The combination of shrinking client demand and growing firm expenses in today’s economy is disruptive to any law firm’s profit margin. Although the imbalance is unsettling, when you measure legal profitability instead of revenue, you gain better control over the firm’s financial position. When you rely simply on revenues to define your firm’s performance, it is easy to miss what drives law firm profitability. These five profit drivers outlined below are a must read if you want to significantly increase your bottom line.
1. Track All Hours, Billable and Non-Billable
Utilization, or the “actual amount of billable time a timekeeper logs” can be improved by reducing the amount of time spent on non-billable tasks. Because non-billable tasks don’t earn revenue, spending time on them is one of the biggest law firm profitability killers. Even in small offices, when lawyers answer non-screened phone calls, schedule appointments, or waste time on other non-revenue generating administrative tasks, legal profitability is literally being flushed down the toilet. Learn how efficiency contributes to higher productivity which contributes to improving law firm profitability in our blog post, 7 Law Firm Profit Killers - Law Firm BI.
Encourage timekeepers to enter time with easy to use software. Tracking both billable and non-billable time provides an opportunity to evaluate which tasks can be delegated to administrative employees. Dig deeper and examine the tasks that do require timekeeper involvement. Are there ways to reduce the time spent? Can new technologies speed up more labor-intensive tasks? Can new software eliminate some manual steps?
2. Look for Opportunities
In the Legal Executive Institute blog post, The 8 Habits of Highly Profitable Law Firms, BTI Consulting analyzed more than 330 law firms with best law firm profitability (reported or not) and found they exhibit some similar traits. Two of their habits really hit home. Number two: Engage in a continuing dialogue with clients about their business even when, and especially if, there are no active matters — Dialogue drives business instead of business driving the dialogue; and number eight: Work with more clients who have a large number of continuing matters — Targeting clients with the most amount of continuing work allows you to sell more work to the clients with more compelling needs. This translates into a long and reliable stream of business, reducing the cost of acquisition and delivery, and demanding the ability to deliver multiple services.
Think about it. When you target clients with the most amount of work, you eliminate the costly and timely task of constantly seeking out new clients. Instead, if you have formed a good working relationship and proven yourself to this client with stellar performance, you will be the law firm they call when they need additional work. Take the time to learn their business inside and out, set realistic expectations, explain information in a non-technical way, and meet their emotional needs as well as their legal needs and you will find long-term clients who turn to you first when they have additional work.
3. Don't Confuse Activity with Productivity
We’ve all been around people at work who always seem “crazy busy” running around with piles of papers, working through lunch, too busy to talk, yet never seem to get anything done. In fact, Scott Adams has made a career out of poking fun at inefficiency at work with his Dilbert comics.
But inefficiency at work is no laughing matter. Managing time efficiently results in higher productivity which translates into higher legal profitability. You can simplify business tasks and increase productivity in your law firm by identifying the processes that are stymying efficiency. Sticking with old habits and outdated technology means you are not managing your practice in the most efficient way possible, risking an increase in law firm profitability. When staff members have to work hard just to gather data, find information and correlate case details, productivity suffers. Quick access to information (especially for partners and other timekeepers), speeds up client response time, trial preparation work, and allows employees to work smarter, not harder.
4. Aim for High Collection Realization Rates
In simple terms, realization measures the difference between time recorded and the percentage of that time paid by the client. What makes some firms achieve higher realization rates than other law firms? There are many reasons. However, broadly speaking, firms that perform at the top manage billing and track performance regularly and methodically. Regardless of size, partners should implement a yearly financial plan that includes projected revenues and expenses. At year’s end, measuring performance against these projections will let you know what works and where improvement is needed.
When billings, discounts and collection processes are improved, realization rates improve also. When it comes to collection realization rates, firms should follow best-practices in their collections. This should include prompt billing, past-due account tracking and detailed aging reports. For those late-paying clients, communication is key. Be persistent in your efforts to collect payment. If necessary a forceful reminder of your firm’s value with an emphasis on the good work performed may be just what you need to receive payment. With some strategic policies and practices put in place, realization rates can be increased.
5. Get a Grip on Your Legal Business Intelligence (BI)
Which clients are the most profitable? How much time is wasted on the least profitable cases? Which attorney brings in the most new business? Which marketing initiative resulted in the most prospects for new clients? How do we reach these prospects? Every law firm should know the answers to these questions. Practice management software can slice and dice legal BI in a variety of ways so that attorneys can see the big picture as well as the minutest of details.
A BI software provider familiar with the legal industry can provide exclusive features particular to the legal profession. Attorneys can turn legal BI into knowledge with: case management, time management, and reporting in order to maximize the effectiveness of their data. Law firm staff and timekeepers want one platform that is capable of integrating financial and operational data, including time recording, practice management, case management and workflow, CRM and marketing, HR and risk management. Provide an easy to use dashboard and you are on your way to getting the most from your legal BI.
Where do you stand when it comes to legal BI and increasing law firm profitability in your firm? Use our Scorecard and find out.
BigSquare is the leading provider of Business Intelligence for law firms and professional service organizations. We focus exclusively on law firm reporting, law firm BI, law firm profitability and law firm analytics.