How Financial Statements Inform Marketing Tactics

In my last job in corporate life as the general manager of the New York division of Savin Corporation, I had a boss who gave me this advice (I heard demand): "I expect you to understand your P&L, but I want you to tell me what you are going to do about those numbers." That, in sum, is the issue that law firms face now as software supplies them with reams of financial operating reports. In the quest for better answers about how to turn numbers into usable management tactics to foster profitable growth, I interviewed a number of experts. Here, in nutshell format, is their best advice.

A Multifaceted Approach

Judy Carberry, administrator and controller at Podvey, Sachs, Meanor, Catenacci, Hildner & Cocoziello, P.C., in Newark, NJ, suggests that you have to look at the numbers -- billable hours, billed hours, WIP, realization rates, receivables and payables -- from a number of angles, a composite view, before you make decisions about remediation. She reviews these numbers weekly, monthly and quarterly, but decides to bring issues to management when she sees one or more of these pieces out of balance. In particular, she watches contingency work numbers because they directly affect cash flows, and scrutinizes realization rates critically. In her firm, changes in those two numbers nudge her to report to management on an informal basis and discuss what to do -- shift workloads, use paralegal help, discuss with professional staff how to generate new matters, or seek cross-selling and referrals.

Judy places little weight on practice area numbers and profitability because the coding in process can be faulty. Rather, she looks over the balanced scorecard of key indicator numbers before she takes action. One of the issues that she advises management on is the integration of associates into the marketing process -- she acts as coach. When she finds that there is a good opportunity for associates to participate in social and other events with clients, she makes sure that the partner involved takes the associate by hand and integrates them into those activities. And, at her last position in another firm, she was instrumental in constructing a fee sharing arrangement when associates brought in new matters. That way, associates had a financial interest in marketing.

Cash Flow is Important

Paul Burns, controller at Winne, Banta, Rizzi, Hetherington & Basralian, P.C., in Hackensack, NJ, pays close attention to what he calls the pulse points -- total fees billed, fees billed versus targets on a month to date and year to date basis, and receivables. However, he adds his own twist to the analysis. Paul is a cash flow expert. While he reports monthly billables to management, he has developed a breakeven analysis that tells him when his billables have paid his overhead during the month. As a result, he watches the billables daily.

Paul's firm has instituted a unique practice that has dramatically improved cash flow. On the last Saturday in every month, all billing partners come in and approve final bills (WIP reports are reviewed during the week before) so they are in the mail by Saturday night. Almost three quarters of the billing is completed this way. On the same day, the partners then sit down together to review receivables in detail, billable hours, realization rates, and write offs. These two practices have dramatically improved cash flow, and have reduced administrative head count.

As Paul puts it, When the bills go out, you get paid. And, ninety-five percent of the time, when you contact a client who has not paid, and send another invoice, you will get paid. There are a number of occasions when he asks one of the lawyers to get involved in collections, such as when the lawyer has insights into the client's finances, but they are the exception.

From a growth analysis perspective, Paul compares recurring and new revenues, especially among the firm's largest clients. "When I look at growth, I first exclude non-recurring or extraordinary items, before I judge whether the firm is on a growth path," Paul comments. "That way I get a valid interpretation of our marketing results."

Drilling Down the Numbers

Ron Henry, Executive Director of Newark's Saiber, Schlesinger, Satz & Goldstein, assesses growth from some unusual perspectives. Namely, he scrutinizes non billable hours by attorney, which can be marketing hours or four other categories. As a result, he can help attorneys turn marketing non-billable time into productive hours, counseling them on how to implement more efficient marketing tactics, and brainstorming new marketing ideas. In addition to non-billable time, Ron evaluates leverage among top clients evaluating whether there is too much leverage among a few clients, growth rate trends, and defections. In the case of client defections, he wants to find out specific reasons.

Ron looks at the more usual numbers once a month: fees billed, received, and realization rates. However, on a quarterly basis, he prepares an overhead presentation to partners going over the P&L (income statement) in detail so that partners understand all sources and uses of funds. He has found that this is far more effective in raising financial consciousness than merely printing and distributing this material.

To help attorneys understand their income potential, Ron prepares individual financial reviews that delve into tactical marketing analysis: number of new clients, fee results this half year compared to last, changes in those numbers, and profitability analysis. In discussing these 6 month results, Ron looks for causation -- why have the numbers changed, and what can be done to enhance positive trends. "You have people's attention when you discuss income in light of marketing," Ron says.

Parental Review Advised

As a financial consultant to many law firms, CPA Ron Orleans, partner in the Boston accounting firm of Kanter, Feingold Orleans & Troy, recounts how one law firm managing partner motivates his non-rainmaking lawyers. When the law firm has its summer picnic, this managing partner takes pictures of the children of his non-rainmakers. Then, at the time of that person's performance review, he sets out the pictures on his desk, and asks the following: How will you provide for the future of your children if you don't start marketing? Subtle, yet engaging.

On a more strategic note, Ron counsels lawyers to view people as inventory, and to realize better utilization rates of this asset. Specifically, he encourages law firms to find efficient ways to sell more billable hours at good profitability rates -- looking for increments of 400 hours as meaningful -- and assessing cost levels before taking on new work. "You have to know your profitability projections before you take on a new matter, and if your margin is low, you need to have a very good reason to take on this work," Ron comments.

As part of utilizing people more efficiently, Ron points out that many firms increase the billable hours of senior partners. This is a danger sign. Senior people should have fewer billable hours. They should be delegating and directing the work of lesser paid attorneys to maintain margins because legal services are, in many cases, commodities. You overbill your senior people, you decrease your margins.

In Ron's opinion, although it is hard to connect marketing tactics with increases in fees billed, firms should look for returns in investment over two to three year time periods unless the firm is doing very direct, targeted marketing, such as direct mail for seminar attendance, plus follow up with the target audience. Because firms don't see an immediate increase in revenues, they tend to spend too little on marketing...2% of gross fees as a marketing budget is too low to produce meaningful results. Ron suggests, rather, that a marketing budget of 5% of gross revenues, is more effective if, and here's the caveat, the firm executes specific quarterly marketing tactics aimed at worthwhile target audiences, and put someone in charge of marketing who is responsible for results.

Fun with Numbers, Redux

Financial software gives one information, not intelligence. Deriving how to turn financial results into marketing practices that produce profitable growth, is an even fuzzier science, but it can be done. In addition to the insights my panel of experts has suggested, I add my own. If you want your partners to be more participative in the financial well being of your firm, they need to become facile with interpreting the firm's and their own income statements on a hands on basis. They must be able to answer the question, What should I do about these numbers?

This article was provided by Christine S. Philip and has been reprinted with permission from New Jersey Lawyer, April 28, 1997.