Feature

posted 1 Nov 2006 in Volume 1 Issue 4

Targeting future revenue streams

Profitability never goes out of fashion and it is human nature to maximise return on investment. Identifying new revenue streams at UK firm Halliwells LLP. By Andrew Dunn

It is fair to say that over the past five years there has been a fundamental shift in the perception of the role of marketing and business development within the legal sector.

During the 1990’s, following the relaxation of the promotional guidelines by the English Law Society, legal practices recruited ‘marketing’ people to fulfil what was, by and large, a marketing/communications role – brochures, events, advertising and hospitality.

Many practices saw the size of their marketing teams grow in tandem with the development of the business and, in the late nineties, began to question the value of what they considered to be quite a substantial ‘overhead’.

This, combined with the growing competitiveness within the legal market, saw movement in the recruitment of business-development professionals. In many cases this was simply a rebrand of the existing marketing team, but in the most progressive firms it was a genuine attempt to bring in new people with a different skill set.

This change in itself is symptomatic of the growing emphasis on revenue generation by management boards within law firms, including Halliwells LLP.

Hence, there has been an increased emphasis on client retention and cross-selling through the introduction of client-relationship management (CRM) programmes, as well as the recruitment of sector specialists, who can utilise their extensive contacts to provide business-development opportunities.

However, many firms have stopped short of recruiting fully-fledged sales professionals for revenue generation, partly due to a perception issue but
also because many sales professionals
find the culture within law firms particularly alien.

The forthcoming change in the management structures of legal practices, as outlined by Sir David Clementi, may change all that.

Why identify new revenue streams?
It may seem like an obvious question but there are a number of reasons why identifying new revenue streams is important to our firm.

First, profitability never goes out of fashion and it is human nature is to maximise return on investment. This has become especially important in recent years as many firms are being judged not only on their turnover, but also on their property-per-equity-partner figure. This is particularly important for a practice like Halliwells, as not only does it mean greater returns, it also enables the firm to attract the best-possible people and invest in a quality infrastructure.

Second, markets are becoming more competitive and turnover growth is important in terms of retaining market share.

This is particularly relevant as we begin to witness a similar type of consolidation in the legal market to that in the accountancy and audit markets in the late 1990s – with the middle tier disappearing, and leading firms getting larger.

Finally, and most pertinent to the readers of Legal Marketing, an effective revenue tracking and targeting programme managed by business development will enhance your standing within the business and help to dispel the much-held view that business development is merely an overhead.

I also believe that, if successful, it will enable many business-development professionals to achieve that nirvana: part ownership of the business (currently known as equity partnership) following the deregulation of the market.

Identifying new revenue potential
New revenue streams can generally be identified within a number of sources.

Existing client revenue streams

Cross-departmental selling;
Intelligence from CRM and key-account-management programmes;
Clients consolidating their panel arrangements;
High-growth clients;
Regulatory changes.

New client revenue streams

New partner followings;
Competitive pitch success;
Individual partner networking;
Client loss from competitors;
Regulatory changes.

The easiest wins are undoubtedly within the existing client base, yet time and time again most practices overlook the potential right in front of them – particularly among premium clients.

In my experience most legal practices follow the ‘Pareto principle’, with 80 per cent of fee income coming from only 20 per cent of the client base. However, if you examine the billings analysis of these clients you will often find that the practice may only sell in three or four legal disciplines. Overly protective partners and an ever-present silo mentality can actively prevent
other partners opening up these
business streams.

Most clients expect their legal advisers to advise them of all available options; by nature this means cross-selling in other service lines to meet client requirements.

In-depth client analysis
I recommend that you examine your client base intimately. This means having effective management information concerning the origin of your existing income streams.

We analyse by client, geography, industry sector, company type, legal discipline and profitability. Then, we track these trends over the previous three years. This may seem elementary, but it is a fact that most practices do not pay enough attention to such management information, which can also highlight cross-selling opportunities.

It will also expose any inherent weaknesses of the client structure. In particular, it is likely to show a prevalence of single-partner relationships that exist with your largest clients. Often these key-client relationships are jealously guarded by the nominated client partners, often to the exclusion of other partners. This is negative for the practice and the client and it is vital to meet the problem head on.

An effective CRM programme that exposes the true state of the adviser/client relationship, is arguably the most popular approach. For maximum impact, we try to conduct these with an independent partner or by outsourcing.

