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HOPE IS NOT A STRATEGY THE REVENUE REVOLUTION GOOD DEBT, BAD DEBT FWO GROWTH CLUB PROTECTING YOUR MOST IMPORTANT ASSET


Hope is not a strategy. Albert Einstein defined insanity as doing the same thing over and over again and expecting a different result. For the vast majority of law firms, and for that matter, lawyers, they do the same thing over and over again and hope that the results will be different. Stop being insane

Matt Schlyder Director FWO Chartered Accountants

I would say that most professionals are insane. After all, I’m a Chartered Accountant, so it takes someone who is insane to recognise the insanity in the masses. Please don’t be offended, we live in a busy world and I often find myself going through the motions of what I need to do in a day, feeling like I haven’t achieved too much while driving home. The law is complex and open to interpretation. There is always more than one side to every matter, deadlines to meet, expectations to manage, work life balance to maintain. No wonder we often seek the path of least resistance. Sometimes we find comfort in doing the same thing day in day out. After all, most principals of law firms don’t know any different. Their firms are designed to function the same way that they were trained themselves, which was by another lawyer in another law firm, or by the firm they are in. Did you ever play Chinese Whispers as a kid? You’d get a line of friends together and the first in the line would tell the second a short story, who in turn would tell the third and so on until it gets to the end of the line. The last person would recite what they heard and everyone would laugh because the story changed so much. The longer the line, the greater the deviation from the original story. If you are a younger partner in an older firm, have you ever heard the older partners talk about the good old days, when life was easier, profits were higher, cash flow was better. I wonder how much of the current performance of the business is as a result of Chinese Whispers. How the firm has aged and the processes have evolved so that they end up significantly deviating from the original purpose of why they exist. This is true for the methodolgy of earning revenue in law firms. For those who can remember, revenue for a file may have been determined on the basis of weight, or thickness. It has evolved a long way since then. Let’s take a look at the basis upon which most firms calculate their revenue: time costing. Before I start, don’t you think it odd that the system upon which firms calculate their revenue is called a time cost system? Also, don’t you think it odd that the amount a law firm will charge their client is referred to as the cost? Isn’t it bizarre that a file gets costed? Cost isn’t revenue, it’s an expense


“The future influences the present just as much as the past.” Friedrich Nietzsche (1844 - 1900), German Poet and Philosopher

not income. Surely that’s a hint in itself that something isn’t right. I’m not saying that time costing systems are not required, what I am saying is that you need to understand why they exist. They are a key element to a profitable firm. Originally, time costing systems were used to measure the cost of labour incurred to produce revenue. This is why it is called time costing. You would take the labour cost and apply it to the different matters (sales) based on the time spent, and the result will give you the margin you made on that income (revenue - share of the labour cost = margin). Then some clever guy, probably an accountant, said, “If we are going to measure the time that it takes to do the work so that we can determine how much it costs us, why don’t we build a formula that can provide with certainty, the revenue that we will make.”

still look good to my partner.” “The firm charges me out at $350 per hour, am I really worth that?” “The labour market is so tight, there is no way that we can grow our revenue because we can’t get anymore people.” “Our only measure of performance for our solicitors is for them to achieve and recover 6 billable hours per day at the pre-determined charge rate”

A coach of mine once told me that “Structure Determines Behaviour”. The side effects that a time costing, or time billing, revenue system causes are behaviours that are so estranged from running a successful business, it is almost ridiculous. To improve profitability there are many things that you need to do in a business, including improving client service and being more efficient. The behaviours that The time costing system then a time based revenue structure became the benchmark for creates are: sit at your desk determining revenue. Yes, a and charge out the hours, and very sound model, but as the the longer it takes the more game of Chinese Whispers you can bill. Whether the progressed, like a drug, it had amount ultimately billed to the side effects: client reflects the work actually done, is another question. “I couldn’t possibly charge the These behaviours are totally client that rate for this work?” opposite to what is required “That new solicitor is in a successful business: they inexperienced so they must have do not promote improved been inefficient, I’ll write some of client service or efficiency. So that time off.” why do it? Because it’s what everyone is doing. Does that “I worked on this file for 10 hours mean it’s right? today, but I only need to charge 6 hours, so I’ll just put down 7.5 Why not just keep doing hours on my timesheet and I’ll what we do, keep our fingers


