Improving Law Firm Profitability

Part one of a two-part article

In today's competitive environment, the profitability challenge to law firms is to increase profits while reducing clients' legal fees. This two-part article provides dozens of specific, workable ideas for enhancing profitability, leaving aside the played-out (and problematic) methods of working longer hours and raising hourly rates.

This month's article offers ideas in the following categories, which together offer the greatest opportunities for profitability enhancement.

1. Expand Your Client Base

2. Assertively Manage Billing, Receivables and Payables

3. Unbundle Operating Costs from Bills for Fees

4. Manage Alternative Billing for Profitability

Next month's conclusion of the article will describe a variety of other profitability measures you may also wish to pursue.

Ideas for Improving the Top Line

Expanding Your Client Base

Perhaps the single most important initiative to increase profitability is the successful marketing of your law firm. This entails that you assure, to the maximal extent possible, a commitment on the part of your partners to seek new sources of profitable business.

Depending on the methods of marketing planned, the buy-in required of partners can vary significantly. The firm must determine whether its principal marketing focus will be individually, departmentally or holistically driven or, of course, a combination of one or more of those possibilities. Also, the firm must establish an annual budget for marketing and, in keeping with its goals and priorities, clearly define how and by whom the money will be expended.

Each practice area should be asked to submit a proposal for marketing, based on views solicited from all partners within the practice area.

A sensible mechanism to monitor the marketing efforts should also be created. An internal marketing coordinator can be useful if he or she is carefully supervised by the Marketing Committee. It is often best to team the internal coordinator with an outside consultant.

Attorneys should be businesslike about their own individual marketing efforts as well. For example, community activities specifically undertaken for business purposes should be reviewed for effectiveness. If the local Rotary Club now has more of the potential clients being sought than Kiwanis, it may make sense to resign from Kiwanis and join Rotary.

Better Client and Matter Selection

Before advertising your general practice on television or radio, or in specialty publications, consider that advertising demonstrably works for only a few practice areas – notably Personal Injury, Workers' Compensation, Matrimonial and some Estate Planning. Unless these are practice areas that you want to further develop, put those advertising dollars to better marketing use.

Avoid obviously unprofitable or otherwise troublesome new matters. Don't fool yourself with the following common rationalizations for taking on problematic work:

• “If I don't take this client, I'll never get another one.”
• “If I take this unprofitable matter, the client will someday bring to me a profitable one.” (This client already gives his or her good work to a lawyer who is more selective than you are.)
• “If you represent me at a discount, I'll refer all my friends to you.” (They will also expect a discount.)

Weed out unprofitable clients ruthlessly. Just as weeds will choke out the good plants in your garden, non-paying or poor-paying clients will keep you from working for the profitable ones. Remember, you are ethically obligated not to neglect any client, but in most circumstances you can discontinue the attorney-client relationship.

Cross Selling

Cross selling of your firm's legal expertise is the least expensive marketing you will ever do. It is always easier and less costly to obtain new work from an existing client than to attempt to attract a new client. Therefore, every client should be asked about other possible legal needs from time to time, and always when an opportunity arises naturally. For example, contingent fee clients should be offered estate planning services when their settlement or verdict is collected.

Introduce your clients to other lawyers in the office who practice in areas your clients may need in the future, even if you don't perceive a need right now. Your client or the other lawyer may perceive the need after they've talked with each other.

Inquire even about practice areas outside your firm's areas of expertise. Identify the client's need, eg, ADA, ERISA, sexual harassment, or whatever, and refer him or her to a specialty practitioner. The specialist won't steal your client for matters your firm handles, and will refer others back to you. It requires no investment of money or time on your part.

Motivating Your Lawyers

Your lawyers must be motivated to cross-sell. The firm's compensation structure must encourage sharing and internal referral of clients; reward referrals internally just as you pay referral fees in appropriate circumstances to external referring lawyers. This discourages the hoarding of clients by the originating lawyer. Also, develop a tracking system and require lawyers to report periodically on cross-selling efforts.

