Does this revenue model sound familiar?
Number of Fee Earners x Available Hours per Fee Earner x Productivity Percentage x Charge Rate x Recovery Rate = Revenue – Direct Labour = Gross Profit
If this is your model, you’re not alone.
The majority of legal firms focus their revenue model around how many hours the firm has available to charge to clients in any given year. In fact, most professional service firms, including accountants, engineers and architects, also use this revenue model.
While it’s the norm, it’s a problematic model. It caps the revenue you can generate and causes your teams daily behaviour to focus on production rather than revenue growth. It stops the leaders of the business getting out there and seriously growing the revenue of the firm.
I refer to this hours based revenue model as “Squeezing the Orange”, where a firm tries to improve profitability on efficiency gains and by attempting ad hoc sales and marketing activity.
The problem with this is you can only “Squeeze the Orange” until it runs out of juice.
You can only minimise costs and increase margin to a point, and ad hoc marketing activities will get you nowhere.
Sure, systems improvements produce efficiency gains; however, the greatest gains are only made when the systems improvements are initially implemented.
Any further efficiency gains are minimal after this and any strategies are focused more on maintaining the improved margins.
When Partners and Associates in firms constantly focus their efforts on achieving hours based budgets, they lose sight of the key activities that drive revenue in legal firms.
But the only way to increase your revenue is by having more hours to sell, right?
Wrong! It means that your factory employs more people and to maintain margin you need to drive more revenue.
So why do anything different?
My challenge for legal firms is to adopt “business best practice”, which means understanding that an hourly rate revenue model inhibits business growth. The revenue activities that drive revenue growth come from product, marketing, sales and client relationship management activities, not the “factory”.
If you look at any successful business, it has separated the key revenue activities so that it can minimise the impact of variables on its daily/weekly/monthly/quarterly and annual revenue targets. For a business to truly be successful it must adopt the following 5 Dimensional Revenue Strategy:
Product = What you sell
Marketing = How you generate leads
Sales = How you convert leads to sales ($revenue)
Production and Delivery = How you build and deliver the product
Client Relationship Management = How you manage your clients’ experience so they buy and buy again
Each activity requires different skills and hinges on each other for revenue to grow. But each activity requires a different strategy so that the action plans are clear.
For a legal firm to truly be successful the Partners of the business need to ensure that their mind set moves away from the hours based revenue model to one of a product focused and client relationship based model. A product focus doesn’t mean that you commoditise what you do. It merely means that you are clear on the list of services you provide, the value they give to the client and you have a program to improve and grow your service offerings over time.
The opportunities that exist within a legal firm are endless with the right action plans in the right areas focusing on the right activities.
Yes, you still need to have a focus on systems and efficiency and charging hours to clients to generate your revenue, but these strategies and action plans fall under the activity of “Production and Delivery”. The P&D activities can only drive margin, they can’t drive revenue growth. Revenue growth will only come from your Product, Marketing, Sales and Client Relationship Management activities.
To build your revenue model using the 5 Dimensional Revenue Strategy, you need to understand and apply the Revenue Growth Formula which is:
Target Revenue/Gross Profit = (current clients+ new clients^) x transaction frequency^ x average sale^ x margin^
Growing revenue is simply a matter of maths. ‘^’ means ‘make it exponential’. Every strategy you implement must work to leverage the activity so that it produces consistent growth.
Any strategies you develop to grow revenue must fall within one of the formula components. If you analyse this further, each of the components relate back to the five revenue strategy activities as follows:
With a “Squeezing the Orange” revenue strategy, if you focus on margin only, you can only squeeze the orange until it runs out of juice. But with a 5 dimensional Revenue Growth Strategy, the growth in revenue can be exponential.
In the below example, you can see that small increments in each component have an exponential impact on the result.
The focus is to develop strategies in each of the growth formula components and then drive the activities to produce the revenue results. In implementing any revenue strategy you must first pick the “low hanging fruit”. Start with your current clients. They already know you, they already trust you. In nearly every instance they will have unmet needs.
You must prioritise your actions that will have the greatest probability of revenue growth so that you do these first. Any strategy must be assessed and categorised according to the following order of priority – We’ll go through these priorities next week.
If you would like a private consultation to discuss improvement strategies for your law firm, call us on 07 3833 3999 or email us on firstname.lastname@example.org