Increasing law firm profitability is not a one-size-fits-all solution. Nor is it simply instituting one or two law firm profitability tips and sitting back and hoping for the best. It is an ongoing process that requires diligence and a watchful eye on the current economic conditions surrounding you. It’s taking control of your law firm’s economics in order to prepare for future opportunities.
So what can you do to increase law firm profitability in a highly competitive environment? Here are five sound tips that can help increase your law firm’s bottom line.
1. Set firm-specific performance goals and targets to increase profit.
Legal profitability and good performance go hand-in-hand. A Key Performance Indicator (KPI) is a measurable value that shows how effectively a law firm is at meeting their key business objectives and reaching pre-defined targets. However, many law firms think they must use all KPIs equally, but that is not the case. No firm uses all KPIs, nor should they. KPIs should be specific to the firm, but measured against industry level performance standards. According to the blog post, Law Firm Key Performance Indicators - A Primer, written by authors Stephen and Michael Mabey, they say, “When choosing KPIs, your firm should consider that the KPIs must: reflect the firm's strategy and goals; be seen as key to the firm's success; and be quantifiable.”
For example, if your law firm sets a strategic goal to improve profit, concentrating on financial KPIs supports that goal. Monitoring the following KPIs assists in measuring overall law firm profit.
- Unbilled days measured against time worked as an indicator of employees not entering billable time in the system or non-productive employees.
- Uncollected days as an indicator of poor accounts receivable policies and procedures.
The value of KPIs will shift and change as the firm’s goals change. For instance, if your law firm is experiencing a reduction in clients, partners may recognize a need to increase marketing and shift attention to the following KPIs:
- The clients the firm has not done work for in two of the past three or three of the past five years as an indicator of upselling possibilities.
- The ratio of the total marketing spend to the total fees billed during the year as an indicator of whether or not the marketing budget should be increased.
2. Get a strong grasp on the law firm’s economics.
Key Profitability Metrics (KPMs) can provide in-depth insight into areas that influence the law firm’s profitability. Client, matter and timekeeper metrics are just a part of the legal profitability equation when it comes to the legal profession, and more specifically, for your firm. When you are familiar with your revenue numbers, you can improve the delivery of legal services with a focus on efficiency as well as quality and speed of service
Read our blog post, The Key Profitability Metrics (KPMs) for Law Firms, to learn the top KPMs law firms should capture and monitor in order to improve their profit.
3. Actively monitor your cash flow.
So many law firms, especially solo or new firms, don’t run their law firm like a business. Instead, they fall victim to the old adage, work hard and everything else will fall in place..While we are certainly fans of hard work, we are even bigger fans of working smarter. Law firms that monitor their cash flow are more profitable. How should law firms effectively monitor their cash flow?
- Educate yourself on financial reports and statements and what they mean to the firm. Income statements vs. cash flow statements provide a wealth of information about the financial health of the firm.
- Cash is king. Law firms need to improve client payment terms and cash collections with faster billing cycles, ensuring hefty initial retainers, and asking for additional payments through the lifecycle of the case.
- Billing and accounting reports should be run regularly to uncover delinquent accounts. Prompt follow-up collection policies should be set in place to collect all outstanding invoices, even if it means out-sourcing accounts receivable management to collection specialists.
- Don’t pay invoices as soon as they arrive. Pay attention to due dates, late penalties, and early payment discounts to better manage the outflow of cash.
4. Reduce overhead and waste.
The first step in controlling waste is to identify areas where potential savings exist. When reviewing your profit and loss statement, don’t arbitrarily cut costs. Think tactically about cost reduction and prioritize and develop specific strategies. Here are some things to review: headcount, compensation, benefits, in-house vs. outsource costs, rent and space size, telephone bills, marketing costs vs. return on investment, supplies and purchases.
Reducing wasteful spending ultimately results in increased profit. It boils down to making careful decisions and implementing smart money management practices to eliminate careless spending and paving the path to increased profit.
5. Take Advantage of Current Technology.
All law practices use some form of Customer Relationship Management (CRM) technology to keep track of basic client information. But are you using the advances in technology to help build your business and increase productivity? In a 2015 survey by Ackert Advisory, 70% of all law firms have a CRM system, but only 7.3% of law firms actually use it properly. Those numbers are staggering. Why do only 10% (more or less) of attorneys make use of their current technology? It comes down to complicated systems, too much data entry, and not enough training. So when considering adding new systems or replacing old ones, make sure that the dashboard is intuitive and easy to use without having to use lots of keystrokes and menus to get the information you need.
In addition to CRM software, there are many other automated tools that allow your office to be more productive and help increase profit, such as online appointment scheduling, customer support chatbots, real-time calendar schedulers, video conferencing and more.
Leveraging new technology not only lets you connect with clients in a highly personalized and efficient way, but can also give you great insight into the productivity and finances of the law firm by measuring Key Performance Indicators (KPIs) and Key Profitability Metrics (KPMs). Current computer platforms that analyze legal BI and metrics for law firms allow today’s lawyers to improve operational efficiency in a way that wasn’t previously available for solos and small firms. Increasing productivity and efficiency by leveraging the right technology, allows attorneys to focus on value-added activities such as servicing and interacting with clients, preparing strategies and actively litigating cases.
Read how we helped Waller Lansden, one of the oldest law firms in Tennessee, increase their firm’s performance by providing them with a consolidated, easy-to-use system that provided one version of the truth.