Develop a cross-selling methodology along with some goals and techniques, and teach them to your lawyers. For example:

• Every lawyer will schedule at least one planned introduction a month between an existing client and a lawyer from a department that is not now servicing the client.
• Organize breakfast or lunch mini-seminars to acquaint existing clients with new legal developments in areas where you do not represent them. (You should already be doing this with legal areas where you do represent them.)
• Try to make a casual unscheduled introduction of each client to a lawyer in a different practice area whenever the client is in your offices.

Over time, methodical pursuit of these common-sense approaches will fortify your top line – the first and most important step in building and maintaining profitability.

Assertively Manage Billing, Receivables and Payables

The slogan, “Time is money” is nowhere truer than concerning billing and collection activities. Not only can one easily calculate the costs of delays, but the inescapable fact is that delays invariably lead to unnecessary write-offs and write-downs of unbilled time and receivables.

Billing, Write-offs and Write-downs

Some useful tips are:

• Adopt a procedure for automatic billing when a partner fails to act within a certain time period.
• Institute automatic statement letters to clients.
• Analyze firm write-offs and write-downs of both unbilled time and outstanding receivables. Look for patterns of questionable write-offs and write-downs in the data for each billing attorney, and address the reasons for such with the responsible partner.
• Bill at appropriate times, even if it is not the regular billing date. Bill immediately upon completion of a matter, whether the outcome was successful or not. Also, bill at appropriate intermediate steps, for example: a) when a deal is signed, even if the closing is coming later; b) when you have just won an important pre-trial motion, or discovered something valuable at depositions; and c) when an item of due diligence has just turned out to be favorable.
• Stagger billing dates for greater efficiency and more even cash flow, eg, alphabetically, by file number, by department, by billing attorney, etc.
• Where appropriate, stop work for a delinquent client, although there are many caveats that have to be considered before implementing action.
• Also, cash your checks! Make deposits every day instead of letting them accumulate.

Receivables

Attack your receivables early and often. Many financially successful firms use end-of-quarter and end-of-year bank reporting as an excuse to follow up on late payers.

Consider providing incentives to clients to pay dated bills, such as a one-time 25% discount credit for cleaning up accounts receivable and unbilled time that are more than 180 days old. Since extraordinary discounts of this type can set a problematic precedent, however, they should be offered by the individual lawyers who provided the services, and with the approval of the managing partner, the financial partner or the management committee. Further, these moneys should be utilized to fund certain of the firm's strategic planning activities or operations, not automatically distributed to the partners.

Depending upon the nature of your firm's practice, it may be prudent for you to accept credit cards. (This will apply primarily to firms with individual rather than business clients.)

Payables

Schedule your payables according to due dates, and take advantage of early payment discounts when appropriate. Be sure, of course, to pay your bills on time to avoid utility late charges and other automatic, largely non-discretionary fees that nibble at profitability.

Maintain alternate services where practical, eg, for office supplies, court reporters, equipment vendors, etc. This will make it more feasible for you to obtain payment deferrals, negotiate for lower prices and greater discounts, etc.

Unbundle Operating Costs from Bills for Fees

Whenever practicable, do not serve as your client's banker. Unless internal pressures or competitive practices justify advancing money for clients, the client should be expected to pay directly for major cost items such as experts, extensive travel, etc. That is, the client should either pay these expenses out of pocket or else pay them to the firm as an advance deposit.

Every effort should be made to recapture various operating costs as separate billable items, assuming you have not already incorporated those costs in your base rates. For example, the following “cash out” items should be billed at 100%: outside printing, outside messengers, automated databases, local transportation, mailings, etc. The following may be billed at other than 100%: photocopying, Lexis/Westlaw, in-house messengers, telephone, etc.

The justification for charging clients for the recapture of some automation capital outlays which give lawyers and secretaries word processing capability is that the efficiencies of automation enable the attorney to complete a client project in less time. The client benefits by lower hourly charges for legal services, even counting somewhat increased secretarial charges for automation.

Manage Alternative Billing Methods for Profitability

Alternative billing methods can have a major impact on profitability – for better or worse, depending on how you manage the use of those methods. For an extensive survey and discussion of such management considerations, please see the front-page article on that subject in the August 2003 edition of this newsletter.

