As a law firm stakeholder, you affect your firm’s profitability every day, with every move you make.
And probably more importantly, you affect it with every move you don’t make; which is actually much better news than you may realize.
Once you understand that you affect your firm’s financial picture even by doing nothing, it becomes easier to take positive action instead of sitting back and hoping good things happen.
The five “gears” of law firm profitability, and their movements, are all firmly in your hands. It’s merely a matter of fine tuning each one, one at a time, to get them all working smoothly together.
Think about the movement of gears in a well-oiled machine. While they’re all working together toward a common purpose – driving the machine forward or backward – adjacent gears are actually moving in opposite directions.
The same goes with the five primary gears driving law firm profitability. Instead of the individual gears moving independently, they’re all interdependent with each other. You can’t move one gear without affecting the others, sometimes in the most unintended ways.
So it stands to reason that getting every gear moving perfectly in sync with every other is a process of constant adjusting, then analyzing the numbers after each adjustment to understand where to make the next tweak.
Before we get ahead of ourselves, though, let’s start at the beginning: defining the five gears.
discover situations in which a particular client may have caused difficulties for a previous law firm; it’s also absolutely essential for helping you avoid potential conflicts of interest that can lead to malpractice suits.
You can’t move one gear without affecting the others, sometimes in the most unintended ways.
The five gears driving law firm profitability
We’re no more interested in turning you into an accountant than you are in being one, so let’s keep this simple:
- Production Value – The amount of fees timekeepers are expected to bill
- Utilization – The actual amount of billable time a timekeeper logs
- Realization – How much money your firm is paid compared to how much you bill
- Leverage – Matching the right resource to the task
- Margin – The difference between the money your firm brings in and the amount you spend
how a singular focus on cost-cutting to improve margins can affect your total profitability picture with possible unintended consequences.
There are a couple of obvious targets for extreme cost-cutting, either or both of which can easily set into motion the law of unintended consequences:
- Employee layoffs
- Technology cutbacks
With a grim economic outlook in the Great Recession years after 2008, many firms worked fiercely to increase their profit margins by cutting costs. That meant layoffs for thousands of lawyers and cuts to benefit programs.
As a result, short-term margins improved.
But extreme cost-cutting is a temporary Band-Aid®, one that eventually has to be ripped off. And when it is, it generally reveals more painful challenges for the future.
With a singular focus on cost cutting, both leverage and margins end up taking a hit:
- The combination of layoffs and employees leaving the firm due to cutbacks leaves fewer employees for partners to leverage work from, so less work gets done, decreasing revenue and growth opportunities.
- Lower-level tasks have to be performed by higher-level employees at a higher cost, eventually eating into the profit margin cost-cutting was supposed to increase.
That’s a painful result however you look at it. And unfortunately, the effect can be even worse when firms slash costs by delaying technology investments.
In an ideal world, firms looking to increase profitability in the face of layoffs would balance out the productivity loss by making smarter investments in technology, allowing the remaining employees to get more done in less time.
But in their zeal to cut costs, some firms also brought technology spending to a grinding halt. The result? A one-two productivity hit that made it near-impossible for firms to recover momentum even when the economy started to improve.
Cutting technology budgets only delays expenditures; by no means does it eliminate them. And because of the nature of technology, those delays often result in higher costs in the long term.
The moral of the story: Profit margin is important, but it’s just one of five gears. If you’re betting your firm’s profitability entirely on extreme costcutting, you’ll bring other profitability gears to a grinding halt.
Now let’s look at the alternative: making small adjustments to individual gears one at a time with a longer-term goal of fine-tuning the entire profitability movement.
Production value: Creating a billable hours target for each timekeeper
From the time employees begin work at a law firm, they have billable hour targets on their backs. It’s how they’re expected to carry their weight in the firm and how partners measure the worth of each employee.
But just billing the required number of hours doesn’t answer the question of how long a matter will take or how much it will cost to service the client.
Do you ever wonder if
the amount you’re charging
for a particular matter or case
will it take to resolve the matter? What about outside costs and expenses, which should include both the costs incurred to resolve the matter and some portion of the firm’s overall costs?
If you consistently estimate all the different factors correctly, you’ll net a profit. If you occasionally get it wrong, accept it and go through the reporting and analytics process to learn why. No one’s right all the time. But successful firms learn from their mistakes, make adjustments and move forward.
