1. Profitability, commercial awareness, risk management and compliance Peter Scott PETER SCOTT CONSULTING www.peterscottconsult.co.uk

2. Challenges now facing law firms The economy Government cuts New competitors in the market The P I insurance market Increasing regulation and compliance Technology The changing needs of clients A fragmented profession Given these challenges, never has the need to be more competitive been so great

3. Today’s session How to compete in tomorrow’s markets Building financial awareness and performance How to manage your risks and compliance under the new regulatory regime Achieving your goals

4. How to compete in tomorrow’s markets

5. The need to be more competitive “Competition is a process by which …  services that people are not prepared to pay for  high cost methods of production and inefficient organisations  are weeded out and  opportunity is given for new…services methods and organisations to be tried” * Could this apply to the legal profession today? *Everyman’s Dictionary of Economics – A. Seldon and F. G. Pennance 1964

6. Your future market competitors? ABS - owned wholly / partly by non-lawyers with deep pockets? MDP - owned by lawyers and other professionals? Highly developed ‘traditional’ law firms? - national / regional - branded - strong sector focus - franchised / federal models - heavy investment in IT, management and infrastructure  Combinations / variants of any of the above  Others? Which kind of law firm do you want to be?

7. The greatest danger? - complacency! “Our strategy is to keep a lid on expenditure and weather the storm. We cannot reinvent ourselves as something we are not” Managing Partner of a major London law firm – Autumn 2008

8. An alternative view… “there seems to be a disturbing strategy of hunkering down, cutting some fat and hoping that business will return to normal. That is not good. The terrain will look very different when this is over. This is not a minor blip, but a discontinuity” “the problem is that most senior lawyers think only two months ahead. They have no coherent picture of the future. The planning is not being done. And it is senior lawyers who need to be driving change” Professor Richard Susskind – May 2009

9. Forward planning - focus on the fundamentals of your business Your clients Your people How you can achieve your goals

10. The fundamentals of your business – are you making the most of them?

11. Do you know what your clients want? Will your people deliver what your clients want?

12. Your clients

13. Preventing client leakage Clients usually do not tell their law firm they are leaving – they just never again instruct the firm. Are you unknowingly at risk of losing part of your client base?

14. Key issues for clients? Client – based research consistently demonstrates that unless law firms listen to their clients and act accordingly, then those clients are likely to migrate to other firms.

16. Your client base It is not only the at risk clients you should be concerned about. The graph shows that typically three out of ten clients have hidden potential to grow that has not been identified.

18. The cost of sales The cost and effort to ensure client satisfaction and thus the retention and development of clients is many times less than the cost of trying to win new business Do you know your clients’ potential which could be unlocked for your firm?

19. Protect your backyard This should be an obvious and profitable way to ensure - not only survival but also - one of the best ways to build long term competitive advantage But are law firms doing so?

20. Strategic forward planning What services are your clients going to need in the future?

21. What are clients looking for? Core issue is to add value More than the competitors In a way which is regarded as valuable by clients and which differentiates you – to create a ‘brand’

22. What is ‘added value’?

23. Value Clients Care About Our clients’ perspective Not our own perspective Is there a gap?

24. The value gap It is the client’s perception of value that matters Professionals often put too much emphasis on service attributes Not enough on helping clients achieve results

25. You will add value if… You provide clients with what they want – and more At prices they perceive to be value for money; and You do this better than the competition

26. Understanding the client’s needs and requirements So what do clients want?

27. Price on its own is rarely a determining factor However, value for money is key

28. The client’s perspective “They always try to sell to us on price – but what we really want is to have a good job done at a reasonable price” Client feedback from a perception survey commissioned by a law firm

29. PETER SCOTT CONSULTING Positioning your practice to be competitive by adding value more than your competitors (Brown and Faulkner 1994, Long Range Planning) Client Perceived Added Value Client Perceived Cost High Low Ave X Suicide Zone

30. So what do clients want? Here are some of our most important research findings from interviewing clients of law firms and in particular from those clients which were in the at risk category

32. Perceived lack of skills and technical expertise Clients absolutely expect that law firms have the necessary technical expertise to get the results clients require This should be a given – but unfortunately it is often not the case

33. What some clients said “They are OK for most work but when it comes to something really important to us, we go [elsewhere]” “If [named partner] is not there we go elsewhere because they lack depth of expertise.” “They need to improve the quality of staff in the 2 nd tier”.

