Improving Law Firm Profitability Without Working Longer Hours or Raising Rates

By Joel A. Rose
November 01, 2003

Last month, in Part One of this article, I discussed three major approaches to enhancing law firm profitability: expanding your client base; assertively managing billing, receivables and payables; and unbundling operating costs from bills for fees. Previously, in the August 2003 edition of this newsletter, I described a fourth major profitability approach: management of alternative billing strategies.

This month's article concludes my overview of profitability improvement methods by summarizing ten more techniques:

5) Use Flex-time, Part-time and Other Attorney Staffing Options

6) Address the Issue of Underproductive Partners and Associates

7) Increase Specialization by Lawyers and Paralegals

8) Enhance Management of Substantive Practice Areas

9) Adopt New Systems, Methods and Technology

10) Expand the Use of Programmed Form Documents

11) Control Costs

12) Improve Banking Relationships

13) Modernize In-house Organizational Procedures and Controls

14) Manage Profitability Improvement as a Process

While virtually all firms can benefit from the four approaches covered previously, individual firms may find these additional approaches important to improving profitability.

Use Flex-Time and Part-Time

Where and when appropriate, the use of flex-time, part-time and temporary lawyers may allow a firm to call upon trained lawyers to work as needed. This reduces the firm's carrying costs for full-time attorneys and staff, including unproductive time due to seasonal workload fluctuations. Flex-time, part-time and temporary attorneys and staff lawyers also traditionally command lower salaries than full-time attorneys; and frequently there is neither a partner-track expectation nor a commitment to supply health care or other benefits.

Address the Issue of Under-Productive Partners and Associates

The productivity of every partner and associate should be subject to continuing scrutiny. Profits should be distributed and career advancement should be awarded to those who earn it, not those who merely stand the test of time. Partners and associates who no longer justify their compensation package should be counseled by lawyer management. Absent appropriate improvement in their performance, their salaries should be adjusted accordingly, and their career progression or even the continuity of their remaining in the firm should be reevaluated.

Increase Specialization by Lawyers and Paralegals

Today's social and economic climate demands specialization. Even smaller firms, when practical, should consider dividing legal work by substantive practice areas in accordance with the abilities and interests of each lawyer.

Lawyers who undertake to be general practitioners require too much additional time to acquaint themselves with each new unfamiliar area of law. That is not a cost-effective use of their efforts. (Further, lawyers should focus on complex legal issues and emerging fields of law; but it takes a knowledgeable practitioner to recognize which tasks can be delegated to competent paralegals.) Conversely, lawyers and paralegals who specialize in particular practice areas can work more efficiently and effectively, so they can charge higher fees and/or bill more clients.

Lawyer management in your firm should insist that work be assigned to the correct department and ideally to the individual lawyer who possesses the appropriate level of expertise. A personal injury lawyer should not write a will or handle a real estate closing, even if it is for a relative and is being done at a discount. Further, the firm's compensation system should reward referrals to the right specialist, and perhaps even penalize inappropriate retention of work by the originating lawyer.

Enhance Management of Substantive Practice Areas

Lawyer management should be able to rely upon the partners within each practice group to optimize attorney workload, staffing, rates, realization and billable hours within the group.

Partners in different groups must be attuned to the uniqueness of each practice area, and managing partners must be equally sensitive when comparing the groups with respect to profitability issues. Clearly, a practice group doing insurance defense litigation is going to have rates, billable requirements and activities that contrast sharply with those of a transactional group.

Adopt New Systems, Methods and Technology

In today's practice environment, it behooves lawyers to provide benefits to their clients and themselves by using modern hardware and software systems. Technology can substantively improve productivity, by helping attorneys and staff accomplish more and better work in a given time, retrieve and use prior work product more efficiently, etc.

To determine the extent to which hardware-software applications, people and practice systems can accomplish specific results, you will need to engage technical experts. But it's equally vital for lawyer management to guide the modernization process by setting goals and limits. Here are some basic questions management should use to frame planning discussions.

With hardware systems, how much technology can your firm profitably use: individual PCs? Handheld PCs? Office networks? Multi-office networks? Home-to-office capabilities?

Concerning software, which systems and user applications will most benefit your office? (The applications listed are just a few of the products available.)

Individual software packages: operating systems, phone lists, spreadsheets, time and billing, word processing, calendar, check writer, communications, Internet access, databases, mailing lists, etc.

Firm-wide software: accounting, on-line banking, case management, conflicts, disaster recovery, docket control, document production, file room, library, management reporting, new client intake, time and billing, local and wide-area networks, Web site/marketing, etc.

Hardware and software choices are of course heavily interrelated. An attorney may feel, for example, that s/he has little use for a standalone handheld or notebook computer; but the same attorney might consider the same device indispensable if it offered convenient, secure, wireless connectivity to a desired application on the office network.

In assessing the potential of technology to contribute to profitability, lawyers must determine where their firms are currently:

What do we actually do in our practice?
What do we want to do? (Or, what should we want to do?)
Can we get there with existing hardware, software, people and operating systems?
Do we have the means, technical skill, and organizational readiness to upgrade?
Should we upgrade as a single project, or compartmentalize and stretch the effort over a several-year period?
Have we analyzed compatibilities, training, financing?
Are consultants of various kinds appropriate at this time?
Should we outsource technology-related functions, either during upgrade projects or as an ongoing solution?

