Wisdom From Consultants

Over the past seven months, I’ve attended several presentations made by consultants to small law firms. Three things that were spoken have stayed with me.

The first was at the launch of the Small Practice Portal of the Law Society of New South Wales, where a speaker addressed a sea of faces from small law firms and said that the number of new solo practices being launched every year in New South Wales was unsustainable. It was one of those “look to your right, look to your left, soon one of you won’t be here” moments.

The second was a presentation by a consultant who described the work he had done for a small law firm in rural Victoria. The firm had no idea how much money it was making on its residential conveyancing. After doing a cost analysis, the consultant discovered that the firm was making $10 on each conveyance. He suggested that the firm would be better off by doubling its price and lose half its customers. The firm ignored his advice and went out of business shortly thereafter.

Finally, at a third presentation, a consultant said that his research showed that small accounting firms are three times as profitable as small law firms.

The common thread of these three presentations is that many lawyers are struggling with managing their own business. As books like The E-Myth reveal, there is a vast difference between being a good technician in any field and being someone with an entrepreneurial outlook who has the ability to manage a business. In fact, knowing the technical side of a business can be a liability because of the temptation to put in long hours and do all the work yourself rather than develop adequate systems to make the business work. Running a business requires skills like creating a business plan, developing business processes, controlling your costs, collecting money owed to you, and managing cashflow.

It appears that some of these start-up law firms may be making the same mistake as the dot-coms of a decade ago by trying to ramp up growth while postponing profitability. As well-known Harvard Business School professor Clayton Christensen has stated, “managers must be patient for growth but impatient for profitability”.

It’s interesting to speculate as to why small accounting firms might be more profitable than small law firms. Differences in training and cultural differences come to mind. It is probably safe to say that more accountants than lawyers have attended business school, where they studied the building blocks of business, such as marketing and finance. Of course, they also got a solid grounding in accounting, which is the mathematics of business. In addition, accountants have a cultural tendency to focus on process rather than on personalities.

As a part-time student in the MTax program at the Sydney Law School, I have been very impressed with the aptitude shown by my fellow students, most of whom are accountants. Tax law is a difficult area of law and the accountants manage to master the art of citing statutes and cases to support their legal propositions with very little legal training. It is difficult to imagine that a lawyer could achieve an equivalent level of success in a Master’s program in Accounting.

There is much that lawyers could learn from accountants. It seems likely that there will be a convergence of legal cultures and accounting cultures over the next few years as legal practice becomes more process-driven.