Part one of a two-part article

In today's competitive environment, the profitability challenge to law firms is to increase profits while reducing clients' legal fees. This two-part article provides dozens of specific, workable ideas for enhancing profitability, leaving aside the played-out (and problematic) methods of working longer hours and raising hourly rates.

This month's article offers ideas in the following categories, which together offer the greatest opportunities for profitability enhancement.

1. Expand Your Client Base

2. Assertively Manage Billing, Receivables and Payables

3. Unbundle Operating Costs from Bills for Fees

4. Manage Alternative Billing for Profitability

Next month's conclusion of the article will describe a variety of other profitability measures you may also wish to pursue.

Ideas for Improving the Top Line

Expanding Your Client Base

Perhaps the single most important initiative to increase profitability is the successful marketing of your law firm. This entails that you assure, to the maximal extent possible, a commitment on the part of your partners to seek new sources of profitable business.

Depending on the methods of marketing planned, the buy-in required of partners can vary significantly. The firm must determine whether its principal marketing focus will be individually, departmentally or holistically driven or, of course, a combination of one or more of those possibilities. Also, the firm must establish an annual budget for marketing and, in keeping with its goals and priorities, clearly define how and by whom the money will be expended.

Each practice area should be asked to submit a proposal for marketing, based on views solicited from all partners within the practice area.

A sensible mechanism to monitor the marketing efforts should also be created. An internal marketing coordinator can be useful if he or she is carefully supervised by the Marketing Committee. It is often best to team the internal coordinator with an outside consultant.

Attorneys should be businesslike about their own individual marketing efforts as well. For example, community activities specifically undertaken for business purposes should be reviewed for effectiveness. If the local Rotary Club now has more of the potential clients being sought than Kiwanis, it may make sense to resign from Kiwanis and join Rotary.

Better Client and Matter Selection

Before advertising your general practice on television or radio, or in specialty publications, consider that advertising demonstrably works for only a few practice areas – notably Personal Injury, Workers' Compensation, Matrimonial and some Estate Planning. Unless these are practice areas that you want to further develop, put those advertising dollars to better marketing use.

Avoid obviously unprofitable or otherwise troublesome new matters. Don't fool yourself with the following common rationalizations for taking on problematic work:

• “If I don't take this client, I'll never get another one.”
• “If I take this unprofitable matter, the client will someday bring to me a profitable one.” (This client already gives his or her good work to a lawyer who is more selective than you are.)
• “If you represent me at a discount, I'll refer all my friends to you.” (They will also expect a discount.)

Weed out unprofitable clients ruthlessly. Just as weeds will choke out the good plants in your garden, non-paying or poor-paying clients will keep you from working for the profitable ones. Remember, you are ethically obligated not to neglect any client, but in most circumstances you can discontinue the attorney-client relationship.

Cross Selling

Cross selling of your firm's legal expertise is the least expensive marketing you will ever do. It is always easier and less costly to obtain new work from an existing client than to attempt to attract a new client. Therefore, every client should be asked about other possible legal needs from time to time, and always when an opportunity arises naturally. For example, contingent fee clients should be offered estate planning services when their settlement or verdict is collected.

Introduce your clients to other lawyers in the office who practice in areas your clients may need in the future, even if you don't perceive a need right now. Your client or the other lawyer may perceive the need after they've talked with each other.

Inquire even about practice areas outside your firm's areas of expertise. Identify the client's need, eg, ADA, ERISA, sexual harassment, or whatever, and refer him or her to a specialty practitioner. The specialist won't steal your client for matters your firm handles, and will refer others back to you. It requires no investment of money or time on your part.

Motivating Your Lawyers

Your lawyers must be motivated to cross-sell. The firm's compensation structure must encourage sharing and internal referral of clients; reward referrals internally just as you pay referral fees in appropriate circumstances to external referring lawyers. This discourages the hoarding of clients by the originating lawyer. Also, develop a tracking system and require lawyers to report periodically on cross-selling efforts.

