Client Profiling and Segmentation

Until recently, law firm management has been largely indifferent to focusing on business development as an area of scrutiny in which measurable success could be achieved. Instead, many law firms chose to rely on anecdotal and institutional knowledge of “what works” to drive their strategy of finding, retaining, and growing billable hours. While this approach may work well when times are good, it is somewhat contradictory when times are bad (i.e., “what works” is no longer working). Thus, as firms have experienced rather tumultuous fortunes in the last two years and a reduction in billable hours, more and more firm managers have taken a hard look at the business development function and allowed those within these departments to expand and adapt their focus. This has led to a greater need for information and a new outlook on how business development managers look at their law firms.

One of the biggest changes (and improvements) for business development departments and their firms is the increased focus on analysis to segment their clients into meaningful groups. This does not refer to simply generating lists of your current top-producing clients (although that is important), but rather driving deeper to profile clients and group them into segments based on similar behavioral patterns. By examining these similarities and the actions the law firm took in dealing with these clients, a manager can derive usable strategies to encourage similar outcomes from both new and existing clients who are not providing the same level of value to the firm. This practice enables law firms to concentrate their limited resources on tasks that have specific and immediate actions.

Client Profiling

While the idea of profiling clients is not a new one, a more recent adaptation is concentrating not only on the client-specific traits, but also on how you as a firm have managed the relationship over its lifetime. In doing so, a firm can gain a better understanding of what it does well and how. In essence, the process involves looking at a client's lifetime value (“LTV”), finding clients with similar trends in their immediate and prior history with the firm, and grouping those clients together. This requires thinking about your client base differently and focusing not only on how your clients look today, but also focusing on what they looked like two, five, 10, even 25 years ago.

To help simplify the output of this process, quadrants to segment clients into common client groupings are often used. A study performed initially by The Redwood Think Tank provided deeper explanation of methodology and practice of Client Profiling Services ["What Do You Really Know About Your Best Clients?" at www.lexisnexis.com/redwood-analytics/pdf/Best_Client.pdf by Kris Satkunas]. It was subsequently used in numerous analyses within top AMLAW 200 law firms. Clients were broken into four vectors based on weighted average hours over the last five years and the consistency (relative standard deviation) in how these hours were delivered over that time period. Additionally, within each of these quadrants, clients were broken out further into sub-quadrants to provide a greater level of detail (see example in Figure 1, below). The goal was to quickly identify those clients who were both stable and provided high value to the firm, as well as those who may one day move into that category. Quadrant divisions yielded the results set forth in Figure 1.

[IMGCAP(1)]

To see how this type of segmentation may differ from a simple top client list, examine the following situation set forth in Table 1, below. A firm has two clients, Client 'A' and Client 'B'. Both are top 50 clients in terms of billable hours in the last 12 months and have provided approximately 8,000 total hours over the last 60 months.

[IMGCAP(2)]

The significant difference is that Client 'A' is a well cross-sold client who provides consistent, high levels of work every year (over the last five years) whereas Client 'B' is a Corporate Litigation client who is considerably less consistent. While both of these clients are providing the firm with a considerable amount of work currently, and have provided a significant amount of hours in the recent past, Client 'A' would be considered a much more stable and consistent client. In this example, Client 'A' falls within Quadrant 1, whereas Client 'B' slips to Quadrant 2.

Utilizing Client Segmentation

Once clients have been identified, the first step in utilizing client segmentation is to focus on the breakdown of the individual firm and focus on potential avenues of risk. For example, consider the unsteady level of work inherent in Quadrant 2 clients, year over year: If this segment makes up a large portion of a firm's billable hours base, it may be cause for a concern. On the other hand, since new clients to the firm are not yet consistent (since they are immature to the firm) there may be several large clients who fall into Quadrant 2 that remain considerable opportunities to grow into Quadrant 1 clients as we move forward. In fact, Quadrant 2 clients can be categorized into one of six subcategories:

• New ' Clients who fall into Quadrant 2 due to lack of history;
• Volume Growth ' Clients who are inconsistent due to exponential growth in recent history;
• Volume Decline ' Clients who are inconsistent due to significant declines of work in recent history;
• Varying Volume (Infrequent Need) ' Clients with few matters over their history;
• Varying Volume (No Breadth) ' Clients who provide periodic work over time, but do not have a steady need for the type of work we are providing (ex. Litigation-only clients); and
• Varying Volume (Other) ' Clients who have work in several areas but have had significant volatility for reasons other than those above.

