Insights from the 2015 Legal Benchmarking Results
When a market is undergoing transformation, how do some firms emerge with a more successful and profitable business? That was the focus of this year's Legal Benchmarking Survey – and the results make essential reading for any professional services provider.
This month, Macquarie released its 2015 Legal Benchmarking Results based on a survey of equity partners, directors, CFOs and General Managers at 226 legal firms across Australia – from sole practitioners to large national firms. Its analysis focuses on the common themes amongst outperforming firms – the 27 per cent of firms growing profits by 20 per cent or more in 2015.
"What I found surprising was the way these high performance firms are already adapting their business models to embrace major changes happening in the legal market," comments Ian Marshall, National head of legal segment, Macquarie Business Banking.
"We've heard so much about the shrinking demand for legal services, disruptive technology, new low cost virtual firms, the big four accounting firms moving in… yet almost two-thirds of the firms we surveyed grew."
He says the other positive news is the strong improvement in firms' working capital management.
Firms have leveraged technology to make payment collection more efficient. They’ve realised how important cash is to the business.
"In 2013 we saw the GFC had contributed to an increase in working capital lock up, resulting in many firms struggling with cash flow. That's changed dramatically. Firms have improved collection procedures and leveraged technology to make payment collection more efficient. They've realised how important cash is to the business."
Across the board, the firms are now collecting more than 75 per cent of billings. "This gives them the cash flow to invest in technology, staff and training."
Marshall says the survey results highlight three factors for success in the current market:
- Adapting business models
- Investing in people
- Embracing technology
The new hybrid business
Low cost virtual firms have taken hold in the low value, high volume commercial work, particularly for small and medium enterprise (SME) clients. High performing firms are adapting to this by creating a 'tiered' model.
Using technology, they can pare down costs and provide fixed price work for basic needs – quickly and efficiently. Meanwhile, their skilled legal advisory teams take care of more complex, non-commoditised work such as litigation.
Another interesting shift in the legal business model is the continued reduction of the billable hour as the primary charge out measure.
31% of firms will not use billable hours as their primary billing method in 2016
"Almost a third of the firms we surveyed said billable hours will not be their primary billing method in the next 12 months. That's a real quantum shift, and it's driven by client demand and the competitive landscape," says Marshall. "It's clear by the trends and the survey that 'value based billing' and fixed fees will take over."
Putting people first
"On all the metrics we analysed, 'people' really stood out on a number of levels," says Marshall. "The firms performing strongly in revenue and profit growth have a very clear strategy around retaining, employing, training and engaging staff – and this in turn creates strong client relationships."
Human capital is still the number one expense for a firm (at around 52 per cent). What has changed is the increased focus on mobility and flexible workplaces.
"The high value legal work will always be based on a face to face human interaction," says Marshall. "Technology now allows staff to work remotely and log in anywhere." It's an attractive workplace benefit that also boosts productivity.
New tech must-haves
Technology clearly plays an integral role in supporting these new business models as well as more flexible work practices. So what should you be looking for in new platforms?
"There are so many new technology solutions for workflow, case flow, back office management – you don't need to invest in building your own platform," says Marshall.
The most essential requirements cover off back office efficiencies in collections, payment solutions, reconciliations and administration.
However, the next wave of technology will take on the legal work itself. "Firms are getting more comfortable now with legal process outsourcing (LPO) and I think it will grow significantly. But the next evolution is artificial intelligence," Marshall explains.
He says supercomputers are already undertaking due diligence and discovery work through programmed algorithms. "The tasks that used to take a team of lawyers hours, going through huge libraries, can now be done in seconds."
Benchmark your own business
So where should you begin if you want to compare your business performance and strategy with others? Marshall admits there is an information overload on social channels, with so many reports, opinions and insights. He says the most valuable tool is a more traditional one: peer to peer interaction.
“You can learn a lot in a neutral environment during a networking meeting or industry forum,” he says.
Talking with others about the context behind these financial benchmarks could be the trigger for a new idea or strategy shift in your own business. Taking some time to look around you could also mean the difference between just surviving, or adapting and thriving.