Amber was still making her case for partnership. It had been going on a long time, but she felt she was making progress. Two of the partners who had seemed very lukewarm were now genuinely enthusiastic on the basis of the new work she was bringing in.
But there was still one area where Amber felt unsure and that was the financial management of the firm. Not her own financial performance – she felt that was fine. She did loads of work, it got billed and the clients paid. Although sometimes slowly. But how the firm as a business dealt with finance and maintained profitability – that was a bit of a mystery to her. And she knew it shouldn’t be.
Then two days ago she had (or started to have) an interesting and encouraging conversation with Steve, one of the older partners. She didn’t really know him that well, but did admire his commitment to the firm’s CSR initiatives. She wasn’t sure how the conversation got round to financial management, but at one point Steve beckoned her closer in a conspiratorial way.
“I’ll let you into a secret”, he whispered, “I could walk you into any number of well-known and well-regarded regional and London firms and you’d find that maybe half the partners couldn’t explain how profitable the firm was or the explanation behind that level (or lack) of profitability. And certainly a number would struggle to tell you how they would plan to improve profitability.” That was vaguely comforting and also unsettling for Amber.
“Ok, so what is it that these people don’t know?” she asked. “What I learnt a few year back was RULES”, he replied. “What sort of rules?”. “No R-U-L-E-S, you can describe them as the levers of profitability. Some of them influence short term profitability and some of them have a longer term and more significant impact”.
“Right so what is R?”
“Rates – or to be precise Realised Rates. So a firm may have set an hourly rate of £250 for a particular lawyer, but of course that doesn’t mean that’s what the client ends up paying.” “No,” Amber jumped in, “We often seem to offer discounts at the start of piece of work. Or then at the end when we have spent more time than expected.” “Absolutely,” Steve responded “but if you can increase your Realised Rates, then you will increase profitability – all other things being equal”, he added with emphasis.
“What sort of other things?” “We can come back to that”.
“Ok so what about U?” “U is for Utilisation”
“Oh yes of course, I know about that, it’s all about …”
And at that moment Amber’s enthusiastic trainee came bouncing up, looking concerned, talking at 100mph and the moment was lost. With a silent acknowledgement Steve headed off.
Amber felt she had a dilemma. How was she going to learn more about the finances of the firm from a partner's perspective, before she was a partner? She needed to work that out.
What do you think you need to know about your firm’s financial management, including profitability? Has it been explained well? What would be helpful?
What are those “other things being equal” that Steve referred to? What are L, E and S?
You can choose to add your name and any contact details - otherwise comments will be anonymous. Up to you.