crossed, so that it will all work out, and next year we’ll get a different outcome? Because businesses are strategic and hope is not a strategy. Strategy implies action, and if your actions aren’t aligned to driving a better outcome, then they are merely hope. A series of actions designed to drive towards a better outcome is a strategy. Strategy is an overused word. Ultimately a strategy is simply a series of actions to achieve an improved outcome. It’s the map that get’s you from A to B. Unless you take an action, you will stay at A. There are no guarantees with strategy that you will get it right, in fact, you’ll probably get it wrong, but an error is only a mistake when you make it for the second time. So if you are not totally happy with the outcomes you have achieved in the last day, week, month, year or decade and you go into work tomorrow and do the same things again, then you are making a mistake. But what do you do instead? What’s going to be different? The reality is that it doesn’t matter, just do something different to get a different result. If you have cash flow issues in your business, change your billing and collection processes. If you aren’t happy with the margin you are making on your services you provide, change your prices. If you don’t like your premises, change your offices. If your employees aren’t performing, change yourself, after all, a fish rots from the head down. If your processes are outdated, change them. If your clients aren’t aligned to your service offering, change your service offering or change your clients. What I can guarantee is that if you aren’t totally happy with any aspect of your business talking about it won’t do anything, but taking an action will. I often remind firms that ‘hope is not a strategy’. Determine what needs to be changed, determine the desired outcome and create your action plan. When actions are planned they will be implemented, not ‘hoping’ for an outcome.

THE BOOK ALL PRIVATE FIRMS NEED TO READ The Revenue Revolution for Law Firms is designed to guide your practice to achieve long-term PROFITABILITY and CASH FLOW success. Matt Schlyder’s book will guide you through the processes to get your law firm in shape and well ahead of your competitors. Albert Einstein defined insanity as doing the same thing over and over and expecting a different result. Do something different in your firm... Lawyers are conservative creatures and our inclination is always to conform versus innovate. Matt’s book opens your thinking to new ideas that will challenge and enliven your practice without offending your professional standards.


Good Debt, Bad Debt In today’s society, it is unusual if you do not have some form of debt, it helps us do things that we otherwise could not afford to do. However debt comes at a cost and eventually has to be repaid, therefore it is essential that you develop an effective Debt Plan. Most of us at some stage in our lives will incur debt by borrowing from a bank to help buy an asset that we otherwise could not afford to buy with our own funds.

Michael Ward Director FWO Chartered Accountants

The most obvious example is our home. Most people will need to take out a mortgage to help them buy a home, paying off the loan over time out of their employment or business earnings. Interest on a home loan is not tax deductible as the home is not an incomeproducing asset, so there is no tax relief on the interest charged. The same applies for any other loans or credit cards that are taken out to buy nonincome producing assets or to pay personal expenses – the interest charged is not tax deductible, so there is no tax relief. Conversely, for any borrowings made to acquire an incomeproducing asset such as a business, rental property or shares, the interest charged will be tax deductible against the income derived from the business, property or shares, providing some tax relief on interest charged equal to the

tax rate of the owner at that time. Tax deductible debt is sometimes referred to as good debt because there is tax relief applicable to the interest charged resulting in a reduced after-tax cost to the borrower. On the other hand, non-tax deductible debt is often referred to as bad debt as it does not offer any tax relief to the borrower. There is nothing wrong with debt as long as it is managed within our means. It must remain within our ability to repay principal and interest over time, from our employment and business earnings. We must take into account funding our various living and other expenses. Having a clear, achievable Debt Plan is an important foundation step in achieving your goals and objectives and being Financially Well Organised. Key elements that should be addressed in your Debt Plan include your choice of loan; a clear repayment plan and the level of exposure your assets are subjected to against the borrowing.


There is nothing wrong with debt as long as it is managed within our means.

Questions you should be asking yourself include what type of loan you should be taking out, the term of the loan and what sort of repayments to make. If you have more than one loan, you should be considering which loan is more advantageous to keep, which one should be paid off first and what collateral is being held against these loans.

A Debt Plan ensures: The best interest rates and terms have been negotiated on the loan. Do I take out a fixed or variable loan? Interest only or principal and interest repayments? Do I take the loan out over 10, 15 or 25 years? There is no one answer to these questions. It is dependent on the personal circumstances of the individual or entity as the borrower, the current economic conditions, and sometimes what the crystal ball says. But for points 2 and 3 below, there are some very clear strategies that you should consider. A clear action plan has been determined in order to pay the debt off. You should ensure that you structure your debt so you pay off the bad debt (non-deductible debt) before you start paying off the principal of the good debt (tax deductible debt). Sometimes, depending on your circumstances, your debt can be structured in a way so that it becomes tax deductible. The assets exposed to borrowing are limited and only sufficient to support the borrowing as security. Only provide the lender with the minimum amount of assets required to obtain the loan. You don’t necessarily have to provide all of your assets as security for a loan. You must take the attitude that your loan security structure is not set and forget. Once you can remove assets from what is required as security by the lender, you should. An example is for business owners who provided their home as security for borrowings made to their business in the early days. Their business has since grown and acquired assets. The loans in the business can sometimes be secured against the business assets on their own so the home is no longer needed as security and should be removed as security. Otherwise, if this is not done and the bank was forced to call up the business loan and needed to sell the home to receive the full loan repayment, a significant amount of equity could be lost.


