Intelligent Office UK: The drivers of sustainable growth for mid-market law firms

Having survived, or in some cases thrived, during the pandemic in 2020, law firm management teams must now chart a route to re-establish or ensure sustainable growth in the future. Usually, recent figures would form the basis of decision-making in the year ahead; but this year, trend analysis is unlikely to offer a reliable guide against a backdrop of negative short term market conditions that contrast sharply with forecasts of strong overall economic growth in 2021.

For management teams this is compounded by significantly different operational set ups with the longer term move to a hybrid working model now seen as desirable in the future.

Given the ongoing uncertainty, how do management teams identify the drivers of sustainable growth that mean their firms thrive and are able to compete effectively in the future?

Data provides the key to regional variations

As part of the solutions we deliver, Intelligent Office helps law firms become more efficient, a key element in enabling high levels of productivity, and it is from this vantage point that we have developed insights on the key operational factors that influence profit margins and PEP. Our research, published earlier this month in Path to Recovery, combines revenue data from The Lawyer with our own industry-wide benchmarking. In it, we have uncovered major differences in the profitability, structures and strategies that exist between those firms primarily based in London versus those in the regions.

Whilst analysis of individual firms’ operating models is the best guide to effective planning and implementation of operational changes, the trends we’ve identified have broad application across the sector.

Scale

For London-based firms, scale does not appear to be a barrier to profit generation, in contrast, regional firms’ profitability is more dependent on scale; however, once critical mass is reached (around the top 100 level) the balance shifts closer in approach to those of London-based firms.

Real estate

The pandemic has ushered in a wholesale re-thinking of office space and in the context of financial planning, how many locations is optimal. The data indicates that London-only firms have the greatest profit margins, whilst at the other end of the scale, regional firms with multiple offices typically have lower profit margins. For this latter group in particular, it is the prospect of continued hybrid working which will have a significant influence on the fine balance between scaling for growth and the investment needed to do so.

A note of caution, however. Real estate costs are an obvious (and not insubstantial) line item in law firm accounts, but our research shows that their proportion relative to other costs is actually smaller than anecdotally perceived. Square foot per head has been declining in the past five years and whilst the pandemic has accelerated this trend, the challenge for management teams is more complex. Their ability to reduce or reorganise how they use available space – and the consequent impact it has on profitability – will be dependent on the implementation of operational structures that support optimum fee earner productivity.

Operational strategy

Our research has shown that revenue per lawyer and profit margin are closely correlated at London-based firms.  Higher RPL drives increased profitability and this advocates a focus on maximising fee earners’ billable hours. That means implementing digital workflows that are underpinned by the right balance of self-service support and delegation to an appropriately skilled support function.

For regional firms, revenue per lawyer and profit margin have a far more disparate relationship. Our analysis suggests this might stem from a greater number of physical offices which have a direct overhead alongside the greater difficulty in properly leveraging the fee earning and support capacity that exists across multiple offices leading to inefficiencies.  The stark shift to home-based working in the past year will have offered a window on a positive target operating model and raised questions about how this might be achieved more permanently.

The difference between thriving and surviving beyond 2021

The market data and analysis from our research provides Intelligent Office with a unique base from which to support law firms in the transformation of their operations, an approach that Intelligent Office has successfully deployed with each of its 40+ UK law firm clients. In overview it includes:

• Understanding individual client operations, including how fee earners and support staff interact and how effective these working relationships are. We use tools and data to analyse the ‘as is’ state and identify opportunities for greater efficiency, productivity and satisfaction at every level
• Planning and implementing operational change that’s needed: centralising and cross training administrative teams so that the right resource is focused, available when needed and fully utilised; embedding digital workflows that seamlessly integrate with existing systems and minimise human error; and reinforcing a collaborative culture rooted in service excellence
• Delivering innovation: our Centres of Excellence for each service area set standards, implement best practice and ensure operational excellence across our network of client sites. Practical insight from our 800+ employees is continuously deployed to improve service delivery

Intelligent Office’s ability to deliver material differences to the top line as well as reducing cost by improving efficiency, makes a partnership with us compelling.

Download a copy of our Path to Recovery report here or contact Sam Nicholls, Head of Business Development at Intelligent Office to discuss how your firm can benefit from more bespoke analysis of its operations.