Understanding where a client falls into each of these categories provides for a more detailed and structured plan to address the opportunity and risk associated with that client when necessary. While the majority of a firm's efforts will be looking at Quadrant 2, it should be noted that those in Quadrants 3 and 4 may provide many future opportunities as well. However, because of the large disparity in hours that can reside in these Quadrants, it is recommended that attention be directed only on the largest (or upper sub-quadrants) of these categories. The law firm must take into account that, although possible, the vast majority of smaller clients remain that way, and it is rare to have significant movement from the lower quadrants to the upper echelons. [Many firms are enamored with the concept of "Acorns," or clients that have grown from a very small client into a large, thriving client. In truth, Acorns are extremely rare and the probability of achieving significant hours from a client that comes in with few hours is negligible. For more information on this subject, I encourage you to read: Ron Paquette, "Cracking the Acorn Theory: Do Small Clients Grow To Be Big Clients?" Strategies: The Journal of Legal Marketing, Sept. 2007, at www.lexisnexis.com/redwood-analytics/pdf/acorn%20theory%20article.pdf.]

Understanding the Firm's Past Actions

Understanding and categorizing clients into similar categories helps funnel out the noise from the true opportunities. However, simply listing those opportunities is not enough. The next step must be to use the vast amount of information that has been gathered by law firms to devise executable plans that can be employed. One such way to do this is to use the clients that have been successful, in this case Quadrant 1 clients, and determine what, if anything, the firm did to encourage this success. This requires a view back at each client's history to follow its life cycles and see what path it took to get to its current position. The goal of this analysis is to find specific actions the firm can replicate with other firms going forward.

Take our initial example with clients 'A' and 'B'. If we look a little further back into the past of Client 'A', we see that like Client 'B', it also started out as a Corporate Litigation client and that within two years had been introduced to several other types of work (Real Estate, Tax, and Intellectual Property) (see Figure 2, below). As well, by looking at other clients who have had significant Corporate Litigation work early in their life with the firm, those who have been introduced to Tax work within a certain amount of time are 300% more likely to become large institutionalized clients than those who are not.

[IMGCAP(3)]

In this scenario, the law firm manager is now armed with information to form a specific action plan and marshal the firm's resources to take advantage of this information both with client 'B' and other clients that also have similar backgrounds. Taking advantage of client segmentations, we can continue to look at other variables such as different practice area pairings, partner involvement, realization factors, individual partner work, etc., of our top-producing clients over time to determine what the firm can do to promote similar success among other clients.

Putting It All Together

The ability to develop numerous executable and measurable plans to drive forward business development is of utmost importance in today's law firms. The business climate has cooled considerably in recent years, and it remains difficult to cultivate long-term, sustainable clients. The first step is to truly understand who your best clients are and how they got there. Then, once this is understood, replicate that success, again and again and again. By profiling current clients and looking back over the years of data accumulated, law firms have an abundance of experience to determine what works and what does not. The key is to set up a systemized approach to extract that data. With limited resources, the room for error is small. Law firms need to ensure they are making decisions based on what actually happened (and is happening), not simply by gut feel alone. Institutional knowledge and experience is an important factor when it comes down to making specific decisions on specific clients, but to target the real opportunities efficiently across your entire client base requires a firm to funnel those clients down into manageable parts.

Firms are beginning to process and utilize the information at their fingertips more efficiently. In order to keep up in a swiftly changing industry, law firms need to manage themselves based on proven metrics. Business development is no exception. By looking at what has been done successfully and using those practices in a wide scale, law firms can enjoy better results from their clients, which leads to more hours and happier partners.

Derek Schutz is a member of this newsletter's Board of Editors and is the Director of Programs/Services for the Business of Law Group at Redwood/LexisNexis. He can be reached at [email protected].

