your staff be involved in marketing the firm?

In my experience, seldom will they seek additional pay and any pay increases can be linked to productivity or perhaps to improvements in the fortunes of the business itself. Are you prepared to offer your staff a real share of future more profitable years in return for a reduction in salaries today?

It is important to remember that this is only a part of a cycle and that business will boom again. Could this be the time to invest in the workflow and case management systems that you have been considering? Often we simply do not have the time to adopt these systems: perhaps they could be implemented now, for the benefit not only of clients but the staff and partners. Good IT systems may allow the practice to deal with far higher workloads in the future without increasing staff costs. There may also be shorter term benefits and cost savings. If redundancies are your only option, then perhaps better to ensure you do have in place robust systems that will allow the firm to cope not only with currently reduced business levels but, more importantly, future increased levels, with a smaller staff base.

Bane or boon?

Next in terms of cost will usually be posts or telephones. Huge savings can be made to both with a little thought. Are you still posting all your letters? Would some of your clients not prefer to receive correspondence by email? There is a benefit to them in terms of time, and potentially a massive saving to the practice in terms of postage. The same applies to other agents, with whom email is already far more common. As well as becoming faster, communications are more easily automated and greater marketing opportunities may arise.

Personally emails became the bane of my professional life. Clients’ expectations that answers should be instant created challenges. Expectations however can be managed and I suspect that the next generation of solicitors are already far more adept in this environment. Clients often simply need to know that you received their email. A simple auto response along the lines “I have received your email and hope to revert to you before the end of the week” may be sufficient to keep 75% of enquirers happy. (One point to note: whatever time limit you state, you must contact them one day earlier, not one day later!)

If you can persuade 50% of your clients to transact this way, the savings in postage alone, never mind stationery, would be huge.

Telephone contracts can be renegotiated. There are numerous options, including internet based services where unlimited calls can be made for a fixed monthly fee. These have many advantages, including the fact that paralegals can telephone from their PC without tying up phone lines. Many services have automated answering messages, thus there may be no need to update or expand existing office systems. 

In this world of mobile phones, has your firm recently looked at the tariffs on the various phones used by your staff to ensure you are obtaining the best possible value? Again a little judicious shopping around may reap huge rewards where a firm has several mobile phone contracts.

Think flexibly

Banks today are desperate for deposits and there is no doubt that a solicitor’s client account is seen as very desirable. Are you satisfied that you are receiving the best possible terms from your bank? Whether it is better client account interest, lower banking charges or better borrowing rates I suspect that almost any existing package can be improved on in the current marketplace. It might even simply be an opportunity to remind your own bank that you are no longer receiving a satisfactory number of referrals or instructions!

Your offices may be crucial to your business due to location or size. It may be possible however to operate from outwith the city where rents and rates are cheaper (even perhaps with one room in the city centre for meetings or for a postal address).

The opportunities to save money are almost endless. Can you cut the cost of your stationery? One solicitor I know actually renegotiated the purchase of the paper itself. Could you join with other firms to buy common items in bulk? Indeed, with a bit of judicious redesigning, could you renegotiate bulk letterhead purchases between you as well?

As solicitors many of our IT requirements are very simple. Except in a few areas we could mostly run our businesses on pre-year 2K hardware and software. A review of future IT requirements may bear fruit. Do you need to use Microsoft products with their licensing costs? Open Office is free and works equally well. Most of our staff require nothing except the most basic PC.

But do look at your costs individually and creatively. Saving money is not always the answer and the last thing I am suggesting is to purchase poorer or shoddier goods. However it does make sense to look again at all aspects of the business. Remember also that each £ saved may equate to at least £2 earned, and the saving if managed well will recur every year.

Old client, new trick?

There comes a time where cost cutting is no longer effective, or indeed satisfying. Let’s look at the next area where improvements can be made. We already have a set (although perhaps reduced) number of clients passing through our doors. How can we maximise the profit to the firm from each client while continuing to act in the client’s best interests?

I think the first step is education, education of the client. Over my years in practice I was always amazed when clients returned to me regularly for conveyancing, but went elsewhere for other services. When questioned the response was, universally, “I didn’t know you did that”. Now, while there may be an excuse (and I’m desperately seeking one) when things are busy not to spend some time with clients exploring other services, there can be no such excuse at the moment.

Education can take many forms. It can be as simple as a few minutes of chat with a client. My own position was always that clients should “call me about anything”. If I didn’t deal with an area I would refer them to someone I knew to be expert in that field. That can of course then be tied in with reciprocal or fee sharing arrangements with other firms. Most importantly though you are reinforcing with clients that you are their first point of contact on all legal matters.

Certainly those 10 or 15 additional minutes that you spend with a client are never wasted. I’m sure we all check whether each client has a will, that it is up to date with all IHT issues considered, and whether they or any of their close family have considered the implications of the care in the community provisions and the need to prepare powers of attorney. Just a few minutes spent with every client on these areas can make it possible to almost double the fee income from the client.

Education can also be undertaken by regular mailshots. One mailshot covering all your services is likely simply to confuse, we all offer so many potential services. It is however better than nothing. Ideally though a series of mailshots (perhaps emailed?) will allow clients to consider small digestible pieces of information. This will also have the benefit of regular contact with the client, further strengthening their bonds with your firm and giving you the best opportunity of securing actual work from each stage. They can be adapted to mirror anything relevant to current events (currently, debt management, trust deeds, insolvency; but perhaps powers of attorney or maybe even, one day, buying a first home!).

One other effective education tool is seminars aimed at specific clients or client types. As a profession we are generally regarded as a “grudge” purchase. Clients seek us because they need advice and they often resist doing so because they believe it will cost them money. We ourselves seldom approach clients offering advice aimed at saving them money. Seminars allow the ideal environment to do this. The opportunities will reflect your firm and your clients, but generally will feature services which are not your principal services. These could include insolvency work, powers of attorney and wills, estate planning or any other area relevant to your clients. Most importantly though, you are identifying and inviting your existing clients to attend, at your expense, to learn about an area which you as their professional adviser have identified will save them time or money, or will protect them. Applied well, this type of education will not only result in a very high takeup of the services offered but will create much stronger bonds between your firm and its clients.

Stephen Vallance is a former partner in Vallance Kliner & Associates, Glasgow. He is happy to undertake consultancy work. For any queries arising from this article or any issues surrounding practice management, profitability or marketing, contact him at svall45193@aol.com .

The second part of this article will look further at expanding services, increasing client numbers and increasing fees per client.