Title: Profitability, commercial awareness, risk management and compliance
1Profitability, commercial awareness, risk
management and compliance
- Peter Scott
- PETER SCOTT CONSULTING
- www.peterscottconsult.co.uk
-
2Challenges now facing law firms
- The economy
- Government cuts
- New competitors in the market
- The P I insurance market
- Increasing regulation and compliance
- Technology
- The changing needs of clients
- A fragmented profession
- Given these challenges, never has the need to be
- more competitive been so great
3Todays session
- How to compete in tomorrows markets
- Building financial awareness and performance
- How to manage your risks and compliance under the
new regulatory regime - Achieving your goals
-
4How to compete in tomorrows markets
5The need to be more competitive
- Competition is a process by which
- services that people are not prepared to
- pay for
- high cost methods of production and inefficient
- organisations
- are weeded out and
- opportunity is given for newservices methods and
organisations to be tried - Could this apply to the legal profession today?
6Your future market competitors?
- ABS - owned wholly / partly by non-lawyers with
deep pockets? - MDP - owned by lawyers and other professionals?
- Highly developed traditional law firms?
- - national / regional
- - branded
- - strong sector focus
- - franchised / federal models
- - heavy investment in IT, management and
infrastructure - Combinations / variants of any of the above
- Others?
- Which kind of law firm do you want to be?
-
7The greatest danger?
- - complacency!
- Our strategy is to keep a lid on
- expenditure and weather the storm. We
- cannot reinvent ourselves as something
- we are not
- Managing Partner of a major London law firm
Autumn 2008
8An alternative view
- there seems to be a disturbing strategy of
hunkering - down, cutting some fat and hoping that business
will - return to normal. That is not good. The terrain
will look - very different when this is over. This is not a
minor blip, - but a discontinuity
- the problem is that most senior lawyers think
only two months ahead. - They have no coherent picture of the future. The
planning is not being - done. And it is senior lawyers who need to be
driving change - Professor Richard Susskind May 2009
9Forward planning - focus on the fundamentals of
your business
- Your clients
- Your people
- How you can achieve your goals
10The fundamentals of your business are you
making the most of them?
11Do you know what your clients want?Will
your people deliver what your clients want?
12Your clients
13Preventing client leakage
- Clients usually do not tell their law firm they
are leaving they just never again instruct the
firm. - Are you unknowingly at risk of losing part of
your client base?
14Key issues for clients?
- Client based research consistently demonstrates
that unless law firms listen to their clients and
act accordingly, then those clients are likely to
migrate to other firms.
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16Your client base
- It is not only the at risk clients you should be
concerned about. - The graph shows that typically three out of ten
clients have hidden potential to grow that has
not been identified.
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18The cost of sales
- The cost and effort to ensure client satisfaction
and thus the retention and development of clients
is many times less than the cost of trying to win
new business - Do you know your clients potential which could
be unlocked for your firm?
19Protect your backyard
- This should be an obvious and profitable way to
ensure - not only survival but also
- one of the best ways to build long term
competitive advantage - But are law firms doing so?
20Strategic forward planning
- What services are your clients going to need in
the future?
21What are clients looking for?
- Core issue is to add value
- More than the competitors
- In a way which is regarded as valuable by clients
and which differentiates you to create a - brand
-
22What is added value?
23Value Clients Care About
- Our clients perspective
- Not our own perspective
- Is there a gap?
24The value gap
- It is the clients perception of value that
matters - Professionals often put too much emphasis on
service attributes - Not enough on helping clients achieve results
25You will add value if
- You provide clients with what they want and
more - At prices they perceive to be value for money
and - You do this better than the competition
26Understanding the clients needs and requirements
27Price on its own is rarely a determining factor
- However, value for money is key
28The clients perspective
- They always try to sell to us on price but
what we really want is to have a good job done at
a reasonable price - Client feedback from a perception survey
commissioned by - a law firm
29Positioning your practice to be competitive by
adding value more than your competitors
(Brown and Faulkner 1994, Long Range
Planning)
High
Client Perceived Added Value
X
Ave
Suicide Zone
Low
High
Low
Ave
Client Perceived Cost
30So what do clients want?
