Squeezing the Middle – how to make more profit

Top Line minus Middle Line equals Bottom Line. In simplistic terms this is the equation for Profit. Top Line is the exciting stuff: new sales. Everyone loves a new sale. The risk arises when people focus on new sales alone. Of course, if you don’t get sales there is no business. Driving up turnover is essential for a healthy expanding business. But it’s not by any means the whole picture. Your business can survive by just increasing sales if that is turning you a profit but it misses an important element of the business.

In this article I’m going to write about the Middle. When times are good this is often neglected. When sales flat-line or fall then businesses may take the time to look at this. That is fine, but there are a couple of problems with only looking in this then. One is that the business will have missed out on extra profit during the good times. Another to bear in mind is that making changes to squeeze the middle may actually involve up-front investment – always harder to do when sales are down.

So, what do I mean by the Middle? In short – the Cost of Production – what it costs for you to get the sale and then do the work so you may invoice, indeed also the cost of recovering the cash. It all drives towards cash in the bank.

Service firms often overlook the investment in getting the sale. If it’s a referral fee or an overt marketing spend then that is usually captured as an overhead. However, the networking, lunches, golf afternoons/days, drinks, social media are all part of the cost of acquisition and should not be overlooked. Some of this is difficult to quantify. It might just be time – but time can be given a value and measured. It is important to do so, to facilitate accurate comparisons.

That brings me on to another point – data. In order to be able to make informed decisions accurate data must be gathered. This is often the hard bit. Getting staff to accurately record their financial outlay is a bit of a struggle, but, if they are claiming that as expenses, easier than getting them to accurately record their time spent. They can see the benefit in recording their expenses, as if they claim them they will be paid back to them. Recording time is a different matter. Most businesses I’ve worked with struggle with this. Some do not even recognise the issue. Some do, but collection of the data is patchy. I would argue that this is of great importance to a business. After all, when a business hires someone what does it do but buy a number of hours of that person’s time and expertise? So, in order to measure Return on Investment, it needs to know what that time is spent on and how effectively that time has been used. No-one would argue against that approach with regard to the investment of hard cash. With good data one can start to measure what is working and what is not working. Then one may start to experiment with approaches that might deliver better results.

I would argue that the best approach is to be scientific: setting out the objective and then measuring results in an impartial manner against the objective. Squeezing the middle will often result in reflecting performance back to people and asking them to make changes. It is very easy for staff to take things personally, or indeed management to mishandle the situation with negative impact on the performance of the business. This is why the whole issue of Change Management is a topic of it’s own. In general, people do not like change – but that is the messy business of improving performance that distinguishes the best businesses. Ducking the issue because it is difficult and might/will result in difficult conversations does not help the business. Certainly, approaching the situation with good, clear, impartial data will help taking out some of the emotion.

Without initially realising it, I have been involved in change management for a large part of my career. When managing and then running a department of 60 in a mid-sized regional law firm, I took them through restructuring, both of the organisation of the teams, the staff and the methods of working. We held regular departmental meetings to keep everyone aware of the objectives so that everyone knew what was happening. We had regular team meetings and a system of monthly 121 meetings – so there was a clear understanding and feedback to guide through the changes.

Since setting up my consultancy, HCL, we have helped around 300 law firms through change. It is fascinating seeing the different business models and approaches that people have. However, the fundamentals I have written about above apply to all.

Below are a few examples of changes that have made a difference to our clients:

? Simplifying and Automating the Billing/Invoicing process: I amazed at how difficult it is in many businesses to create and send out the bill/invoice. Some people seem to be positively scared of doing so. That baffles me. For me invoicing is the reward. Your client expects to receive it – at least they should do, because you discussed that at the beginning before you took on the work. (Maybe you shied away from discussing that clearly at the start. That is a mistake.) There should be as much clarity as possible with the client and you as to what your fees will be and when they are to be paid. They should be recorded by the relevant staff member. The system you use should make it easy to produce the invoice/bill. Template what you can. I’ve been in firms where they have commented “It used to take us up to an hour to produce the bill, now it will just take us a few minutes!” Time is money. If billing is that hard, no wonder some people regard it as a chore!

? Create a basic Electronic Letter Template with an auto-signature in it so that people may email it out direct from their computer. (I recognise that there will be supervision issues for certain staff which may impact on this.) The idea is that this will allow one to email directly out rather than having to print onto pre-printed letterhead, collect the paper letter, sign it, scan it in, attach it to an email and send it out. I calculated that, on a conservative basis, the automation of this could save a business ￡6,000p.a. per member of staff. (Assumptions: 20 letters a week x 45 weeks = 900 letters p.a. 2 minutes saved per letter @ ￡200/hr = ￡6.67 per letter. Total ￡6,210.). Remember that is per staff member.

? Create and use Precedent Letters. (This also interfaces with Risk Management.) It is a waste of time for staff to be typing the same words again and again. Time invested up front in the creation of good precedent should pay off in reduced cost of production – if people use them, which is where measuring and reinforcing will come into play. (Create precedent emails as well.)

? Incorporate your Risk Management into processes so that it is more likely to happen and will enhance rather than impede the work.

? Analyse what you do and Map Processes. Nearly everything we do has a process. Even the most complex work will have elements that follow a common process. Best practice can be established and then reinforced.

Each circumstance will vary and the ideas will need to be adapted to the way each firm works and the challenges it faces. There is so much more to explore on this topic but that will be for future articles.

Ingemar Hunnings runs a HCL, consultancy providing Business Support to Law Firms and others improve how they run themselves. Previously he practiced as a solicitor for 24 years, as an equity partner for 14 years and running a department of 60 staff. Since setting up his consultancy he has worked with around 300 businesses.