03 Dec Business, practice or micro-practice – know which game you’re playing!

Recent years have seen a lot of talk about new business models in legal practice, in terms of using technology, outsourcing, flexible staffing arrangements, value pricing and more.

Before you get to the stage of considering specific innovations however, it is important to consider – at a more basic level – what game you are playing. Are you ‘in legal business’ where you primarily seek to generate revenue from the work of others, or are you ‘in practice’, where you primarily seek to generate revenue from your own work.

Wherever there are employed fee-earners, there is of course a mix of the two, but the focus and emphasis is important – and can have implications for your strategy, marketing, operations, what staff you employ and what you should expect from them. Are staff there to support your productivity, to help you create value, or to create value and revenue themselves? Running your practice like a business, or running your business like a practice can lead to mis-steps and problems. To clarify, here’s how I define the 2 approaches:

A business primarily focuses on generating revenue from the legal work of others. There is usually a larger team, an emphasis on systems, high risk, high overheads and a higher initial investment. Businesses have value outside their founder/principle and are more likely to attract high succession value. Businesses commonly have low profit margins – but due to their size can attract high profits in terms of actual $s.

A practice has a small team, is low risk and requires minimal start-up investment. It requires more on the expertise of an individual than on systems and has lower overheads. The practice has relatively low succession value/appeal, but can attract high profit margins.

So which is better?

There is no ‘better’ approach. It depends on your personal vision as a principal, and to a large extent where your strengths and preferences lie. There are very successful examples of both types. There are also examples of practices who combine both approaches very successfully, but these are relatively less common, and more likely to be seen in larger established firms. For new or growing firms, I suggest it is best to start with one approach in mind, and only build on this when you are a proven success.

To help with your thinking, here are two insights from the world of smaller legal practice:

1. Converting people growth and revenue growth into profits is difficult. Benchmark profitability data suggests that – after a point – profits grow at a much slower rate than revenue. Inefficiencies of scale kick in. More work means more supervision, more marketing, more systems, more overheads, productivity challenges and a drain on your own fee-earning potential. Yes, of course it can be done, and growth is sometimes the only route to higher profitability, but don’t expect it to be easy: it takes work, investment and a different role for the principal.
2. The costs of practice have come down in recent years relative to business. Practice is now relatively cheap and easy. The availability of affordable, efficient technology has reduced the need for admin staff and other resources. Marketing can be cheaper and easier. There is less need for expensive premises – clients don’t need these any more. Businesses still have most of the same overheads!

The changes above have led to a recent surge in new ‘micro-practitioners’, who operate on a shoestring: “have laptop, will travel”, using cheap but effective technology and remote or casual admin staff when needed. Many micro-practitioners run on a profit margin of about 80% (compared to many (successful) law businesses of 20%). Although it doesn’t work for all practice areas, this approach can be incredibly profitable, with many such practitioners taking home $300,000+.  All with lower stress and more work-life balance.

The appeal of the above model has accelerated the jump from larger practices. It has also led to some rewarding downsizing. If you are struggling to turn your firm into a successful ‘business’, you might want to consider the other route. Cut your ties, go it alone and eat 80% of what you kill.

Tasty!