- Here are some of our most important research
findings from interviewing clients of law firms
and in particular from those clients which were
in the at risk category
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32Perceived lack of skills and technical expertise
- Clients absolutely expect that law firms have the
necessary technical expertise to get the results
clients require - This should be a given but unfortunately it is
often not the case
33What some clients said
- They are OK for most work but when it comes to
something really important to us, we go
elsewhere -
- If named partner is not there we go elsewhere
because they lack depth of expertise. -
- They need to improve the quality of staff in the
2nd tier.
34However, it is not enough just to be a good lawyer
- The following factors can all influence a
clients choice of law firm
35Brand and Positioning
- Law firms win and lose work based on how clients
and key decision makers perceive them, and
particularly in relation to transactions, factors
around - complexity
- risk or
- size
36Some relevant client comments
- For high value / high risk work I would use a
big name firm very unlikely to get bad advice -
- Our accountants tell us to use a corporate
firm - The firm is under pressure if it does not do
some bigger corporate work -
- Sometimes we dont use them for complex work
-
- (They) may not be able to do complex
transactions
37Lack of client awareness of specialisms offered
- Sometimes the problem is not so much actual lack
of technical expertise but more a failure on the
part of the law firm to make clients aware of
what the firm can do
38The following client quotes show this
-
- They must not assume that people know what they
do -
- If I had a 5m project, would I think of
(Firm)probably notI would think of one or two
others first it may be that I dont know enough
re the full extent of their expertise. -
- Not sure if they have certain capabilities
-
- They are not proactive with their own clients
-
- I dont think they have anyone in
litigation...but if (the client partner) told me
they did, I would trust him...Id be interested
in talking to them -
- Maybe not so good at telling people what they
do
39Speed and other service factors including
- Meeting deadlines
- Keeping commitments
- Ability to offer advice quickly and efficiently
- Keeping clients informed of progress
- Care and attention to work
- Billing as expected
- Personable and likeable people / rapport with the
team - Interest in / knowledge of clients business
40These client comments help to illustrate this
-
- Their response times leave much to be desired
-
- We had to chase all the time we said it was
urgent but it still ended up drifting -
- They didnt communicate enough, or didnt seem
to be on top of things -
- I dont believe they have the resources
41Relationship and understanding of needs
- If a law firm is unaware of a clients strategic
needs then it is at risk - An example of this was a firm which was unaware
that it was likely to lose a large client
relationship in an imminent review of panel firms
42For service, I would rate them 8.5 out of 10
(they are upper quartile on this)...for strategic
value I would rate them 2/10
- Being aware of this client feedback, and
effectively responding to it, enabled the firm to
retain what was its largest single client
43Referrers of work
- Different factors are likely to be identified
from listening to referrers of work such as
accountants, banks, overseas lawyers, IFAs,
surveyors and estate agents
44Research indicates that referrers consider these
factors important
- Knowing the individual / the personal
relationship / having confidence in the
individual - Expertise / technical ability / good quality
advice - Track record in an area of work
- Turnaround time / speed / ability to meet
deadlines - A fit with client
- Location
- Reciprocation
- Working as a team
45Your firm
- For any individual firm it is key to identify
what is important to your clients and referrers
of work and how you perform in key areas - Understanding and then responding to the issues
can create immediate financial benefit and
clarify the future direction of your firm
46To be unaware of or to ignore client and referrer
perceptions is to put at risk a firms very
existence
47Your people
48Your people?
- Are you presently unable to add
- value to your clients because of
- Gaps in your skills base?
- Under performance?
- internal attitudes and behaviour?
49What should your people be doing
- better?
- more of?
- less of?
- differently?
- How are you going to manage this?
50In particular
- how should your people be using technology more
effectively? - How financially aware are your people?
