The full text of my 7 August 2020 opinion piece first published in the Australian Financial Review.
There is every chance that COVID-19 will mean a big hit to your firm’s revenue for the 2020-21 financial year. So, what levers are you using to limit the downside impact on profitability?
Greg Keith, the chief executive of accounting firm Grant Thornton, recently indicated he was anticipating a decline of 8.5 per cent in revenue and 33 per cent in profit.
It means that for every 1 per cent drop in income, they are forecasting a fall of nearly 4 per cent in profits.
Accounting firms, like law firms, are mostly high fixed-cost businesses that are super-sensitive to changes in revenue – both on the downside and the upside.
To limit the profit impact, firms tend to first cut non-essential spending like travel and entertainment. After these “easy” savings are exhausted, reducing staff numbers comes into the frame.
While there are obvious short-term benefits – staffing can comprise 60 per cent of all expenses – there’s a significant risk of not having enough of the right resources on hand when demand picks up. So, the 2020-21 saving needs to be weighed up against the full cost of re-hiring and training in the future.
In my view, there are two areas where firms could do a lot better to enhance profitability without letting people go – pricing and the sharing of resources.
Pricing for profit
Over the last few years, most mid-sized and large firms have worked on their pricing practices.
With a significant market downturn and price war on the cards, one firm recently redoubled its support for partners to preserve and capture value through price. This included video training modules on value articulation, gamified programs around price negotiation, improved analytics, new pricing tools and more direct hand-holding for new business pitches.
Some firms are adopting a range of creative strategies to meet client needs rather than merely dropping price. They include:
· Adjusting payment terms and conditions so strapped clients are more willing to brief the firm rather than others;
· Offering non-time-based pricing structures such as subscriptions, contingency fees or amortising fees;
· Special promotions in ‘ring-fenced’ service areas to avoid across-the-board rate cuts and safeguard the firm’s brand position; and
· Offering options at different price points.
One law firm offers its clients three pricing options on every new matter. They’ve adapted Qantas’ pricing approach by offering the equivalent of the airline’s Red e-Deal, Flex and Business Class options. As with Qantas, each option has the same core benefits around quality and reliability but differ in terms of the format of the deliverables, roles, timing and scope.
Another firm analysed their top 100 clients to determine how each was being affected so they could tailor messages and offers. In one instance, this led to a new digital service offering as some clients moved to virtual selling and distributed operations. In another case, they shifted to a self-service model for a client going through a major cost-cutting exercise.
I was recently advising a law firm where analysis of time records revealed that some individuals and teams were extremely busy while others were well below capacity.
When I asked why resources were not shared to even out workloads, the most common response was that lawyers could not easily work outside their area of specialisation.
Not satisfied with that objection, I delved a bit deeper. My enquiries revealed a range of constraints – cultural, structural and personality – to collaboration. For some partners, “letting my people go” was a sign of failure. For others, they didn’t see any direct financial incentive to share resources, so they didn’t bother. In one office, each practice team saw itself as a self-contained business, and the prevailing mindset was more competitive rather than co-operative.
In good times, there’s often enough fat in the system to ignore these problems, But if your firm is looking at an equation that means every 1 per cent drop in revenue leads to a 4 per cent drop in profits, then you might need to change your thinking.
About the Author
Joel Barolsky is MD of Barolsky Advisors, Senior Fellow of the University of Melbourne and Creator of the Price High or Low smartphone app. For the past 30 years, he has helped law, accounting and other business advisory firms plan, innovate and grow. Joel has advised over 100 of Australia and Asia’s leading professional service organisations. Around 70% of his clients are repeat clients or come directly from referrals from existing clients.