Until recently, law firm management has been largely indifferent to focusing on business development as an area of scrutiny in which measurable success could be achieved. Instead, many law firms chose to rely on anecdotal and institutional knowledge of “what works” to drive their strategy of finding, retaining, and growing billable hours. While this approach may work well when times are good, it is somewhat contradictory when times are bad (i.e., “what works” is no longer working). Thus, as firms have experienced rather tumultuous fortunes in the last two years and a reduction in billable hours, more and more firm managers have taken a hard look at the business development function and allowed those within these departments to expand and adapt their focus. This has led to a greater need for information and a new outlook on how business development managers look at their law firms.

One of the biggest changes (and improvements) for business development departments and their firms is the increased focus on analysis to segment their clients into meaningful groups. This does not refer to simply generating lists of your current top-producing clients (although that is important), but rather driving deeper to profile clients and group them into segments based on similar behavioral patterns. By examining these similarities and the actions the law firm took in dealing with these clients, a manager can derive usable strategies to encourage similar outcomes from both new and existing clients who are not providing the same level of value to the firm. This practice enables law firms to concentrate their limited resources on tasks that have specific and immediate actions.

Client Profiling

While the idea of profiling clients is not a new one, a more recent adaptation is concentrating not only on the client-specific traits, but also on how you as a firm have managed the relationship over its lifetime. In doing so, a firm can gain a better understanding of what it does well and how. In essence, the process involves looking at a client's lifetime value (“LTV”), finding clients with similar trends in their immediate and prior history with the firm, and grouping those clients together. This requires thinking about your client base differently and focusing not only on how your clients look today, but also focusing on what they looked like two, five, 10, even 25 years ago.

To help simplify the output of this process, quadrants to segment clients into common client groupings are often used. A study performed initially by The Redwood Think Tank provided deeper explanation of methodology and practice of Client Profiling Services ["What Do You Really Know About Your Best Clients?" at www.lexisnexis.com/redwood-analytics/pdf/Best_Client.pdf by Kris Satkunas]. It was subsequently used in numerous analyses within top AMLAW 200 law firms. Clients were broken into four vectors based on weighted average hours over the last five years and the consistency (relative standard deviation) in how these hours were delivered over that time period. Additionally, within each of these quadrants, clients were broken out further into sub-quadrants to provide a greater level of detail (see example in Figure 1, below). The goal was to quickly identify those clients who were both stable and provided high value to the firm, as well as those who may one day move into that category. Quadrant divisions yielded the results set forth in Figure 1.

[IMGCAP(1)]

To see how this type of segmentation may differ from a simple top client list, examine the following situation set forth in Table 1, below. A firm has two clients, Client 'A' and Client 'B'. Both are top 50 clients in terms of billable hours in the last 12 months and have provided approximately 8,000 total hours over the last 60 months.

[IMGCAP(2)]

The significant difference is that Client 'A' is a well cross-sold client who provides consistent, high levels of work every year (over the last five years) whereas Client 'B' is a Corporate Litigation client who is considerably less consistent. While both of these clients are providing the firm with a considerable amount of work currently, and have provided a significant amount of hours in the recent past, Client 'A' would be considered a much more stable and consistent client. In this example, Client 'A' falls within Quadrant 1, whereas Client 'B' slips to Quadrant 2.

Utilizing Client Segmentation

Once clients have been identified, the first step in utilizing client segmentation is to focus on the breakdown of the individual firm and focus on potential avenues of risk. For example, consider the unsteady level of work inherent in Quadrant 2 clients, year over year: If this segment makes up a large portion of a firm's billable hours base, it may be cause for a concern. On the other hand, since new clients to the firm are not yet consistent (since they are immature to the firm) there may be several large clients who fall into Quadrant 2 that remain considerable opportunities to grow into Quadrant 1 clients as we move forward. In fact, Quadrant 2 clients can be categorized into one of six subcategories:

• New ' Clients who fall into Quadrant 2 due to lack of history;
• Volume Growth ' Clients who are inconsistent due to exponential growth in recent history;
• Volume Decline ' Clients who are inconsistent due to significant declines of work in recent history;
• Varying Volume (Infrequent Need) ' Clients with few matters over their history;
• Varying Volume (No Breadth) ' Clients who provide periodic work over time, but do not have a steady need for the type of work we are providing (ex. Litigation-only clients); and
• Varying Volume (Other) ' Clients who have work in several areas but have had significant volatility for reasons other than those above.