34. However, it is not enough just to be a good lawyer The following factors can all influence a client’s choice of law firm

35. Brand and Positioning Law firms win and lose work based on how clients and key decision makers perceive them, and particularly in relation to transactions, factors around - complexity - risk; or - size

36. Some relevant client comments “For high value / high risk work I would use a big name firm – very unlikely to get bad advice” “Our accountants tell us to use a ‘corporate’ firm” “The firm is under pressure if it does not do some bigger corporate work” “Sometimes we don’t use them for complex work” “(They) may not be able to do complex transactions”

37. Lack of client awareness of specialisms offered Sometimes the problem is not so much actual lack of technical expertise but more a failure on the part of the law firm to make clients aware of what the firm can do

38. The following client quotes show this “They must not assume that people know what they do” “If I had a £5m project, would I think of (Firm)…probably not…I would think of one or two others first… it may be that I don’t know enough re: the full extent of their expertise”. “Not sure if they have certain capabilities” “They are not proactive with their own clients” “I don’t think they have anyone in litigation...but if (the client partner) told me they did, I would trust him...I’d be interested in talking to them” “Maybe not so good at telling people what they do”

39. Speed and other service factors including - Meeting deadlines - Keeping commitments - Ability to offer advice quickly and efficiently - Keeping clients informed of progress - Care and attention to work - Billing as expected - Personable and likeable people / rapport with the team - Interest in / knowledge of client’s business

40. These client comments help to illustrate this “Their response times leave much to be desired” “We had to chase all the time … we said it was urgent but it still ended up drifting” “They didn’t communicate enough, or didn’t seem to be on top of things” “I don’t believe they have the resources”

41. Relationship and understanding of needs If a law firm is unaware of a client’s strategic needs then it is at risk An example of this was a firm which was unaware that it was likely to lose a large client relationship in an imminent review of panel firms

42. “For service, I would rate them 8.5 out of 10 (they are upper quartile on this)...for strategic value I would rate them 2/10” Being aware of this client feedback, and effectively responding to it, enabled the firm to retain what was its largest single client

43. Referrers of work Different factors are likely to be identified from listening to referrers of work such as accountants, banks, overseas lawyers, IFAs, surveyors and estate agents

44. Research indicates that referrers consider these factors important Knowing the individual / the personal relationship / having confidence in the individual Expertise / technical ability / good quality advice Track record in an area of work Turnaround time / speed / ability to meet deadlines A fit with client Location Reciprocation Working as a team

45. Your firm For any individual firm it is key to identify what is important to your clients and referrers of work and how you perform in key areas Understanding and then responding to the issues can create immediate financial benefit and clarify the future direction of your firm

46. To be unaware of or to ignore client and referrer perceptions is to put at risk a firm’s very existence

47. Your people

48. Your people? Are you presently unable to add value to your clients because of: Gaps in your skills base? Under performance? internal attitudes and behaviour?

49. What should your people be doing:  better?  more of?  less of?  differently? How are you going to manage this?

50. In particular…  how should your people be using technology more effectively?  How financially aware are your people?

51. Making technology effective Technology without people does nothing Law firms are people businesses People use technology Are your people helping you to get the most benefit out of technology?

52. Your IT IT is a tool to be used by you in your business to help you be competitive Is it doing so? Do you analyse the cost / benefits of the IT you use? Could you use it better to achieve your business objectives?

53. Your business objectives Client service delivery Financial management Business development Knowledge management Risk and compliance management Others?

