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Do fee budgets properly… and unlock the potential (21st June 2013)

This is the time of year when budgets should be done for next year.  As I travel around the country I am regularly confronted with firms failing to properly calculate the fee income for the year ahead.  Consequently (and unwittingly) this is costing them a fortune in lost revenue. 

Take the case of a South Australian firm I recently encountered. This was, on the face of it, a well-run firm with competent staff and a lot going for it. The principal wanted to do the individual budgets for this coming financial year.  I sensed that the firm was underperforming.  I asked him to provide me with the hours everyone worked, their individual charge out rates, the areas they worked in and their level of experience, so I could do the budget as well but separately.

The difference in our budgets was (rounded down) a staggering $900,000!  Note this was not the budget itself but the difference between them and came about without increasing anyone’s time at work.  How could this happen? It’s not that this firm was deliberately intent on losing money or ignorant of the importance of budgets- it’s deeper than that.  It’s a story repeated in every city in every state.  Usually it comes down to a combination of factors all conspiring to mask what should be, from any business and financial perspective, an intolerable position.

Usually these factors include:

As you can imagine he was keen to know what the differences were between the budgets.  It’s not magic and I went about explaining the concepts to him.  He embraced it and together we developed the firm policies needed.  For starters we introduced time recording and credit control policies.  We met with the staff and explained the policies and the reasons behind them.  This included a reminder that the firm should be run like any other business and we discussed in general the future plans of the business.  Everyone was on-board.

Then we met with the staff individually, meeting the key solicitors first and chatting to everyone about what their budget would be for the forthcoming year.

As a general observation people like to be managed, they like to know where the boundaries are and they like working to targets.  It is critical though; that each person accepts the logic behind the budget calculation and believes it is achievable.  If they do not accept this and they are being unreasonable then there should be consequences. Maybe they are not the right people for the firm.   In this firm I can remember comments from professional and support staff like, “now I know what is expected from me each day” and “I had budgets in my last job and never understood why there weren’t any here”.

My additional advice to the principal was that the individuals should receive bonuses if they attain their targeted fees (and recover them) The size and payment date should also be discussed at the time of this discussion so there is no misunderstanding- and to be fair I believe that it should be put in writing.  Why wouldn’t he gladly pay up- he is starting an extra $900k ahead and why wouldn’t the employee strive to achieve a budget that they had already agreed was achievable? A win: win situation!

All of this is based on the assumption that he had work for all his staff. We had that covered too as we concurrently had developed a marketing plan for everyone in the firm. 

There is a post script to this story.  Since the first draft of this article was done, I repeated the exercise with a different firm about twice the size of the SA firm.  Naturally the more leverage you have the better the outcome.   The old budget for the year just ended created by the partners was around $4m.  They knew they were financially underperforming but did not know the degree.  My budget for the new financial year without adding any additional staff or altering their hours was around $7m!