Canadian Lawyer

42 O C T O B E R 2 0 1 8 w w w . c a n a d i a n l a w y e r m a g . c o m capital. Each firm is different and there isn't a "one-size-fits-all" approach. There are many options, and Hasan did a great job explaining the various capital mixes: undistributed earnings, capital contributions and bank loans. And I'd add that the mix depends on such factors as the collective risk profile of the part- ners. It's not one or the other or all or nothing, each firm's mix is unique to its situation. Perhaps you adjust distributions and hold back more to finance the growth or you have partners put more "skin in the game" and have a capital call. I think firms should have a solid capitalization strategy so that they can deal effectively with growth opportunities and challenges as they arise. Developing a capital plan is not a one-time exercise; it should include an ongoing assessment of the strategic and financial needs of your law firm. Khorasanee: The capitalization of the firm, that balance of those three buckets, plays heavily into one other piece that falls outside of the equation. What culture do you create by changing the mix? And part of that is ensuring that partners feel like they are invested in the law firm as a business. And they're invested in ensuring the growth and sustainability of that law firm. And, of course, with issues such as non-competes, you want to ensure partners have skin in the game to ensure that they're doing the right thing and moving in the right direction — or the same direction — as the other partners. I think that is where this concept of capitalization ties in to the concept of growth for the law firm in general. By having the right mix, you incent partners to do the right things to contribute to the growth of the firm and sustainability of the organization. Wilbur: For expense control, what do you think the most important factors are for law firms to consider if they want to grow and improve profitability? Nicoló: Control of expenses is key to the continued profitability of a law firm. Law firm managers should review each firm expense category periodically to determine if more rigid controls are necessary. A good place to start is by using the firm's budget as a management tool to determine where expenses can be reduced. If a firm does not currently budget for expenses, this is a critical starting point. To gain a better understanding of expense trends, management should analyze budgets in comparison to actual results for the last two or three years, on a line-by-line basis. Then, the firm should re-examine every line item to look for ways to reduce operating expenses. Perhaps consolidate vendors to get group discounts or do an office space study to support minimizing leasing and operating expenses. The largest single expense for a law firm of any size relates to salary and benefits followed by occupancy costs. Remember, if you are reducing headcount, it has a dramatic effect on your firm. Although a firm commitment to expense reduction may initially improve profitability, most categories of expenses are not susceptible to dramatic reduction without affecting practice efficiency or quality of service delivery. One of the best ways to revitalize the firm and grow it is to focus on growing revenue. Generally, increases in revenue will not be offset by a corresponding increase in expenses. Improving billing and collections also has a profound positive impact on your bottom line. Khorasanee: On the people side, one way we've seen our clients manage costs is promoting lawyers to partners earlier, because it allows them to convert what would have been a fixed salary cost to a variable salary cost. The reality is that they're not really paying anybody any less, but they're ensuring that if results don't turn out to be what they expect in any given year, they've got a lever there to adjust that cost (at least to some degree). Another lever is the timing of partner payouts. If you can delay that payment or have a hold-back period at the end of the year and then roll forward, that has a huge impact on your costs. That's not technically an expense, but it is a significant factor to control your cash flow if you have that flexibility. For premises, amortizing large investments over the life of those investments is going to be key to ensuring that your cash flow matches your net income. You want to make sure that your financial institution is offering you the right options on things such as leaseholds. Where law firms tend to get into trouble is less so on the expenses; it's more so on not keeping an eye on collections. Proactively manage what's owed to the firm, collect in a timely way and engage partners and encourage them to ensure that they don't only bill but they also collect. Wilbur: If law firms want to shed less profitable practice areas, how can they go about determining what to shed? Nicoló: It depends. The numbers only tell you part of the story; you really need to assess qualitative and quantitative aspects. You also need to review the firm's mission and strategic vision. Maybe that practice area is temporally losing money, "One of the best ways to revitalize the firm and grow it is to focus on growing revenue. Generally, increases in revenue will not be offset by a corresponding increase in expenses. Improving billing and collections also has a profound positive impact on your bottom line." Michael Nicoló, Partner at RSM Canada LLP

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