Cash is king, but is it the right focus?
They say “cash is king,” and rightfully so - especially during tough times. And, in case you haven’t noticed, it seems as we might have tough times at our doorstep.
However, there is an underlying reason why many consider revenue as a vanity metric.
Editor’s note: John Grant discussed on his blog why law firm revenue is a one-dimensional metric that doesn’t have much value as an indicator. Some of his thoughts are below, paired with experience from the startup world.
Law Firm revenue is a lagging indicator
JG: Is focusing on revenue growth always the right goal? And what about the business fundamentals and strategies that are needed to drive that growth?
Many touted metrics like Profit per Partner, etc., put revenue under the spotlight. Likewise, other parameters that are being diligently followed by BigLaw are all in service of measuring or forecasting revenue. Such is, for example, the infamous utilization rate.
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However, such a one-dimensional focus on revenue growth as the critical metric has its drawbacks. Don’t get me wrong; revenue growth is a beautiful thing. But revenue is a lagging indicator.
Likewise, revenue targets are easy to miss if you’re focused only on the money and not on the fundamentals that underpin a successful practice.
Law firms that are still operating under the BigLaw model may suggest that business fundamentals could be expressed by utilization, realization, collection, and billing rates. Those are interesting metrics, but to my mind, they’re still too far down in the weeds.
Above are also lagging indicators, and low scores in the first three areas are symptoms of either ineffective strategy, inadequate implementation of a potentially-effective strategy, or both.
billing rates are more of an (almost) arbitrarily set hourly rates for a particular line of services. At best, they would demonstrate what cost levels the market can swallow in certain circumstances.
The macro aspects of the economy heavily influence hourly rates. Rates quickly go down at times of downturn, given the competitive pressure.
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Law Firms must focus on people and processes first
As I’ve said before, overall improvement requires an examination of people, processes, and tools, roughly in that order. I also firmly believe that when a business isn’t performing as well as expected, it is usually because the owners/managers aren’t paying enough attention to their higher domains of activity.
Law Firm mission, goals, strategies, and tactics
While the mission presents a desired future state, it doesn’t tell you how you end there. Hence, you need to set specific actionable and measurable steps in terms of their impact.
The Strategies then stem from the Goals; those are the programs you’ll run or the experiments you’ll try to get your law firm to meet your numbers. And the Tactics - the day to day activities you and your team will engage in - hang from the Strategies.
At the same time, your tactics (and results therein) should support your strategies, your strategies should support your goals, and your goals should support your mission.
And what about the revenue?
Where does revenue fit? For most of my clients, I encourage them to have revenue targets, but not necessarily to have those targets be express goals for the practice. As I said, revenue is a lagging indicator, and I like managers to focus on more actionable metrics.
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To build a straw-person, let’s assume a law firm with a mission to “Ensure that every citizen of the tri-state area has a robust estate plan that they feel confident will protect their assets and ensure care for their loved ones.”
Note that mission statements should be aspirational - that you might never fully achieve your mission is acceptable when the world will be better for your attempt.
Hanging a goal off of that mission to “generate $1.2M in top-line revenue in 2020” is a bit incongruous. Sure it would be nice (for a certain sized firm), but your revenues don’t have anything to do with improving the lives of tri-state citizens.
Instead, I prefer to articulate goals that naturally flow from the mission (ideally using the SMART-goal framework).
One might be to “grow the number of estate plans we deliver to tri-state residents each month from 10 to 15 by the end of 2020.” Or maybe to “Improve our customer confidence scores by 10% by the end of June” (assuming you measure such a thing).
Both of these relate directly to the mission above, and also suggest possible strategies that will hang from them.
They also, not coincidentally, should lead to revenue growth (perhaps even profit growth). More estate plans should yield more money, and better customer confidence should improve referrals and other marketing efforts.
After you have your mission and goals set...
You might try several different strategies to meet your goals. For example, you could add resources to your team in the form of paralegals, associates, or contract attorneys.
Further, you could improve the rate at which you deliver estate plans through workflow & process improvements. Or maybe you already have the excess capacity, so you want to improve your business development to make sure your team has demand for the additional work.
And your tactics, of course, will vary depending on what strategy you decide to test.
Moreover, this structure helps you determine what tactics to exclude from your arsenal. If you make the strategic choice to focus on workflow improvement, then you have to resist the urge to tinker with your website SEO (for example).
I can’t tell you how often I see law firms whose attempts at growth are all over the place because they lack either a defined strategy or the fortitude to stick to a particular strategic choice.
Back when I was working with the fantastic folks from StartHereHQ, we coined a verb for this: Stop Tacticing! Seriously, formulate a strategy, write it down, and show it to someone who will hold you accountable...
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The other key to this structure of nested goals, strategies, and tactics is building a feedback loop to determine whether your strategies are working to achieve your goals.
The Lean Startup approach is to break those measurements cycles into manageable chunks that yield maximum information (a Minimum Viable Product). I suggest running small experiments of no longer than a few months (ideally a few weeks) and being vigilant about measuring progress or lack thereof.
Can revenue focus kill your law firm?
CL: In addition to John’s thoughts (above) on setting your focus right, I thought it would be valuable to you to see some stories from the tech startup world.
As mentioned above, revenue is an important metric for every company. However, revenue tunnel-vision could be damaging. And startups can be pretty privy to making the mistake of focusing on revenue.
After all, it is what all press releases of tech startup boast about, right? The first 1Mio in ARR (i.e., annual recurring revenue); the first 100 employees; 10%+ month-to-month growth… You know - all the flashy tech-blog titles.