54. Encourage your people to think creatively about how to use technology to: Provide better service Improve productivity Build competitive advantage Build profitability

55. How financially aware are your people?

56. “I don’t have a clue about the financial reports I receive” PETER SCOTT CONSULTING

57. Do your partners / other fee earners have financial knowledge gaps? Do they understand why you provide them with financial reports? Do they understand why you are asking them to take certain actions? PETER SCOTT CONSULTING

58. Does your firm have a financial education gap? How can I grow revenue? How can I price more creatively? How can I improve profitability? How should I manage working capital? How do I control the cost base? What reports do I need to better manage my practice? Why should I fully record time? How can our partners gain more confidence to talk to clients about money?

59. Defining the financial education gap What do our partners and other fee earners tell us they need to know? What do we think they need to know? What messages are fed back from clients?

60. Finding the right solution What is realistically achievable? What is the cost / benefit? What is the most appropriate forum / method for training?

61. Gaining partner buy-in Must be relevant to the partner Needs to be user-friendly and practical Should demonstrate a clear benefit and improvement opportunity for the firm

62. Implementation Identify the key sponsors, stakeholders and likely blockers Involve partners and other fee earners in the design and implementation of the education programme

63. Would a financial education programme for your firm help to achieve the outcomes you want? PETER SCOTT CONSULTING

64. Measure and report what matters PETER SCOTT CONSULTING

65. Financial measurement and reporting - create KNOWLEDGE - help to manage RISK PETER SCOTT CONSULTING

66. Without good financial measurement and reporting it is not possible to adequately manage your knowledge of what is happening in your business and the risks to which your business subject. PETER SCOTT CONSULTING

67. Risk and Knowledge Management Risk Management Knowledge Management

68. Financial measurement enables you to manage performance PETER SCOTT CONSULTING

69. If you cannot measure it, you cannot manage it. PETER SCOTT CONSULTING

70. What is the purpose of financial measurement and reporting? PETER SCOTT CONSULTING

71. To provide clear information to those running the business to enable them to: - Know what is happening / will happen in the business - Make decisions based on sound knowledge - Take effective action PETER SCOTT CONSULTING

72. Is your financial measurement and reporting aligned with and helping you to achieve your objectives? PETER SCOTT CONSULTING

73. How do you use financial information? PETER SCOTT CONSULTING

74. Financial management - whose responsibility is it in your firm? PETER SCOTT CONSULTING

75. Is your IT helping or hindering your financial measurement and reporting?

76. Data Vs Information? PETER SCOTT CONSULTING

77. Avoiding financial information overload PETER SCOTT CONSULTING

78. In a law firm what needs to be measured - and why? PETER SCOTT CONSULTING

79. Only measure what matters PETER SCOTT CONSULTING

80. What matters? -How can we measure the financial performance of each part of our firm? -How profitable / loss making are our clients? -Which parts of our firm generate good cash flow or soak up cash? PETER SCOTT CONSULTING

81. Are you measuring and reporting on what matters? PETER SCOTT CONSULTING

82. Is there anything you should measure which you do not currently measure and report on? PETER SCOTT CONSULTING

83. Your key performance indicators? PETER SCOTT CONSULTING

84. Testing your KPIs PETER SCOTT CONSULTING

85. Your KPIs? Why do we produce this information? Does it tell us what we need to know about our business? What does it not tell us about our business? Do we ever use this information? If not then why do we produce it? PETER SCOTT CONSULTING

86. Real time or historical information? PETER SCOTT CONSULTING

87. Do you / your people use everything you measure / report on ? If not – why do you measure it / report it? PETER SCOTT CONSULTING

88. Identifying your priority financial outcomes Aligning measurement and reporting to achieve those outcomes PETER SCOTT CONSULTING

89. Outcomes? - Accelerating cash flow? - Improving profitability? - Building performance? - Effective business development? - Risk management and compliance? - Others? PETER SCOTT CONSULTING