51Making technology effective
- Technology without people does nothing
- Law firms are people businesses
- People use technology
- Are your people helping you to get the most
- benefit out of technology?
52Your IT
- IT is a tool to be used by you in your business
to help you be competitive - Is it doing so?
- Do you analyse the cost / benefits of the IT you
use? - Could you use it better to achieve your business
objectives?
53Your business objectives
- Client service delivery
- Financial management
- Business development
- Knowledge management
- Risk and compliance management
- Others?
54Encourage your people to think creatively about
how to use technology to
- Provide better service
- Improve productivity
- Build competitive advantage
- Build profitability
55How financially aware are your people?
56I dont have a clue about the financial reports
I receive
57Do your partners / other fee earners have
financial knowledge gaps?Do they understand why
you provide them with financial reports?Do they
understand why you are asking them to take
certain actions?
58Does your firm have a financial education gap?
- How can I grow revenue?
- How can I price more creatively?
- How can I improve profitability?
- How should I manage working capital?
- How do I control the cost base?
- What reports do I need to better manage my
practice? - Why should I fully record time?
- How can our partners gain more confidence to talk
to clients about money?
59Defining the financial education gap
- What do our partners and other fee earners tell
us they need to know? - What do we think they need to know?
- What messages are fed back from clients?
60Finding the right solution
- What is realistically achievable?
- What is the cost / benefit?
- What is the most appropriate forum / method for
training?
61Gaining partner buy-in
- Must be relevant to the partner
- Needs to be user-friendly and practical
- Should demonstrate a clear benefit and
improvement opportunity for the firm
62Implementation
- Identify the key sponsors, stakeholders and
likely blockers - Involve partners and other fee earners in the
design and implementation of the education
programme
63Would a financial education programme for your
firm help to achieve the outcomes you want?
64Measure and report what matters
65Financial measurement and reporting- create
KNOWLEDGE- help to manage RISK
66Without good financial measurement and reporting
it is not possible to adequately manage your
knowledge of what is happening in your business
and the risks to which your business subject.
67Risk and Knowledge Management
68Financial measurement enables you to manage
performance
69If you cannot measure it, you cannot manage it.
70What is the purpose of financial measurement and
reporting?
71To provide clear information to those running
the business to enable them to - Know what is
happening / will happen in the business - Make
decisions based on sound knowledge - Take
effective action
72Is your financial measurement and reporting
aligned with and helping you to achieve your
objectives?
73How do you use financial information?
74Financial management - whose responsibility is
it in your firm?
75Is your IT helping or hindering your financial
measurement and reporting?
76Data Vs Information?
77Avoiding financial information overload
78In a law firm what needs to be measured- and
why?
79Only measure what matters
80What matters? -How can we measure the
financial performance of each part of our
firm?-How profitable / loss making are our
clients?-Which parts of our firm generate good
cash flow or soak up cash?
81Are you measuring and reporting on what matters?
82Is there anything you should measure which you do
not currently measure and report on?
83Your key performance indicators?
84Testing your KPIs
85Your KPIs?
- Why do we produce this information?
- Does it tell us what we need to know about our
business? - What does it not tell us about our business?
- Do we ever use this information?
- If not then why do we produce it?
- PETER SCOTT CONSULTING
86Real time or historical information?
87Do you / your people use everything you measure /
report on ?If not why do you measure it /
report it?
88Identifying your priority financial
outcomesAligning measurement and reporting to
achieve those outcomes
89Outcomes?- Accelerating cash flow?-
Improving profitability?- Building
performance?- Effective business development?-
Risk management and compliance?- Others?
90How to design clear and understandable reports to
achieve required outcomes
91How can you ensure the most effective use is made
of your financial reports?
92Accurate reports build credibility
93Financial roles in a law firmWho needs what?
94Hard copy or available on line?
95Frequency of reporting?
96Is it enough just to provide reports or do you
need to do more?
97Questions?
98Implementing effective risk management and
compliance procedures
99Law Firm Risks
Management
100Who has looked at the new SRA Code?
