There is no escaping the financial aspect of your performance as a lawyer. While most lawyers are aware of traditional law firm profit levers such as utilisation, realisation, managing costs and leverage, concepts such as these don’t provide an action plan for what YOU actually need to do to lift your contribution to firm profitability. Here are 5 ways for you to personally help improve law firm profitability…
1. Self-Analysis and Active Monitoring
It’s difficult to improve without an analysis of where you are now and what you are currently doing. That’s the first step. But once you have conducted this analysis, you need to back that up with a commitment to improve, which means that you understand the benefits of doing something new and better: how to achieve it and how to make a sustained effort to implement it. Even then, your intended outcome might not match the actual outcome. To improve, continuous monitoring is needed, which means keeping records or review tables, identifying which strategies are working, or if they’re not, re-analysing and creating new strategies.
How many of us actually take the time to do this self-analysis and active monitoring on a consistent basis? You can’t bill for it and it doesn’t directly benefit the client, so probably not many of us do this. Some practitioners would argue they have “great management people who do all that for us.” Great practice managers will generate reports and provide insightful analysis, but they can’t actually change what you do on a daily basis. Only you can – so you need to take at least some responsibility for the analysis and the monitoring to improve your contribution to firm profitability.
2. Adopt a Cohesive Approach
You can’t improve firm profitability by altering just one thing. For example, you work hard to be more productive and capture more chargeable time, but you fail to reduce WIP write-offs or don’t collect your debtors. You might work hard to analyse your client base and eliminate unprofitable clients, but you haven’t addressed the question of leverage, so profit is leaked through inefficient staffing on matters. There are an infinite variety of reasons and circumstances that lead to profit leakage, so you need a cohesive suite of strategies in order to improve profitability. A holistic Profit Analysis and Recommendation Plan is a good exercise to perform, which can identify both firm profitability strengths and weaknesses, strategies across all operations of the firm (including better communication with clients about fees) to improve and tools that will be able to test and show whether your plan is achieving the desired result.
3. Read Behind the Numbers
In analysing profitability in order to improve it, it’s important to look at what is behind the numbers. For example, low profitability in a particular work-type area may be caused by one or a small number of clients, not the nature of the work-type itself. In this instance, the profitability fix is at client rather than work-type level. Incorrect decisions regarding profitability are at risk of being made unless you look for detailed explanations as to why the numbers say what they say.
4. Recognise the “Power of Small”
You may think that what you do as an individual doesn’t really matter – as one fee earner how can you have any really meaningful impact? So what if you manage to capture 2 extra units of chargeable time per day? At your charge out rate, 12 minutes equals $50 – hardly a sum that is going to turn firm profitability around. That’s $250 a week and even over a 44 week year, it is only $11,000, which is not that much. Well, law firms rarely have just one fee earner. Let’s say there are 8 fee earners doing the same as you. Now there is $88,000 of extra revenue. What if you usually only realise 70% of your monthly chargeable time ($25,000) budget, but implemented some small strategies to improve that realisation to 75%? That is only a difference of $1,250 per month. Over a year though, it is $15,000 and if all 8 fee earners achieve that 5% improvement, there is $120,000 of extra revenue to add to your $88,000 and with an extra $208,000 of revenue; small improvements can have a significant impact on profitability.
5. Balance Profitable Practice with Superior Client Service and Ethical Behaviour
You won’t have any clients or a practice with profitability numbers to improve if you don’t do this. Management of client relationships has been shown to have a significant impact on firm financial performance through likely increased realisation, lower days to collect and lower write-offs as well as less risk of cost disputes and less time spent managing client expectations. Lawyers are under a statutory obligation to provide accurate cost estimates to clients, which is clearly for the protection and benefit of the client, but the obligation can positively impact profitability as well, through improved matter budgeting, planning & management skills.