There is a reason why media put revenue under the spot-light. It is flashy. It sells clicks. But what could be under the hood?
Revenue (nearly) gets startups to fail
In my previous company, we kept a laser-focus on revenue too early, and for far too long.
And it is understandable - to some extent. After all, revenue prolongs your runway. It also impacts your next financing round. Moreover, revenue may also be among the most important topics with investor updates (depending on your stage).
However, if you focus so much on revenue that you neglect your product-market fit, you are destined to fail (sooner or later).
The product-market fit is much more critical for the success of companies and law firms alike. Some would argue it is more significant in early-stage companies, but I respectfully disagree.
Law firms as well should understand what their PMF is and why it is so important.
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Product-market fit is crucial for law firms
Simply put, product-market fit determines the “stickiness” of your customer base. As such, the PMF is vital in the mid-to-long term success of any tech company.
But what about law firms? Does product-market fit apply to legal services?
Well, of course, it does.
Firstly, let’s see how you should understand what a product-market fit is.
Product-market fit as a state
Briefly put, product-market fit is a state where your offering satisfies strong market demand. It is an excellent place to be in, and you will undoubtedly know when you get there.
“But, but...” I hear you shake your fist in disbelief “EVERYONE needs legal services. It is how it always used to be!”
Legal services are indeed in demand in general. However, the question here is, are YOUR legal services satisfying the demand? Do your services FIT to what buyers of legal services need?
To make sure you are at that point, you need to measure your clients’ retention rate. In other words, are your clients coming for more? Or do they churn-off after a short while?
Granted, SaaS (Software as a Service) business is different, given that products tend to be needed and sometimes used daily. The same isn’t likely true for legal services.
However, you could extrapolate and make a model that would enable you to follow your retention rates. You would certainly need to factor in the seasonality of legal services demand.
Product-market fit as a learning method
You can also observe the PMF as a process that gets you to the ideal state (where you satisfy market demand).
In that sense, the PMF is a process where you launch products or services on a small scale, and then learn from your customers how to further refine your offering.
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What happens if you neglect the PMF
Let’s imagine your marketing investment (e.g., activities, $$ ad budget, etc.) are delivering ROI. You could be seeing revenue increase month over month, and be ecstatic about it.
However, if the PMF and your service delivery quality take the backseat, your clients would start to churn off.
But if you are not paying attention to the churn and only observing increasing revenue (induced by your ongoing investments), you would have a false sense of success.
Where, in reality, your offering is likely missing the mark. The client churn rate is a telling sign. By lauding your revenue, you are merely celebrating your marketing efforts.
Let’s say that you have a 10% month-to-month revenue growth rate. Sounds impressive, right?
Well, yes in principle. But imagine that your marketing effort brings in 20% growth, while your clients’ churn equals 10%. That is not a good place to be in.
Why? Well, the above case is a text-book example of a proverbial leaking bucket.
What happens when you have to tighten the marketing budget for whatever reason? If your revenue is only a product of your marketing, then you will be left empty-handed once you cut the ads dollars.
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How to measure the value of your legal services
Successful SaaS businesses are laser-focused on the following metrics:
Product quality. The Net Promoter Score usually measures this (in other words, are your clients excited about your services, and do they recommend you gladly?);
Retention rate. A percentage of customers you retain in a certain observed period. The retention rate correlates inversely to the Churn rate. If your retention is high, your churn rate is low. Retention and churn are particularly valid for any subscription-based revenue;
Retention rate is one of the key metrics when working within the SaaS subscription industry. A high retention rate logically would show that a business has a low churn rate.
Churn rate. A percentage of customers you lose in a certain observed period;
Client Lifetime Value (CLTV). This is your expected value of a client over the course of a few years. In SaaS, based on collected data and experience, companies estimate how long a client will remain their customer. If you run a subscription-based business, it is that much easier to determine CLTV. However, you can predict CLTV even with other pricing models.
If you determine your churn is high…
If your retention is weak, you should step away from your marketing campaigns. Spending marketing dollars when your services aren’t at the product-market fit stage is similar to setting dollar bills on fire.
Once you see your retention rising, and you feel more confident about the quality of your service delivery, you may start marketing again.
However, it is also important to remember that product-market fit is a never-ending process. You should always encourage feedback from your clients and see how you stand.
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Revenue is a product of the whole machinery
Revenue is necessary, yes. But it is a result of all the efforts. Marketing is just one piece. Finding your product-market fit, and maintaining the quality of your services is at least as crucial.
While you have to look at, forecast, and report revenue, you must also make sure not to lose focus from all critical aspects of your legal service business.
John Grant helps legal professionals build practices that are scalable, sustainable, and profitable. He does it with the help of the Lean, Lean Startup, JTBD, Design Thinking, and other concepts.
Lawyer by vocation, John has spent nearly a decade in the technology industry before going to law school.
John’s work and know-how are especially valuable to legal professionals and law firms that plan to transition from the billable hour to the alternative (value-based) legal fee models.
Ivan Rasic holds the Transnational Trade Law and Finance LLM, a program by Universidad de Deusto (Bilbao, ES), Universiteit van Tilburg (Tilburg, NL), and Goethe Universität (Frankfurt, DE). After his work in law firms and inhouse, he started a legal tech company.
Nowadays, Ivan leads STP Informationstechnologie AG's Sofia RnD center with project/development management, culture, strategy, and special project initiatives.
Ivan is an Ambassador at European Legal Tech Association (ELTA). He closely follows and writes on future of law, legal tech, ALSPs, and new ways of delivering legal services.