90. How to design clear and understandable reports to achieve required outcomes PETER SCOTT CONSULTING

91. How can you ensure the most effective use is made of your financial reports? PETER SCOTT CONSULTING

92. Accurate reports build credibility PETER SCOTT CONSULTING

93. Financial roles in a law firm Who needs what? PETER SCOTT CONSULTING

94. Hard copy or available on line? PETER SCOTT CONSULTING

95. Frequency of reporting? PETER SCOTT CONSULTING

96. Is it enough just to provide reports – or do you need to do more? PETER SCOTT CONSULTING

97. Questions? PETER SCOTT CONSULTING

98. Implementing effective risk management and compliance procedures

99. PETER SCOTT CONSULTING Law Firm Risks People Operational Regulatory IT Competition /business Economic, political, fiscal Financial Asset Reputational Management

100. Who has looked at the new SRA Code? Go to Freedom in Practice at www.sra.org.uk Peter Scott Consulting

101. Timetable towards implementation April 2011 – publication of final Handbook August 2011 – Anticipated designation of SRA as a Licensing Authority for ABSs 6 October 2011 – first ABSs licensed and implementation of new Handbook Peter Scott Consulting

102. Key elements of Outcomes Focused Regulation (OFR) Principles not rules Emphasis on results rather than process Sets out expected outcomes Provides indicative behaviours Peter Scott Consulting

103. A New Online Handbook Will contain all the elements of the regulations Principles Code of Conduct Accounts Rules Authorisation and Practicing Requirements Client Protection Discipline and Costs Recovery Specialist Services Peter Scott Consulting

104. Handbook and “risk based regulation” Firms will need to demonstrate their approach to compliance: through compliance officers compliance plans possible self certification of compliance reporting of non compliance A new relationship between regulator and regulated required: more openness; more information provision by firms both annually and ad hoc. Peter Scott Consulting

105. The Principles Ten mandatory over-arching Principles Embody key ethical requirements on firms and individuals Not part of the Code Six you will recognise but four are new Peter Scott Consulting

106. The six Principles you will recognise Uphold the rule of law and proper administration of justice Act with integrity Do not allow your independence to be compromised Act in the best interests of each client Provide a proper standard of service to clients Behave in a way that maintains the trust the public places in you and in the provision of legal services Peter Scott Consulting

107. Four new Principles Comply with your legal and regulatory obligations and deal with your regulators and ombudsmen in an open, timely and co- operative manner Run your business and carry out your role in the business effectively and in accordance with proper governance and sound financial and risk management principles Run or carry our your role in the business in a way that encourages equality of opportunity and respect for diversity. Protect client money and assets Peter Scott Consulting

108. Outcomes Generally replace rules in the Code Describe what you are expected to achieve in order to comply with the relevant Principles in the context of the relevant chapter Supplemented by Indicative Behaviours NB – there are 81 outcomes but they are not an exhaustive list of the application of all the Principles Peter Scott Consulting

109. Your Challenge How can you best achieve the outcomes, taking into account the nature of your firm, the particular circumstances of the matter and the needs of your clients? Peter Scott Consulting

110. How they work Principles and Outcomes are mandatory Indicative behaviours are not mandatory NB – Indicative behaviours specify, but do not constitute an exhaustive list of the kind of behaviour which may establish compliance with or contravention of the Principles Peter Scott Consulting

111. The Code Has five sections You and your client You and your business You and your regulator You and others Application, waivers and interpretation Each section is divided into chapters Applies to solicitors, RELs, RFLs, authorised bodies and their managers, and all employees in relation to “practice from an office in England & Wales”. Has in-house and overseas application. Peter Scott Consulting

112. 1 st section – You and your client Chapter 1 Client Care Chapter 2 Equality and diversity Chapter 3 conflicts of interest Chapter 4 Confidentiality and disclosure Chapter 5 Your client and the court Chapter 6 Your client and introductions to third parties Peter Scott Consulting