Less successful firms, on the other hand, may be less particular about tracking the profitability of individual jobs, or even write off losses as the price of doing business, putting revenue on equal footing with profitability.
While it may occasionally make sense to bring in less money on a matter than you send out, as a long-term business strategy, it’s a better fit for running a charity.
Utilization: How much of your employees’ time is billable?
Firms don’t make money from time their employees don’t bill. So unless you’re dealing with rainmakers and partners, whose time may be better spent capturing new business, increasing timekeeper utilization can be a prime candidate for increasing profitability.
But what about the non-billable tasks that are essential to firm performance? How can you steal billable time away from those tasks?
You cannot manage what you can’t measure, so you’ll need to start by requiring timekeepers to track both billable and unbillable time, which will help you divide nonbillable tasks into two categories:
- Non-billable tasks that should be delegated to admin employees
- Non-billable tasks that require some timekeeper involvement
Reducing timekeeper hours from the first category is easy: Require timekeepers to hand off tasks such as making copies or chasing down files to admin staff. This may require a little bit more planning, but it pays off in the long run.
For the second category – non-billable tasks that require timekeeper participation – your goal should be to reduce the time required to complete them.
For instance, you may be able to make a one-time investment in technology that will reduce the time required for non-billable tasks. If so, it’s likely to pay off in multiples over the lifetime of that investment.
Capturing more billable time with practice management software
No one wakes up in the morning looking forward to keeping track of every minute of the day. But timekeeping is just one of many jobs that can be made dramatically easier and more efficient with legal-specific practice management software.
Besides providing multiple ways to capture time – including on the go – look for software that reminds timekeepers of work performed, but not yet billed.
Just as an example, PCLaw® from LexisNexis® has a feature called Time Entry Advisor that helps capture billable time that hasn’t yet been recorded.
If employees log phone calls or appointments on their calendars, or save email to a matter, for instance, Time Entry Advisor makes a note of that billable time, then sends out daily reminders of time that hasn’t been recorded. From there, it’s a simple matter of a few clicks on the timekeeper’s part to record the time that would otherwise be lost.
Even at $150 an hour – a conservative estimate of a law firm’s average billed rate across all timekeepers – capturing just thirty more minutes a day can put an additional $18,750 per year in your firm’s bank account.
And that’s just the increase in revenue from one timekeeper, so the savings keep multiplying by the number of billable employees you have.
What’s more, timekeeping is just one of the many ways the right practice management software can rev up the profitability machine. Let’s look at another.
Better document management through practice management software
Electronic file copies have been around since computers and word processing programs were adopted by law firms in the 1980s.
So why are there still so many paper copies in file cabinets weighing law firms down? Why are there still firms not taking advantage of practice management technology to organize, search and retrieve documents electronically instead of hunting for the printed version?
Two good questions. But unfortunately, no good answers.
In addition to keeping files organized for everyone in the firm to reference when needed, centralizing electronic documents in practice management software helps lawyers be more responsive to their clients.
If a client calls with a question about an event six weeks ago – or even six years ago – any employee in your firm can respond on the spot, without the dreaded, “Let me call you back after I pull the file”.
Having easy access to electronic files also makes timekeepers’ workdays more productive, with less reliance on admin staff – so you can utilize their time more effectively in other ways, or perhaps even get by with fewer admins. Either way, better document management creates another potential bonus to your firm’s bottom line
If you haven’t checked out practice management or other legal-specific programs lately, making an appointment with a legal technologist can be a giant leap forward in getting the profitability gears greased.
Realization: How much of your firm’s potential income actually reaches its potential?
Law firm economic survey models typically group law firms into four categories:
- The top 25% of law firms, which have the highest earnings per partner
- The bottom 25%, with the lowest earnings per partner
- And the middle 50%, divided into two groups
As a general rule, there are two reasons why the top performing law firms reach the top:
- They understand the value of what they do and bill accordingly.
- Their clients realize the value of what they do and pay accordingly.
However you look at it, it’s worth taking the time to understand why your firm may be lower on the realization ladder than you deserve in spite of your hard work and sacrifice.
Pinpointing what’s getting in the way of your firm’s realization
There are a number of reasons your firm may not be realizing its potential.