- Go to Freedom in Practice at
- www.sra.org.uk
- Peter Scott Consulting
101Timetable towards implementation
- April 2011 publication of final Handbook
- August 2011 Anticipated designation of SRA as a
Licensing Authority for ABSs - 6 October 2011 first ABSs licensed and
implementation of new Handbook - Peter Scott Consulting
102Key elements of Outcomes Focused Regulation (OFR)
- Principles not rules
- Emphasis on results rather than process
- Sets out expected outcomes
- Provides indicative behaviours
- Peter Scott Consulting
103A New Online Handbook
- Will contain all the elements of the regulations
- Principles
- Code of Conduct
- Accounts Rules
- Authorisation and Practicing Requirements
- Client Protection
- Discipline and Costs Recovery
- Specialist Services
-
-
Peter Scott Consulting -
104 Handbook and risk based regulation
- Firms will need to demonstrate their approach to
compliance - through compliance officers
- compliance plans
- possible self certification of compliance
- reporting of non compliance
- A new relationship between regulator and
regulated required - more openness
- more information provision by firms both annually
and ad hoc. - Peter Scott Consulting
105The Principles
- Ten mandatory over-arching Principles
- Embody key ethical requirements on firms and
individuals - Not part of the Code
- Six you will recognise but four are new
- Peter Scott Consulting
106The six Principles you will recognise
- Uphold the rule of law and proper administration
of justice - Act with integrity
- Do not allow your independence to be compromised
- Act in the best interests of each client
- Provide a proper standard of service to clients
- Behave in a way that maintains the trust the
public places in you and in the provision of
legal services - Peter Scott Consulting
107Four new Principles
- Comply with your legal and regulatory obligations
and deal with your regulators and ombudsmen in an
open, timely and co-operative manner - Run your business and carry out your role in the
business effectively and in accordance with
proper governance and sound financial and risk
management principles - Run or carry our your role in the business in a
way that encourages equality of opportunity and
respect for diversity. - Protect client money and assets
- Peter Scott Consulting
108Outcomes
- Generally replace rules in the Code
- Describe what you are expected to achieve in
order to comply with the relevant Principles in
the context of the relevant chapter - Supplemented by Indicative Behaviours
- NB there are 81 outcomes but they are not an
exhaustive list of the application of all the
Principles - Peter Scott Consulting
-
109Your Challenge
- How can you best achieve the outcomes, taking
into - account the nature of your firm, the particular
- circumstances of the matter and the needs of your
- clients?
- Peter Scott Consulting
-
110How they work
- Principles and Outcomes are mandatory
- Indicative behaviours are not mandatory
- NB Indicative behaviours specify, but do not
constitute an exhaustive list of the kind of
behaviour which may establish compliance with or
contravention of the Principles - Peter Scott Consulting
111The Code
- Has five sections
- You and your client
- You and your business
- You and your regulator
- You and others
- Application, waivers and interpretation
- Each section is divided into chapters
- Applies to solicitors, RELs, RFLs, authorised
bodies and their - managers, and all employees in relation to
practice from an office in - England Wales. Has in-house and overseas
application. - Peter Scott Consulting
1121st section You and your client
- Chapter 1 Client Care
- Chapter 2 Equality and diversity
- Chapter 3 conflicts of interest
- Chapter 4 Confidentiality and disclosure
- Chapter 5 Your client and the court
- Chapter 6 Your client and introductions to third
parties - Peter Scott Consulting
1132nd section You and your business
- Chapter 7 Management of your business
- Chapter 8 Publicity
- Chapter 9 Fee sharing and referrals
- Peter Scott Consulting
114Under Chapter 7 the Outcomes provide that firms
must inter alia ....
-
- - have appropriate systems and controls in place
to achieve and comply with all Principles, rules
and outcomes and other requirements of the
Handbook - - identify, monitor and manage risks to the
achievement of all outcomes, rules, Principles
and other requirements in the Handbook if
applicable and take steps to address issues
identified - Who already has appropriate systems and controls
in place to - comply with the present regulatory framework?