FWO Growth Club In Australia 95.6% of private firms operating are 1-4 partner practices. How is your firm positioned in this highly competitive market? What are you doing to stand out? Most practitioners are too busy doing the work and running the day-to-day activities in their practices to think about strategy. Moreover, they rarely take regular time out to reflect on their practice and develop and implement actions that will drive improvement in PROFITABILITY and CASH FLOW. The FWO Growth Club is an exclusive club for like-minded practitioners in the 1-4 partner practice space. The FWO Growth Club is exclusive because: 1. Only 5 of these clubs will be run over the next 12 months with each group being limited to 10 non-competing legal firms. 2. You and your firm will need to have a desire for growth in profitability and cash flow. 3. You will receive an insight into other firms, how they work, their ideas, strategies and actions. 4. Try something different and contact Matt Schlyder today... To register your interest in the FWO Growth Club please email us and we will be in contact with you to discuss in more detail. Our next Growth Club group will commence Friday 14th March 2014. REGISTER HERE


Protecting your most important asset, yourself. Many people do not understand Total & Permanent Disability insurance (TPD) and how it works. TPD insurance provides a lump sum payment in the event the life insured becomes totally and permanently disabled and can not return to work ever again. The leading causes for TPD claims in 2012 were musculoskeletal, mental illness and cancer. Most Australian’s have some form of TPD cover. However the bulk of this cover is owned by superannuation funds. This poses some serious issues: 1. Ability to meet the ‘Any Occupation’ definition of total and permanent disablement within superannuation;

Tim Ward Finanical Adviser FWO Chartered Accountants

2. Underinsurance – the automatic levels of cover offered by industry funds is not enough to meet the needs of individuals. 3. Increases on premiums for group policies. Any Occupation Definition verse Own Occupation Definition By way of example the legal industry super fund Legal Super has a TPD definition which is determined by the Insurer (currently OnePath) at the end of the six month qualifying period (or such later time as the Insurer agrees with the Trustee), the life insured needs to be permanently incapacitated to such an extent as to render them unlikely ever to engage in any gainful occupation, business, profession or employment, for which they are reasonably suited by education, training or experience. This particular definition can be extremely hard to satisfy. When compared with the more generous ‘Own Occupation’ definition – which states that if you are incapacitated to such an extent that you are unlikely to be ever able to work again in the occupation you were last engaged in before becoming disabled. Essentially the ‘Own occupation’ definition provides you with a greater level of certainty in the event of suffering a permanent disability. However, you should structure the policy to ensure that it is held outside of the superannuation environment.


Underinsurance The automatic acceptance limits for TPD cover for Legal super is currently $440,000 for a 40 year old male who is an employer sponsored member and $250,000 for personal members. Most legal professionals who are self employed or directors of a firm will require much more cover than the automatic acceptance limits provided. TPD cover is used to eradicate debt, provide continued income for living expenses, paying medical costs, making modifications to home or car and providing funds for further assistance with home carers and or babysitters if you have children. A recent study, conducted by a leading Australian in home care provider, calculated that the average costs associated with suffering from terminal bowel cancer was approximately $490,000 for 18 months of care. This was based only on the care element of a client and did not include personal factors like debt and number of dependants. Increasing premiums on group policies Two of Australia’s largest industry funds have announced significant increases to the premiums for death and TPD cover. This is due to rising operational costs faced by insurance companies and increase in claims. For example Australian Super increased premiums on death and TPD cover by 38%, while REST increased its death and TPD cover by 30%. The increase in claims for the industry funds is attributable to the excellent outcomes personal injury lawyers have achieved for clients in regards to claiming their TPD benefits from their respective industry superannuation funds. Also the increased awareness of the general public in regards to insurance within superannuation. However, due to the underinsurance issues in Australia and the lack of engagement industry funds have with their members to get adequate levels of insurance, the claim payments received by clients will be exhausted very quickly and do not provide enough cover for the average person in the event of claim. You should ensure you have adequate TPD cover as part of your comprehensive personal insurance plan. In recent years a few product developments have been made to help mitigate the serious issues raised above.


Ground Floor, Green Square North Tower 515 St Paul’s Terrace, Fortitude Valley QLD 4006 GPO Box 81, Brisbane QLD 4001 www.financiallywellorganised.com Ph: 07 3833 3999 Fax: 07 3833 3900 info@fwo.net.au


Grow Your Law Firm - Issue Three