Develop a cross-selling methodology along with some goals and techniques, and teach them to your lawyers. For example:

• Every lawyer will schedule at least one planned introduction a month between an existing client and a lawyer from a department that is not now servicing the client.
• Organize breakfast or lunch mini-seminars to acquaint existing clients with new legal developments in areas where you do not represent them. (You should already be doing this with legal areas where you do represent them.)
• Try to make a casual unscheduled introduction of each client to a lawyer in a different practice area whenever the client is in your offices.

Over time, methodical pursuit of these common-sense approaches will fortify your top line – the first and most important step in building and maintaining profitability.

Assertively Manage Billing, Receivables and Payables

The slogan, “Time is money” is nowhere truer than concerning billing and collection activities. Not only can one easily calculate the costs of delays, but the inescapable fact is that delays invariably lead to unnecessary write-offs and write-downs of unbilled time and receivables.

Billing, Write-offs and Write-downs

Some useful tips are:

• Adopt a procedure for automatic billing when a partner fails to act within a certain time period.
• Institute automatic statement letters to clients.
• Analyze firm write-offs and write-downs of both unbilled time and outstanding receivables. Look for patterns of questionable write-offs and write-downs in the data for each billing attorney, and address the reasons for such with the responsible partner.
• Bill at appropriate times, even if it is not the regular billing date. Bill immediately upon completion of a matter, whether the outcome was successful or not. Also, bill at appropriate intermediate steps, for example: a) when a deal is signed, even if the closing is coming later; b) when you have just won an important pre-trial motion, or discovered something valuable at depositions; and c) when an item of due diligence has just turned out to be favorable.
• Stagger billing dates for greater efficiency and more even cash flow, eg, alphabetically, by file number, by department, by billing attorney, etc.
• Where appropriate, stop work for a delinquent client, although there are many caveats that have to be considered before implementing action.
• Also, cash your checks! Make deposits every day instead of letting them accumulate.

Receivables

Attack your receivables early and often. Many financially successful firms use end-of-quarter and end-of-year bank reporting as an excuse to follow up on late payers.

Consider providing incentives to clients to pay dated bills, such as a one-time 25% discount credit for cleaning up accounts receivable and unbilled time that are more than 180 days old. Since extraordinary discounts of this type can set a problematic precedent, however, they should be offered by the individual lawyers who provided the services, and with the approval of the managing partner, the financial partner or the management committee. Further, these moneys should be utilized to fund certain of the firm's strategic planning activities or operations, not automatically distributed to the partners.

Depending upon the nature of your firm's practice, it may be prudent for you to accept credit cards. (This will apply primarily to firms with individual rather than business clients.)

Payables

Schedule your payables according to due dates, and take advantage of early payment discounts when appropriate. Be sure, of course, to pay your bills on time to avoid utility late charges and other automatic, largely non-discretionary fees that nibble at profitability.

Maintain alternate services where practical, eg, for office supplies, court reporters, equipment vendors, etc. This will make it more feasible for you to obtain payment deferrals, negotiate for lower prices and greater discounts, etc.

Unbundle Operating Costs from Bills for Fees

Whenever practicable, do not serve as your client's banker. Unless internal pressures or competitive practices justify advancing money for clients, the client should be expected to pay directly for major cost items such as experts, extensive travel, etc. That is, the client should either pay these expenses out of pocket or else pay them to the firm as an advance deposit.

Every effort should be made to recapture various operating costs as separate billable items, assuming you have not already incorporated those costs in your base rates. For example, the following “cash out” items should be billed at 100%: outside printing, outside messengers, automated databases, local transportation, mailings, etc. The following may be billed at other than 100%: photocopying, Lexis/Westlaw, in-house messengers, telephone, etc.

The justification for charging clients for the recapture of some automation capital outlays which give lawyers and secretaries word processing capability is that the efficiencies of automation enable the attorney to complete a client project in less time. The client benefits by lower hourly charges for legal services, even counting somewhat increased secretarial charges for automation.

Manage Alternative Billing Methods for Profitability

Alternative billing methods can have a major impact on profitability – for better or worse, depending on how you manage the use of those methods. For an extensive survey and discussion of such management considerations, please see the front-page article on that subject in the August 2003 edition of this newsletter.