- Peter Scott Consulting
-
1153rd Section You and your regulator
- Chapter 10 You and your regulator
- Peter Scott Consulting
1164th Section You and others
- Chapter 11 Relations with third parties
- Chapter 12 Separate businesses
- Peter Scott Consulting
117Authorisation Rules
- Every firm must have
- - a Compliance Officer for Legal Practice (COLP)
who - must be a lawyer and
- - a Compliance Officer for Finance and
Administration - (COFA)
118COLP and COFA role requirements
- COLP must ensure general regulatory and statutory
compliance by the firm and its managers and
employees - COFA must ensure compliance with the Accounts
Rules - Both must promptly report non compliance
- Notes to the rule make clear that the firm and
its managers are not absolved from their own
responsibilities
119NB - Authorisation Rules para 8.5 (b)
- The COLP of an authorised body must
- (ii) as soon as reasonably practicable, report to
the SRA any failure so to comply. - Peter Scott Consulting
120Consider the risks of non-compliance
- Disciplinary action
- Bad publicity and loss of reputation
- Lost clients
- Complaints and claims
- Increased P.I. insurance premiums
121Complaints
- LSA sets up role of Legal Ombudsman (operational
from 6.10.2010) to handle complaints - Establishment of Consumer Panel now operational
to represent interests of consumers and report
to LSB - Peter Scott Consulting
122Complaints handling
- Legal Ombudsman and Consumer Panel both targeting
poor standards of service. - Legal Ombudsman is examining first tier
complaints handling by firms - firms that dont
measure up will be penalised. - Consumer Panel have laid down outcomes they want
to see in relation to complaints handling. Also
want firms to analyse complaints and learn from
mistakes. - Peter Scott Consulting
123How to approach OFR?
124What is required?
- A need to manage your
- Resources
- Knowledge
PETER SCOTT CONSULTING
125Resources?
- People and Money
- Internal or external?
- Part time partners or professionals?
- Bespoke or off the peg?
- Carry out a cost / benefit analysis to establish
- the most resource effective method for your firm
- to manage compliance
PETER SCOTT CONSULTING
126Knowledge? - Failure to manage knowledge
involves widespread risk
127Compliance and risk do you know your compliance
risk areas?
- Where does the knowledge of your compliance risk
areas reside? - Can you access it?
- Do you have systems to maintain and
- upgrade your knowledge?
- PETER SCOTT CONSULTING
128Where to start?
- A systematic approach is needed
- Management driven, with top level buy-in
- Zero tolerance is required
- Managing risk and compliance needs to be seen as
everyones job a mind set change is needed - Need a no guilt culture to encourage disclosure
- Approach compliance and risk management from a
knowledge management viewpoint and vice versa
PETER SCOTT CONSULTING
129 A systematic approach is required
- Put in place a formal compliance and risk
- management process to identify and manage
every area of compliance and risk for the new SRA
Code - Establish a comprehensive database covering all
compliance and risk areas - Standards such as Lexel and ISO 9000 are likely
to help - Use of IT systems?
PETER SCOTT CONSULTING
130Advantages of a formal compliance and risk
management process for the new SRA Code?
- Structured approach focuses on key compliance and
risk areas - Can demonstrate how a firm is complying and the
effectiveness of compliance / outcomes - Continuous monitoring ensures management of
compliance and risk is lived day to day - Universal application to all compliance and risk
areas - Comfort / assurance to PI insurers and SRA?
- PETER SCOTT CONSULTING
131 Use of IT systems for compliance and risk
management?