Here are just a few:
- Poor billing practices – For some firms, it may be less about the amount of the
bill than it is the bill itself. Make sure that every client bill is:
- Written in plain English
- * In line with the fee agreement
- * Sent in a timely manner (when the matter is still fresh in your client’s mind)
REALITY 11: You don’t have to actually commit malpractice to get sued out of existence for it.
No one goes into law intending to commit malpractice. But it does happen, even to the best law firms in the world. It also occasionally happens that a perfectly ridiculous claim of malpractice actually wins.
Either way, you need malpractice insurance. We know the struggles of hanging a shingle and getting off to a good start financially. But it’s because we’re so aware of those struggles that we advocate so strongly for malpractice insurance.
While it may seem expensive initially, it only takes one lawsuit, or even the threat of one, to put that cost into perspective. Cut back on the expensive office. Cut back on the high-dollar furnishings. But don’t cut corners on malpractice insurance.
If you never make use of it, good for you; you’ve accomplished something. If you do, thank goodness for it; you could very well save your practice because of your foresight.
REALITY 12: Listen to your instincts in a new-client meeting. Your gut can be smarter than your head.
It’s been said that there’s nothing less valuable than services already rendered. In the field of law, as in many other service industries, that can mean one very frustrating outcome: not getting paid. And bad debt is just one of a very long list of ways things can go wrong in a client relationship.
Bad client relationships can reveal themselves very early on in what you may pass off as the most harmless ways: an inappropriate comment or look, a quick flash of unwarranted anger, even an attempt to be overly controlling about the way the case should be handled.
Trust your instincts. Don’t be afraid to give all due credit to those hairs standing up on the back of your neck. Instincts are a big part of what make you a good lawyer and they can save you from taking on a client that you’re likely to regret later.
If you don’t listen and all that happens is the loss of income from one rotten client, consider yourself lucky for the cheap education.
Of course, while your instincts can be a great barometer of client problems to come, it’s also important to have a rigorous client-intake process for on boarding any new client. The process can not only help you discover situations in which a particular client may have caused difficulties for a previous law firm; it’s also absolutely essential for helping you avoid potential conflicts of interest that can lead to malpractice suits.
Finally, hanging a shingle is a great option with great potential for good. Enjoy the ride, but don’t let it run you over.
There’s no end to the number of decisions you’ll need to make as you get started in your new firm, including a few we haven’t even mentioned:
- Office options, including leased or virtual office space vs. purchasing space
- Hiring or outsourcing office help
- Buying or leasing furniture
The fact is, it’s easy to get overwhelmed or burned out or even depressed that you can’t control every decision. Don’t.
Remember why you got into law and remind yourself of the incredible opportunities in front of you. Every person is different, every situation new, every firm unique. If you start out thinking you’re going to do everything perfectly, you’re already well on your way to failure. Give yourself a break when things aren’t going your way and learn from your mistakes. New opportunity is just around the corner.
And if you find you need advice or opinions on making your firm a success, remember that your legal industry vendors can be a great resource. Their success depends on the success of the law firms they work with and they can be very helpful in answering questions or offering insights.
Quite often, too, you can find a wealth of useful information just by searching legal industry websites. LexisNexis, for instance, maintains a Resource Center with a wealth of information worth browsing through – case studies, industry studies, product literature, white papers, and webinars and podcasts – about a wide variety of subjects all types of firms can benefit from.
A good place to start is www.lexisnexis.com/HangYourShingle.
About LexisNexis Legal & Professional
LexisNexis Legal & Professional (www.lexisnexis.com) is a leading global provider of content and technology solutions that enable professionals in legal, corporate, tax, government, academic and non-profit organizations to make informed decisions and achieve better business outcomes. As a digital pioneer, the company was the first to bring legal and business information online with its Lexis® and Nexis® services. Today, LexisNexis harnesses leading-edge technology and world-class content to help professionals work in faster, easier and more effective ways. Through close collaboration with its customers, the company ensures organizations can leverage its solutions to reduce risk, improve productivity, increase profitability and grow their businesses. Part of Reed Elsevier, LexisNexis Legal & Professional serves customers in more than 100 countries with 10,000 employees worldwide.
LexisNexis helps professionals at law firms and legal departments of all sizes manage the business element of their practice with innovative software and mobile solutions for customer relationship management, competitive intelligence gathering and assessment, time and billing management, matter management, client analysis, legal holds and more.