But without doubt, the most effective way to open up these relationships is through a key-account-management programme, which actively assigns specific teams to premium and growth clients to both widen internal ownership and expose revenue streams.

Another route to new revenue streams is through a non-client targeting programme.

There are two key factors in such programmes, which are often overlooked.

‘Best fit’ targets
Be absolutely honest with yourself about the capabilities of your practice and what you can realistically achieve in terms of new client wins. For example, don’t target high-growth technology companies if your intellectual property capability is weak.

Profitable targets
Winning any new work is difficult, but too many firms believe that they can be all things to all men and pitch for every opportunity. It goes without saying that certain sectors have a reputation for low charge-out rates. Likewise, certain legal disciplines have a reputation for economy rates. If your firm expects profitability in excess of 30 per cent, you should be particularly careful about which work you pursue. This is really important if your legal practice is particularly poor at structuring the client team. At the end of the day most firms make maximum profit from effective utilisation of assistants and associates on client work, not by overloading with partner time. Clients often take a dim view of this.

I try to actively grade both clients and targets against four principal variables:

The strength of the existing relationship;
The attractiveness of the client/target;
The current work received;
The realistic potential for winning new work.

Take each of your specific targets and score them on a scale of one-to-ten against each of these variables (see Table 1). Undertaking this exercise will allow you to realistically judge potential. At Halliwells, we undertake this process on a monthly basis.

Market dynamics and opportunities
From an industry-sector perspective, there have been some well-documented structural changes in the economy, particularly the decline of the manufacturing base and the growth in the services sector. Nowhere has this been more apparent than in the real-estate market. The development and property-investment markets have been especially buoyant and many legal-services firms have capitalised on this growth.

Changes in legislative and regulatory framework have to be considered in parallel with these sector changes. The UK has been particularly affected by significant new European Union legislation, especially in relation to employment, regulatory and health
and safety law.

All these changes present opportunities and key to maximising their success is acting as early as possible.

The second dynamic is the changing market for individual legal disciplines.

Over the past ten years we have witnessed a number of changes; all of which have altered the demand for many ‘traditional’ legal services. The first of these has been the increasing commoditisation of legal services, which has led to pressure on fee rates. This change allied to the increased use of outsourcing and ‘legal partnerships’ in the public sector has created more opportunities.

From a specific legal discipline point of view, we have witnessed the growth in a number of diverse areas such as real-estate investment trusts, as well as initial public offerings in emerging markets – such as Eastern Europe and mainland China. All these have created opportunities for progressive firms,
who have been quick to capitalise on these opportunities.

When tracking the market we monitor not only the market leaders, but also the established niche players. Legal journals often provide a useful insight into emerging opportunities, too.

Market intelligence and assessment
Before commissioning in-depth research about these emerging markets there are a number of common-sense questions you need to ask about your practice before contemplating
an entry strategy.

The first of these is does you firm have the expertise (from a sector, geographical and legal discipline point of view)? This seems a fairly rudimentary question but you would be surprised at the number of firms who assume they automatically have the capability.

Another consideration should be what competition exists and the price sensitivity of the market. Once again, firms should exercise caution in trying to access markets where competition is high and charge-out rates are depressed.

I have found that investment professionals – particularly private-equity houses, fund managers and global banks – are arguably the best at tracking opportunities. Many of these have dedicated research departments and analysts.

Second, you should examine the market-penetration strategies used by your direct competitors and the market leaders. If you get into a market early enough, there will be real opportunities for you.

Once you have done this you can then consider bespoke research, as well as reviewing the legal and financial press. It is worth noting that many online databases such as Mergermarket now include an intelligence tool that enables you to monitor potential business-development opportunities across a variety of sectors.

My advice, however, is do not over analyse; success does involve controlled risk and a certain amount of gut instinct.

Market positioning and communications
Effective communications strike at the heart of your target audience and build empathy. There is one golden rule that many of us consistently break: we often market our own internal departmental structure.

To successfully reach targets you need to actively shape your positioning and communications around that specific market, as well as selling the potential benefits of your offering, not merely the product itself.

Developing key-selling messages (KSMs), not only for the practice itself, but also for the major discipline areas is an effective way of doing this.

KSMs are vital as they enable you to sell key pointers and actively differentiate yourself from the competition.

One word of caution though – KSM’s must be realistic and believable, as well as being sector, rather than departmental, focused. Remember, you cannot be everything to everyone.

Andrew Dunn is director of business development at Halliwells LLP. He can be contacted at andrew.dunn@halliwells.com