Expand the Use of Programmed Form Documents

Increase your firm's “library” of pre-approved programmed form documents. Encourage lawyers to share frequently used form documents. Formalize the process by having a departmental committee work with each lawyer's forms to create departmental standards where practical, and encourage your lawyers to submit examples of good work received from other firms for possible adaptation to your practice.

All standard or semi-standard forms should be entered into your computer system so that all document preparers can retrieve them easily. Be aware that the secretary's attitude will affect the lawyer's willingness to use a particular form, so make it easy for the secretary.

Circulate hard copy of existing forms to all potential users whenever there are revisions or additions. Lawyers can't use what they don't know exists. Further, to gain greater acceptance of the use of standard forms, be flexible with alternate language to suit each lawyer's style. It's better for a lawyer to use 80% of a standard form and craft 20% to his or her own liking than for the lawyer not to use it at all because the rules are too rigid.

Bill appropriately for form documents. You must be paid for development efforts, and it is both reasonable and proper to charge based on what the document is worth to the client, not for the few minutes it takes you to pull it from the computer. [Ed. note: Time-based billing needs to be accurate, of course, but attorneys can pursue this suggestion using appropriate elements of fixed-fee and value pricing. See the discussion of billing ethics in our October edition.]

Control Costs

After years of consulting to the legal profession, I find inescapable the conclusion that profitable firms are revenue driven: an hour spent deriving new revenues normally results in more profit to the lawyer than an hour spent reducing costs.

That said, law firms still need to employ standard cost-control techniques such as the following:

Budget ahead of scheduled activities.
Reduce interest charges by aligning recurring expenses as well as any substantial outlays ' eg, for purchases of capital equipment ' with the firm's cash flow pattern.
Centralize office purchasing to avoid the duplication of purchases and to take advantage of volume discounts.
Review performance against both budget and prior year expenses. Make these reviews with other lawyers and with administrative staff responsible for line items.
Compare your firm's initial and/or ongoing costs (salaries, rent, etc.) and financial performance with published surveys of firms your size. Remember, there is no “average” law firm. Your firm's costs will be higher than survey averages in some aspects and lower in others. Your analysis must be tailored to your practice. [Ed. note: For additional advice, see the three-part series on law firm surveys in our July-September editions.]

Exercise collective purchasing power. Negotiate for group rates – usually best done through your local or county bar association or legal administrator organization. Also consider joining with other law firms, and with other service firms.

Banks have become more difficult and expensive to deal with. Customer service for smaller accounts has taken a back seat to large commercial accounts, and smaller firms are feeling the pinch. Therefore, bank wisely: shop for the best banking relationships you can, using your escrow accounts, checking accounts, etc., as bargaining chips for favorable banking services, costs and marketing opportunities. Use possible client referrals as a further bargaining chip, and offer to use bank services for real estate closings, trusts, etc. [Ed. note: For detailed advice on bank financing of law firms, see the article on firm capitalization in our July edition.]

Modernize In-house Organizational Procedures and Controls

Law firms need to maintain up-to-date policies, standards and procedures. Many firms ' especially those undergoing rapid change as an economic entity ' specifically need to tighten their financial controls. Such firms should, for example:

Write a “Limits of Authority” statement for all – including partners – who have the right to sign checks or to commit the firm to any financial obligation.
Designate explicitly which individuals can hire and which can approve overtime.

Policies, standards and procedures can serve their purposes, however, only if the firm is properly organized for accountability. Like any other policy, your firm's decision to be more profitable needs to be backed up organizationally:

At the overall firm level, the managing partner, firm administrator and other management personnel need to attend to firm revenue and costs, to the operations of the various practice areas and offices, and to problems affecting profitability.
Multi-office firms need a hands-on managing attorney in each office to assume first-level responsibility for the profitability of that office.
Similarly, branch offices should be able to stand profitably on their own, or else serve some other significant function that benefits overall firm profitability. Offices that do neither must be identified, and then improved or eliminated.

Manage Profitability Improvement as a Process

Managing the overall array of strategies to enhance firm profitability is frequently more difficult than implementing the individual strategies themselves. Ideally, this challenging task of change management should be implemented through the firm's existing organizational structure, ie, the managing partner, the management committee, the strategic planning committee, heads of substantive practice areas, etc. For this reason, organizing for accountability (as discussed in the preceding subtopic) will in some firms require priority attention from top management ' even before more obviously profit-related improvements.

Once senior management has approved a profitability-improvement agenda and timetable, individual partners should be assigned responsibility and held accountable for the satisfactory implementation of each phase of the process. Partners responsible for the implementation phase should report to the managing partner, the management committee or other group designated to oversee the implementation process. Progress and problems should be reviewed routinely, and these assessments should be used to update the strategy as appropriate. Status reports on all improvement projects should be provided to all partners. Finally, in tracking these expenditures of effort, be sure to report on the gratifying result: improved profitability.

Joel A. Rose http://www.joelarose.com/