113. 2 nd section You and your business Chapter 7 Management of your business Chapter 8 Publicity Chapter 9 Fee sharing and referrals Peter Scott Consulting

114. Under Chapter 7 the Outcomes provide that firms must inter alia.... - have appropriate systems and controls in place to achieve and comply with all Principles, rules and outcomes and other requirements of the Handbook - identify, monitor and manage risks to the achievement of all outcomes, rules, Principles and other requirements in the Handbook if applicable and take steps to address issues identified Who already has appropriate systems and controls in place …to comply with the present regulatory framework? Peter Scott Consulting

115. 3 rd Section You and your regulator Chapter 10 You and your regulator Peter Scott Consulting

116. 4 th Section You and others Chapter 11 Relations with third parties Chapter 12 Separate businesses Peter Scott Consulting

117. Authorisation Rules Every firm must have - a Compliance Officer for Legal Practice (COLP) who must be a lawyer; and - a Compliance Officer for Finance and Administration (COFA)

118. COLP and COFA role requirements COLP must ensure general regulatory and statutory compliance by the firm and its managers and employees COFA must ensure compliance with the Accounts Rules Both must promptly report non compliance Notes to the rule make clear that the firm and its managers are not absolved from their own responsibilities

119. NB - Authorisation Rules para 8.5 (b) The COLP of an authorised body must: (ii) as soon as reasonably practicable, report to the SRA any failure so to comply.” Peter Scott Consulting

120. PETER SCOTT CONSULTING Consider the risks of non- compliance Disciplinary action Bad publicity and loss of reputation Lost clients Complaints and claims Increased P.I. insurance premiums

121. Complaints LSA sets up role of Legal Ombudsman (operational from 6.10.2010) to handle complaints Establishment of Consumer Panel – now operational – to represent interests of consumers and report to LSB Peter Scott Consulting

122. Complaints handling Legal Ombudsman and Consumer Panel both targeting poor standards of service. Legal Ombudsman is examining “first tier” complaints handling by firms - firms that don’t measure up will be penalised. Consumer Panel have laid down outcomes they want to see in relation to complaints handling. Also want firms to analyse complaints and learn from mistakes. Peter Scott Consulting

123. How to approach OFR? Peter Scott Consulting

124. PETER SCOTT CONSULTING What is required? A need to manage your: Resources Knowledge

125. PETER SCOTT CONSULTING Resources? People and Money Internal or external? Part time partners or professionals? Bespoke or ‘off the peg’? Carry out a cost / benefit analysis to establish the most resource effective method for your firm to manage compliance

126. Knowledge? - Failure to manage knowledge involves widespread risk Compliance / Risk Management Knowledge Management

127. Compliance and risk – do you know your compliance risk areas? Where does the knowledge of your compliance risk areas reside? Can you access it? Do you have systems to maintain and upgrade your knowledge? PETER SCOTT CONSULTING

128. Where to start? A systematic approach is needed Management driven, with top level buy-in Zero tolerance is required Managing risk and compliance needs to be seen as ‘everyone’s job’ – a mind set change is needed Need a ‘no guilt’ culture to encourage disclosure Approach compliance and risk management from a knowledge management viewpoint and vice versa

129. PETER SCOTT CONSULTING A systematic approach is required Put in place a formal compliance and risk management process to identify and manage every area of compliance and risk for the new SRA Code Establish a comprehensive database covering all compliance and risk areas Standards such as Lexel and ISO 9000 are likely to help Use of IT systems?

