As law firms begin a new fiscal year, whether in January or at some other point in the calendar, most of them overlook one of their most powerful and reliable planning resources, last year's performance. Year-end financial data and the collective experiences of a firm's partners can help detect the probable causes of serious, often chronic, strategic, financial, and operational issues.
To paraphrase the Spanish-American philosopher and essayist, George Santayana (1863-1952), law firms that cannot remember the past are condemned to repeat it.
By taking a little time to investigate and understand the past year's performance, a law firm is better able to set realistic priorities for the new year. Year-end financial data and the collective experiences of a firm's partners can help detect the probable causes of serious, often chronic, strategic, financial, and operational issues.
Here is a short checklist of questions that you and your partners should ask as you review your firm's performance during your last fiscal year.
What is the firm's current distribution of revenue among small, midsized, large and very large clients? Will it provide sufficient stability and potential growth in the near future? If not, what can be done about it?
- How did billings evolve last year for the firm's top 20 or 50 clients? Which grew, which decreased?
- Are there any formerly midsized or large clients who have largely disappeared from view in the last several months? If so, can something be done before they effectively become ex-clients?
- Are there any clients (either old or new) who "sneaked" their way into your list of top 20 clients law year? If so, should something be done to ensure that they remain at the top?
- Did billings for new clients last year meet initial expectations?
- Did any of these financial measurements change by more than 10% from the previous year?
- average fee yield per lawyer hour
- average number of billable hours recorded by partners and associates
- average value of unbilled work in progress at the end of the year
- average age of accounts receivable at the end of the year
- billing realization rate for the year
- collection realization rate for the year
- fully-loaded operating cost per lawyer hour
- average profits per equity partner
- What were the factors that caused a change of more than 10% -- up or down -- in any of these measurements?
- What were the most frequent reasons for write-offs, write-downs, or other compromises of billed fees?
- If a lawyer voluntarily left your firm during the last fiscal year, what were the reasons for that person's decision?
- If the overall financial performance of a partner declined by more than 10% last year, what were the reasons for that decline?
- If you lost any existing clients to a competitor, what were the reasons for the clients' decisions?
- If you took any new clients from a competitor, what were the reasons for the clients' decisions?
- Why did you win or lose each major competitive tender last year?
- If your firm is ranked in a legal directory, did your rankings go up, go down, or remain the same compared to those of your most important competitors?
Ask why five times.
These are fairly simple and obvious questions, but most law firms fail to ask them. The answer to any of these questions could make a profound difference in your firm's performance and market position in the new year.
When you and your partners ask these questions, be sure that you are basing your answers on reliable evidence -- not just hunches, instincts, or "experience." "How do we know this?" can be one of the most powerful analytical questions of all.
Moreover, we suggest that you follow the Japanese management technique of "asking why five times." Usually the basic cause of a performance problem is not on the surface, but requires intellectually persistent probing to find and understand it. You and your partners might have to ask why several times before you discover the action that will give you the best results.
Before you start planning the future, take a few hours to be sure that you fully understand your firm's recent past.
Norman Clark and Fernando Moreno