Law firms participate in a maturing market. Growth is becoming more difficult to achieve. Corporate clients keep more legal matters in house. The emergence of “virtual” law firms is now a reality. The migration of talent from law firms that fail to provide a high quality culture and incentive-based compensation is a reality facing many firms. We are experiencing the early innings of change. A high quality strategic plan can be your law firm’s road map to success in a changing marketplace.
The legal services industry is markedly different from almost any conceivable professional service. Nevertheless, law firms are not immune to the invisible hand of economics. While the financial crisis certainly impacted a large number of law firms, even more disruption will take place over the next decade as a result of evolving industry dynamics.
How Companies Grow
Outside of the world of law firms, we are often asked what enables certain companies to grow faster than their peers. Typically, high growth companies have three things in common:
- A product or service that has a distinct competitive advantage
- High barriers to entry
- A lower cost of capital than their competitors
How Law Firms Grow
The legal services industry is no different. The same economic principles apply, with one distinct nuance: all of the growth drivers are (in-part) driven by profits per partner.
Regardless of a law firm’s size, profits per partner will be a significant factor in determining whether the firm will be able to achieve above-average growth.
If you have higher profits per partner than your competitors, your law firm can:
- Attract higher caliber partners
- Attract more productive associates
- Spend more money incentivizing your lawyers to achieve the firm’s productivity and financial goals
- Invest in systems, tools, and solutions that make your law firm more efficient, liquid, and productive
This has always been the case. Law firms that have superior financial performance have been able offer better compensation, attract higher caliber talent, and grow at rates higher than the industry average.
But the industry landscape is changing. Growth is slowing. There are more law firms with which to compete. Technology and innovative law firm strategy have allowed a select group of competitors to enjoy a more favorable cost structure.
Industry change will take time, partially because law firms have limited access to the capital markets. The pace of change will be dictated by two things:
- The rate at which industry-level growth slows
- The degree to which law firms continue to use PPP as a vehicle to attract partner-level talent
What does this mean for my law firm?
Not all law firms desire to grow their business at high rates. Nonetheless, law firms that employ strategies to consistently achieve top-line growth will cause an industry-level rift that will leave stagnant law firms at an impasse. They will be left with limited opportunities to achieve revenue and PPP growth and/or will have difficulties attracting partner and associate-level talent.
Stagnant law firms could face a difficult future. Talent will slowly gravitate to firms that offer an attractive culture and compensation package. Strategies that drive PPP provide both of these elements.
If such firms are not readily available, top-level talent will continue to establish new law firms – further disrupting the industry. Either way, stagnant law firms will ultimately be faced with declining performance & compensation.
Profits per partner – the key to law firm growth
Law firm rankings have cast a proverbial spotlight on profits per partner. However, industry dynamics and competitive strategy are immune from rankings. If industry-level growth slows, law firms (both large and small), with higher profits per partner will grow faster than those with below-average PPP metrics.
Improving PPP has little to do with cost cutting. Cost cuts should be limited to firms with unsustainable expense ratios. Law firms that consistently grow at above-average rates will be those who continuously reinvest a portion of their free cash flow back into their businesses.
Law firms that invest a portion of their free cash flow into endeavors that will improve profits per partner over the long-term increase their chances of enjoying higher revenue growth, a positive and productive culture, and higher profits per partner.
Develop A Law Firm Strategic Plan
Successful law firms have a strategic plan that is unique to their business. Develop a strategic plan that addresses industry dynamics, your local market, and your individual business. The key to a successful law firm strategic plan is to:
- Define your law firm’s growth strategy
- Define your expected profits per partner over the short & long term
- Continuously monitor business performance and productivity metrics. Performance measurement will lead to higher profits.
- Diligently construct and monitor your talent acquisition and compensation strategies.
- Embrace technologies that improve the efficiency of your lawyers.
- Judiciously solicit feedback from your associates and your clients. Both constituencies have valuable information that can improve the financial performance of your law firm.
A quality law firm strategic plan will serve as your road map to improved growth and profits per partner. Questions regarding your law firm’s strategic plan? Call us at 888-995-0818. We are here to help.
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