130. Advantages of a formal compliance and risk management process for the new SRA Code? Structured approach focuses on key compliance and risk areas Can demonstrate how a firm is complying and the effectiveness of compliance / outcomes Continuous monitoring ensures management of compliance and risk is “lived” day to day Universal application to all compliance and risk areas Comfort / assurance to PI insurers [and SRA?] PETER SCOTT CONSULTING

131. Use of IT systems for compliance and risk management? Use an integrated compliance and risk management system to cost effectively manage compliance and risk areas by: creating and maintaining one central, up to date compliance and risk database providing information access to all who need it in relation to exposure to risk embedding compliance and risk management procedures – e.g. client inception procedures streamlining identification, assessment, mitigation and monitoring PETER SCOTT CONSULTING

132. Implementing a compliance and risk management strategy Diagnosis Identification and assessment Implementation of compliance procedures and Mitigation of risk Avoidance, control or transfer Monitoring Auditing, tracking and reporting Limitation Minimising the effects of crystallised risks

133. PETER SCOTT CONSULTING Identification of compliance and risk areas? Needs to be management- driven ‘Top down – bottom up’ brainstorming sessions to: - to identify every compliance and risk area - are we achieving every Outcome under the new Code? - are we compliant in every area? - do we have gaps? - what will be required to fully comply? - to what standards should we comply? - how should we prioritise our efforts? Assignment of responsibilities and lines of accountability

134. PETER SCOTT CONSULTING Assessment of non-compliance and other risks Consider the impact of, inter alia: Disciplinary action Bad publicity and loss of reputation Lost clients Complaints and claims Increased P.I. premiums

135. Risk Mapping- where to focus resource?

136. Try this out on your... Supervision arrangements Financial controls Business continuity planning Client care letters AML procedures etc

137. Compliance and Risk Mitigation Designed to:- Ensure effective compliance Avoid / reduce non compliance Avoid / reduce incidence of risks Transfer some risks PETER SCOTT CONSULTING

138. Some techniques to put in place compliance and mitigate risks Top level buy-in – management must not only drive compliance but also live it Zero tolerance – just do it! Training and education programmes to build awareness and change mind sets Continuous and systematic monitoring and reporting A need to continuously challenge the effectiveness of compliance and risk management

139. Compliance and risk monitoring involves… Auditing, tracking and reporting Comparing actual outcomes to preset indicators Confirming effectiveness of risk responses Reporting compliance and exceptions Annual compliance and risk management report PETER SCOTT CONSULTING

140. Start now Systemise your compliance and risk management PETER SCOTT CONSULTING

141. Any questions? PETER SCOTT CONSULTING

142. How to achieve your goals?

143. You have developed a realistic plan, but… This will require RESOURCE - resource which many firms cannot realistically and at an economic and acceptable cost provide themselves

144. Is lack of resource making you - uncompetitive? - non compliant? - financially underperforming?

145. Lack of resource  Often a lack of resource of expertise (client perception surveys will show if this is the case)  Often a lack of financial resource (inability to invest in your people and in the business)

146. Resource to enable you to… attract and retain the best talent

147. Resource to enable you to… provide clients with the depth and breadth of expertise they  will require  when they need it  where they need it

148. Resource to enable you to… build the quality management which will be required to successfully compete in the future

149. Resource to enable you to… provide the necessary infrastructure to underpin the effective provision of high quality professional services

150. Resource to enable you to… provide the necessary technology to make you more efficient and profitable

151. Building resource to compete Will you be able to build sufficient resource on your own to achieve your goals?

152. The profession is too fragmented  Over 11,000 law firms  Over 85% have 4 or fewer partners  Many will not be able to compete and survive if they remain as they are Size does matter

153. Competitive growth models? Organic growth alone? Some form of consolidation?

154. How can consolidation enable tomorrow’s law firms to compete?  Not about size for the sake of size A means to develop resource at an acceptable economic cost to each constituent firm which individual firms cannot on their own provide  A better platform on which to build a more competitive law firm capable of succeeding in tomorrow’s legal market

155. A Vision To build a law firm which over a given period of time will become “greater” than the sum of the individual firms which comprise it. This will involve building a BRAND which can begin to compete with larger, more developed firms for better quality, higher value work leading to greater competitiveness and profitability.

156. Is that a Vision you share?

157. How are you planning to compete to win?

158. Any questions?