- Use an integrated compliance and risk management
system to cost effectively manage compliance and
risk areas by - creating and maintaining one central, up to date
compliance and risk database - providing information access to all who need it
in relation to exposure to risk - embedding compliance and risk management
procedures e.g. client inception procedures - streamlining identification, assessment,
mitigation and monitoring - PETER SCOTT CONSULTING
132Implementing a compliance and risk management
strategy
Diagnosis Identification and assessment
Implementation of compliance procedures and
Mitigation of risk Avoidance, control or transfer
Monitoring Auditing, tracking and reporting
Limitation Minimising the effects of
crystallised risks
133Identification of compliance and risk areas?
- Needs to be management- driven
- Top down bottom up brainstorming sessions to
- - to identify every compliance and risk area
- - are we achieving every Outcome under the
new Code? - - are we compliant in every area?
- - do we have gaps?
- - what will be required to fully comply?
- - to what standards should we comply?
- - how should we prioritise our efforts?
- Assignment of responsibilities and lines of
accountability
PETER SCOTT CONSULTING
134Assessment of non-compliance and other risks
- Consider the impact of, inter alia
- Disciplinary action
- Bad publicity and loss of reputation
- Lost clients
- Complaints and claims
- Increased P.I. premiums
PETER SCOTT CONSULTING
135Risk Mapping-where to focus resource?
136Try this out on your ...
- Supervision arrangements
- Financial controls
- Business continuity planning
- Client care letters
- AML procedures
- etc
137Compliance and Risk Mitigation
- Designed to-
- Ensure effective compliance
- Avoid / reduce non compliance
- Avoid / reduce incidence of risks
- Transfer some risks
- PETER SCOTT CONSULTING
138Some techniques to put in place compliance and
mitigate risks
- Top level buy-in management must not only drive
compliance but also live it - Zero tolerance just do it!
- Training and education programmes to build
awareness and change mind sets - Continuous and systematic monitoring and
reporting - A need to continuously challenge the
effectiveness of compliance and risk management
PETER SCOTT CONSULTING
139Compliance and risk monitoring involves
- Auditing, tracking and reporting
- Comparing actual outcomes to preset indicators
- Confirming effectiveness of risk responses
- Reporting compliance and exceptions
- Annual compliance and risk management report
- PETER SCOTT CONSULTING
140Start now Systemise your compliance and
risk managementPETER SCOTT CONSULTING
141Any questions?
142How to achieve your goals?
143You have developed a realistic plan, but
- This will require RESOURCE - resource which
- many firms cannot realistically and at
- an economic and acceptable cost provide
- themselves
144Is lack of resource making you -
uncompetitive?- non compliant?- financially
underperforming?
145Lack of resource
- Often a lack of resource of expertise
- (client perception surveys will show if this is
the - case)
- Often a lack of financial resource
- (inability to invest in your people and in the
- business)
146Resource to enable you to
- attract and retain the best talent
147Resource to enable you to
- provide clients with the depth
- and breadth of expertise they
- will require
- when they need it
- where they need it
148Resource to enable you to
- build the quality management which will be
- required to successfully compete in the future
149Resource to enable you to
- provide the necessary infrastructure to
- underpin the effective provision of high quality
- professional services
150Resource to enable you to
- provide the necessary technology to make you
- more efficient and profitable
151Building resource to compete
-
- Will you be able to build sufficient
- resource on your own to achieve your
- goals?
152The profession is too fragmented
- Over 11,000 law firms
- Over 85 have 4 or fewer partners
- Many will not be able to compete and survive if
they remain as they are - Size does matter
153Competitive growth models?
- Organic growth alone?
- Some form of consolidation?
154How can consolidation enable tomorrows law firms
to compete?
- Not about size for the sake of size
- A means to develop resource at an acceptable
economic cost to each constituent firm which
individual firms cannot on their own provide - A better platform on which to build a more
competitive law firm capable of succeeding in
tomorrows legal market -
155A Vision
- To build a law firm which over a given period of
- time will become greater than the sum of the
- individual firms which comprise it. This will
involve - building a BRAND which can begin to compete with
larger, - more developed firms for better quality, higher
value - work leading to greater competitiveness and
profitability.
156Is that a Vision you share?
157How are you planning to compete to win?
158Any questions?