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External investment: Can the legal profession really deliver a decent return?

My guest blog for Totum Partners (www.totumpartners.com) the leading law firm management recuitment consultancy.

This month we welcome guest blogger Andrew Hedley, who provides a few salutary lessons for law firms that are serious about attracting external investors.

There was much excitement from the private equity community a few years ago when the possibility of external investment into law firms first raised its head.  I had a number of conversations with potential investors who waxed lyrical about the “mouth-watering” profitability available in the sector. They clearly had no understanding of the operating basis of the traditional law firm financial model!

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Changed Expectations

“It may be hard for an egg to turn into a bird: it would be a jolly sight harder for it to learn to fly while remaining an egg. We are like eggs at present. And you cannot go on indefinitely being just an ordinary, decent egg. We must be hatched or go bad.” 
C. S. Lewis

The legal sector is full of decent eggs; firms which are technically competent, deliver good service, price their work the way they always have and are structured along historic lines. They are operating a cottage industry model and are woefully ill-equipped to deal with the fundamental and far reaching change which is sweeping the market.

There are two dimensions to the challenges which firms must address. The first is external, dealing with a new set of client expectations and fast-emerging competitive forces. The second faces internally and is concerned with operational efficiency, new ways of working, structure and governance.

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Outsourcing Competitive Advantage?

There are a number of core strategic questions which firms need to answer when entering into an outsourcing arrangement.  The most significant is to what extent a firm should be prepared to outsource areas of potential competitive advantage.

If one takes the view that outsourcing is driven by a desire to reduce costs, by buying into a consistent set of scalable processes which are shared across a number of organisations, then it follows that none of these areas should (or could) be sources of unique competitive advantage.

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Easy to do business with?

There is a management adage that “businesses that do well tend to be businesses that are easy to do business with”.  Looked at from a client experience management perspective, it could be easy to believe that many firms adopt attitudes, approaches, policies and procedures which have quite the opposite intent.

My strong view is that client strategy must sit at the heart of all strategy – without clients we simply don’t have a business.  What that means in practice is that any initiative must be stress-tested by looking at it through the eyes of the client.  By asking a small number of core questions, based around new client benefits and the building of sustainable competitive advantage, it is quickly possible to identify the overall cost-benefits of projects competing for limited resources and make the best possible prioritisation decisions.

Understanding the client experience can be achieved by looking in detail at the touch points with the firm.  Some of these will be physical, for example the accessibility of premises, the quality of the built environment or the efficiency of front-of-house services.  Others will centre on service delivery such as the ease with which lawyers can be contacted, responsiveness and clarity of communication.  Taken together this touch point analysis provides the management team with an accurate perspective on “how it feels to be a client”.

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Fingers Crossed?

The last year has seen saw numerous “big plays” by firms, both nationally and internationally, as they set about positioning themselves to take advantage of market opportunities or dealing decisively with challenging market conditions. Early indications are that 2013 will paint a similar picture with mergers, restructurings, redundancies and strategic repositioning dominating the headlines in the opening few weeks. It is also fair to say that the numbers of headline grabbing firms are small when viewed in the context of the whole market, but their influence in shaping that market and the thinking of other law firm leaders is huge.

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Where did all the fun go?

In the brave new world of Six Sigma, LPO and BPR it is all too easy to forget that, for the vast majority, this approach to legal service delivery isn’t what was signed-up to when entering the profession.

However, with pricing under pressure and a fixed-fee basis increasingly the norm, better management is needed.  But modern business practices, information technology, knowledge management and the rise of artificial intelligence are widely viewed as the enemies.  They are seen as disruptive forces altering a comfortable status quo forever.

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Keep Running Faster – You Might Win the Race to the Bottom!

“We can’t solve problems by using the same kind of thinking we used when we created them.”  Albert Einstein

Operational efficiency is necessary but not sufficient. Simply being better at doing things the way that they have always been done may provide some respite, a way to carve profit from a market in which downwards pressure on price is unrelenting, but it is not a long-term solution to the structural changes which are affecting the industry. By running faster, you might win the price-cutting race to the bottom but the real issue is whether you will have a sustainable business when you get there.

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It’s time to compromise on merger candidates: start looking for a doable deal

Over the past four years, the ‘perfect storm’ of deregulation and economic downturn has crystallised issues for managing partners. Having drawn comfort from the belief that they had a strong and profitable business, albeit protected by regulatory barriers and driven by an exceptional period of bull market activity, firms have come back down to earth with a deafening thud.

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Spring into Action!

“Vision without action is daydream. Action without vision is nightmare.”  Japanese Proverb

Without a clear vision, coupled with a strategy to deliver it, firms leave their future success to chance.
But the vision must be more than clear, it must be achievable. And the strategy to achieve it must be founded in the firm’s resources, capabilities and client opportunities. Most importantly, and self-evidently, any vision will only become reality through changes to the behaviours and activities of people across the firm.

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