Understanding where a client falls into each of these categories provides for a more detailed and structured plan to address the opportunity and risk associated with that client when necessary. While the majority of a firm's efforts will be looking at Quadrant 2, it should be noted that those in Quadrants 3 and 4 may provide many future opportunities as well. However, because of the large disparity in hours that can reside in these Quadrants, it is recommended that attention be directed only on the largest (or upper sub-quadrants) of these categories. The law firm must take into account that, although possible, the vast majority of smaller clients remain that way, and it is rare to have significant movement from the lower quadrants to the upper echelons. [Many firms are enamored with the concept of "Acorns," or clients that have grown from a very small client into a large, thriving client. In truth, Acorns are extremely rare and the probability of achieving significant hours from a client that comes in with few hours is negligible. For more information on this subject, I encourage you to read: Ron Paquette, "Cracking the Acorn Theory: Do Small Clients Grow To Be Big Clients?" Strategies: The Journal of Legal Marketing, Sept. 2007, at www.lexisnexis.com/redwood-analytics/pdf/acorn%20theory%20article.pdf.]

Understanding the Firm's Past Actions

Understanding and categorizing clients into similar categories helps funnel out the noise from the true opportunities. However, simply listing those opportunities is not enough. The next step must be to use the vast amount of information that has been gathered by law firms to devise executable plans that can be employed. One such way to do this is to use the clients that have been successful, in this case Quadrant 1 clients, and determine what, if anything, the firm did to encourage this success. This requires a view back at each client's history to follow its life cycles and see what path it took to get to its current position. The goal of this analysis is to find specific actions the firm can replicate with other firms going forward.

Take our initial example with clients 'A' and 'B'. If we look a little further back into the past of Client 'A', we see that like Client 'B', it also started out as a Corporate Litigation client and that within two years had been introduced to several other types of work (Real Estate, Tax, and Intellectual Property) (see Figure 2, below). As well, by looking at other clients who have had significant Corporate Litigation work early in their life with the firm, those who have been introduced to Tax work within a certain amount of time are 300% more likely to become large institutionalized clients than those who are not.

[IMGCAP(3)]

In this scenario, the law firm manager is now armed with information to form a specific action plan and marshal the firm's resources to take advantage of this information both with client 'B' and other clients that also have similar backgrounds. Taking advantage of client segmentations, we can continue to look at other variables such as different practice area pairings, partner involvement, realization factors, individual partner work, etc., of our top-producing clients over time to determine what the firm can do to promote similar success among other clients.

Putting It All Together

The ability to develop numerous executable and measurable plans to drive forward business development is of utmost importance in today's law firms. The business climate has cooled considerably in recent years, and it remains difficult to cultivate long-term, sustainable clients. The first step is to truly understand who your best clients are and how they got there. Then, once this is understood, replicate that success, again and again and again. By profiling current clients and looking back over the years of data accumulated, law firms have an abundance of experience to determine what works and what does not. The key is to set up a systemized approach to extract that data. With limited resources, the room for error is small. Law firms need to ensure they are making decisions based on what actually happened (and is happening), not simply by gut feel alone. Institutional knowledge and experience is an important factor when it comes down to making specific decisions on specific clients, but to target the real opportunities efficiently across your entire client base requires a firm to funnel those clients down into manageable parts.

Firms are beginning to process and utilize the information at their fingertips more efficiently. In order to keep up in a swiftly changing industry, law firms need to manage themselves based on proven metrics. Business development is no exception. By looking at what has been done successfully and using those practices in a wide scale, law firms can enjoy better results from their clients, which leads to more hours and happier partners.

Derek Schutz is a member of this newsletter's Board of Editors and is the Director of Programs/Services for the Business of Law Group at Redwood/LexisNexis. He can be reached at [email protected].