In my last instalment, I illustrated how prioritising client success helps firm leadership address the ‘wicked problem’ of continued success. This instalment explores how firms can consistently grow revenue, highlighting some key questions that should be considered.
Growing Revenue
Most firms set a revenue goal for the coming year as early as possible, and usually align annual spending around this target. However, this target is often created by simply adding an ‘appropriate’ increase or multiplier to last year’s actual revenue. Indeed, this can frequently be seen in year-end reports, where the focus seems to be perennially on achieving double-digit revenue growth.
Revenue targets developed using this multiplier method are arbitrary and, as a result, can be either difficult to reach or substantially lower than what could be delivered with a change in strategy. The knock-on effect is that the approved spending budget for the year could then equally be over or under-stated, sometimes significantly.
Below are some simple questions under four broad areas that leadership teams can use as a guide when revisiting annual (or 3-year) plans to ensure that the firm is consistently improving its revenue growth strategy. This is by no means an exhaustive list, and a number of books and articles on this topic are available; this list is simply designed to provide a starting point to frame internal discussions.
Where will the firm generate more revenue?
- On which practices should the firm focus and how much revenue can it expect each team to generate?
- How does this practice based revenue aggregate across sectors or industries?
- What does total revenue look like across offices and geographies?
- In which of the above does the firm see the highest revenue growth potential?
There will always be debate about the merits of bottom-up planning (individual team estimates rolling into geographies, then combining into total firm targets) versus a top-down approach (firmwide target set by the leadership team, and then allocated down to individual teams through geographies). However, the key thing is to establish a process for regularly reviewing these questions and adapting the firm’s approach over time as the global markets fluctuate. In my experience, mixing elements of both approaches often flushes out areas of disagreement that need the most attention.
Data is the key to making good decisions in relation to potential future growth areas for the firm. For example, if a practise group is close to 100% utilisation across the year, barring annual rate increases (which are becoming ever more difficult to justify), expectations of greater results from this group could be misplaced. Or if the firm is already the dominant player in a particular geography that has reached maturity, there is unlikely to be significant revenue growth available without a meaningful strategy change.
Which clients will the firm target for revenue growth?
- On what type of clients and in which sectors will the firm predominantly focus?
- What is the ideal size of client that the firm can best support?
- Who are the firm’s Key Clients and how are their client experiences differentiated?
- How long should the firm’s ‘tail’ of clients be allowed to grow?
Gone is the old adage that ‘any work is good work’, as firms now have the ability to target specific clients and particular work types with relative certainty of optimising revenue growth. Client analysis is one of the newest, and arguably most interesting, areas on which leadership teams can focus. As firms become more sophisticated in data capture and hygiene, it is easier to identify the clients (and their characteristics) that make for the best fit.
While most Partners will welcome this guidance for targeting work that delivers the greatest rewards, the topic becomes potentially more controversial when applying the same lens to existing firm clients. As I discussed in a previous article, outside of their key clients (which tend to number from around 10-100 and often account for 60-80% of the firm’s total revenue) firms regularly have 1000s of other clients to which resources are dedicated on annual basis. A detailed opportunity cost analysis of this ‘tail’ could help leadership teams to identify which of these clients can be developed to generate more revenue for the firm, and which should potentially not be clients going forwards (freeing up resources to better deploy on other existing or new clients).
As an example, we recently spoke with the Co-Chair of a leading US law firm, where such a program had been run in one of its transactional practice areas, identifying 500+ clients that weren’t the right fit for the business going forward. The majority of these are no longer clients of the firm and, even though the natural disappointment of the affected Partners had to be carefully managed, the revenue growth from remaining clients (who received more focus) has far exceeded any revenue lost from the client departures.
How will the firm generate more revenue?
- Will the firm be responding to market demand or attempting to create demand?
- Is there capacity to win new work or is the focus on increasing market share?
- Should the firm have an Alternative Legal Service Provision (ALSP) offering?
- Does a multi-disciplinary approach make sense for the firm?
Leading specialist firms tend to do very well with a responsive approach to the market; their brand is well known and, as the work arises, it is very likely to find its way to the firm. However, the full-service law firms are in a much more competitive space, where differentiation is challenging. The leadership teams of these firms must always have a very clear idea on how the firm will create demand and win work ahead of its competitors.
ALSPs now number in the hundreds, both as captive businesses (or departments) within existing law firms and as completely standalone entities that have no tie to a standard law firm structure. However, jumping on the bandwagon is not as easy for firms to accomplish now as it was in the past, and any new entrants to this very competitive marketplace must have a solid understanding of how they will carve out their space. Even with the lower cost model, there is opportunity for firms to substantially increase their overall revenue if this is done well. If it is not, there is equal opportunity to cannibalise the firm’s existing work, reduce overall revenue and lose disgruntled talent along the way.
What processes will the firm adopt to promote revenue growth?
- What investment will the firm make to support its ‘Go-to-Market’ activities?
- How will the firm settle on the best structure and incentives to drive revenue growth?
- What is the best allocation of responsibilities between Partners and the BD team?
- How will the firm define, measure and report on success of revenue growth activities?
My first three missives focussed on high-level strategy, but this is where the leadership teams need to drill down to the practicalities that will enable successful revenue growth. A well thought out vision alone is not enough to be successful – without the corresponding investment in resources and tactical planning, the firm is unlikely to see significant growth. Conversely, as has been seen at some of the larger firms, simply spending on a multitude of new resources is unlikely to even achieve breakeven without a good idea of how those resources will be effectively deployed.
For me, one of the areas where firms have so much unrealised potential for revenue growth is in properly empowering Business Development teams to be significant contributors to growth. There is real ‘sales’ talent in the BD teams at most law firms, but rarely are those individuals enabled to achieve their full potential. At a minimum, these resources should be better utilised to support Partners for whom client development is not their forte – which means attending client meetings, playing significant roles in pitches and being allowed to build up client relationships over time. Just as importantly, when firms have secured the right talent in their BD team, those people should have their incentives aligned with growing revenue (with meaningful returns for overperformance just as in any other ‘sales’ team in every other industry).
Even with the best talent in the market, there comes a point for every firm where future revenue growth will not happen passively. Add to this that the historically reliable method of annually increasing billing rates has long since seen its day, and firms face a real challenge in driving continuous growth. There are multiple different ways that leadership teams can approach this ‘wicked problem’, some of which are discussed above. The key point, however, is that firms must revisit their revenue strategy regularly and adapt as opportunities and challenges present themselves globally. Of course, at some point, a leadership team could simply decide that ‘we make enough money and have reached the ideal size’ – what an enlightening day that will be for us all.
In the next part of my series, I consider how firms should consistently review their strategy for increasing profit. In the meantime, you can explore more inspiration and resources for leaders & partners, including our latest COVID-19 law firm research findings.