The Fees Pyramid

I could stop with the diagram and invite people to ‘Discuss’ like in an exam question – if I was being cheeky. But I won’t. I’ll unpack this. It’s something I’ve been thinking about over the last couple of years or so. I think that it has pretty universal application to business but I’ll have a focus on professional services and in particular solicitors firms.

My thoughts have arisen from analysing my own businesses. I run a management consultancy providing Business Support for Law Firms and other Professional Services businesses. A sort of ‘One-Stop-Shop’ for the busy partner, so they may get on with doing the client work. Before that I practiced as a solicitor for 24 years, 14 of which as an Equity Partner. I sat on the Board and ran a department of 60 staff.

Transactional Work

For lawyers most fees are generated through transactional work. Indeed, most professional services businesses, my own included, generate most of their fees this way. The client instructs you to do a job for them, you agree a price, do the work and invoice them. You might invoice them before you do the work (or receive money on account) or at stages during the work or at the end on delivery. That’s good. You have a trading business. That is how most law firms operate and they do so very successfully. That’s how most businesses operate - mine included. No problem with this – except that income is not so predictable. When setting budgets, you’re doing so on the presumption that things will be as they were last year. Some matters might be long-running (for example litigation) and so, if you know the end date, you might be able to predict some income in the coming year. However, that’s still transactional work. It also doesn’t add much to the value of the business, for example when valuing it to sell.

What could be better?

Recurring work

Recurring work is one step better. It’s Transactional Work, but Recurring Transactional work. That gives a level of predictability. Accountants have the annual audit, accounts and recurring tax work, which would fall into this category. It can give you a base income for your business that you are fairly confident will be generated, because all things being equal, the client will instruct you to do this work on a recurring date. Solicitors firms don’t manage to craft much of this type of work. An example where they have is with Employment Law, where they might carry out an annual audit of contracts and operating records. If solicitors were able to be more creative it would give a bit more certainty to budgeting and income. It would involve them getting closer to their clients. It would seem to me that there are opportunities in Corporate, Commercial and Health & Safety areas to mention a few. In my business, I’ve been able to generate some compliance packages that operate on a recurring basis: a monthly COFA & COLP Review and external file reviews carried out for some firms. Another example is that some firms ask me to train new starters on their LEAP Case Management System (really a hybrid between transactional and recurring) or to do an annual review on LEAP or Proclaim usage, update of changes and revision on best use. That is true recurring work.

What could be better?

Retained Work

Retained Work – what do I mean by this? You have a retainer which the client pays to cover work that you will do within the agreed price, paid at agreed intervals (quarterly, yearly etc). Normally there is no end date other than termination of the contract. Income is guaranteed unless the contract is terminated. This is great for predictability of income. It also gives some solidity to allow for valuation of the business. Of course, you need to evaluate and define carefully the work that would be included in the price and price the contract so you don’t end up doing the work at a loss or suffer from mission creep. (Don’t forget that defining work at the outset doesn’t always translate into what you end up doing, especially where the work is complex, and so a proper periodic review may be required to deal with situations where the goalposts are moving.) I’ve seen retainers created for Employment Work. There are some large non-legal firms (Peninsular for example) doing this. Many employment firms or employment departments have followed suit. Once you have a set price this should drive a focus on how to deliver to the best standard and at the lowest cost of production so as to maintain or drive up profit. I’ve worked recently with a couple of small commercial solicitors firms where the majority of their work is done on a retained basis. It gives them great predictability. It does so also for their clients. That is a good selling point not to be under-estimated. Your client might welcome such a discussion. I have been able to develop some services offered on a retained basis. Our OPM Service (Office Procedures Manual) has a recurring annual fee paid by monthly instalments for which the firm gets an up-to-date OPM with quarterly updates which is maintained up to date by us. We are on a general Compliance Advice Retainer with some firms. This is a sort of hybrid with Transactional Work. The client requests our assistance at an agreed rate. We record the work and time spend and invoice every quarter. The retainer remains in place unless and until it is terminated.

What could be better?

Passive Income

Passive Income – the Holy Grail of fees. The money comes in while you sleep. All of the above methods require ongoing effort to generate the income. Passive income typically requires up-front effort to establish and crystalise the opportunity, but then no additional effort to harvest (other than invoicing, which should never be regarded as a chore in my opinion). You then have real value in the business which could be capitalised and sold. I would venture to advise that all business owners should invest significant time and effort in thinking how they can create and generate Passive Income. In my experience it is very seldom achieved in law firms. Some could be generated, and I would welcome the ability to work with Managing Partners to see how this could be done in their businesses. It is a strategic aim to do so for my business. I now track how much is generated this way each month and look for opportunities for how to add to this. It is an old adage ‘What gets Measured Gets Done’. I know there is criticism of this statement, but I still think there is a lot of value in it. By measuring it you maintain focus and track progress. I have to maintain balance. Building Passive income is often a long-term project that I hope will harvest sustainable passive income in the future. I have to balance the time and effort devoted to this against the other 3 methods of earning income which puts bread on the table NOW.

My Fees Pyramid is currently the traditional one, with Passive Income as a small pointy bit at the top. My AIM is to invert the Fees Pyramid. I may never achieve it, but any progress towards it strengthens my business and makes it more sustainable and drives sustainable value.

An Additional thought re Passive Income

Thinking some more about this, one could sub-divide Passive Income as follows:

a) Recurring Passive Income: a regular amount that will come in and 

b) Variable Passive Income: the amount varies (for example: royalties or fees from training videos watched). 

My Fees Pyramid is currently the traditional one, with Passive Income as a small pointy bit at the top. My AIM is to invert the Fees Pyramid. I may never achieve it, but any progress towards it strengthens my business and makes it more sustainable and drives sustainable value.

Food for thought.

Ingemar Hunnings is lead consultant at HCL a management consultancy providing Business Support to Law Firms, in-house legal departments and other organisations Everything to allow a busy partner get on with the client work. Previously he practiced as a solicitor for 24 years, as an equity partner for 14 years and ran a department of 60 staff. Since setting up his consultancy in 2014 HCL has worked with over 400 businesses. Contact details: https://www.hunningsconsultancy.co.uk/ 07887 524507 & [email protected]