Fourteen Profitability Techniques Other Than More Hours and Higher Rates

Cross-selling of your firm's legal expertise is the least expensive type of marketing that 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 do things your clients may need in the future, even if you don't perceive a need right now.

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.

2) Better Management of Billing, Receivables and Payables

Some useful tips are: Adopt a procedure for automatic billing when a partner fails to act within a certain period of time. Institute automatic statement letters to clients. Analyze firm write-offs and write-downs of both unbilled time and outstanding receivables by billing attorneys, looking for patterns, and address reasons for such write-offs and write-downs 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 successful or not, and at appropriate intermediate steps. Stagger billing dates for greater efficiency and more even cash flow, i.e., 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, make deposits every day instead of letting them accumulate.

Schedule your payables according to due dates and take advantage of early payment discounts, when appropriate. Use available payment deferrals, and negotiate for lower prices and greater discounts.

Attack your receivables early and often. Further, provide incentives to clients to pay dated bills, such as a one-time, 25% discount credit for cleaning-up of accounts receivable and unbilled time, that are more than 180 days old. This extraordinary action plan should be undertaken by the individual lawyers who provided the services, with the approval of the managing partner, the financial partner or the management committee. These monies should be utilized to fund certain of the firm's strategic planning activities or operations, not automatically distributed to the partners.

3) Unbundling Operating Costs from Bills for Fees

Unless internal pressures or competitive practices justify advancing money for clients, the client should be expected to pay out-of-pocket expenses directly (or to the firm as an advance deposit) for major cost items such as experts, extensive travel, etc. Every effort should be made to recapture various operating costs as separate billable items.

4) Using Alternative Fee Arrangements

Demands of some clients and competition among law firms are causing fairly dramatic changes in the pricing of legal services, away from straight hourly billing, i.e., task-based billing, contingent fees, modified hourly rate with a success factor, fixed-fee or combinations of the above. One key to pricing legal services effectively is to understand what the client values most in the engagement: Is it highly specialized expertise? Is it labor (i.e., is this an engagement many firms can handle and the client is looking for inexpensive labor)? Is it speed of production? Is it the reputation and credibility of the firm? Is it a contact or connection? Or is it risk sharing? What the client wants and needs will generally frame how legal services for the engagement can be fairly priced.

5) Attorney Staffing: Flex-Time, Part-Time and Other Options

Where and when appropriate, flex-time, part-time and temporary lawyers may allow a firm to call upon trained lawyers to work as needed, and reduce the amount of unproductive time, seasonal fluctuations and expensive carrying costs for attorneys and staff. Also, there is frequently no need for health care or benefits or partner track.

6) Partnership Track: Addressing the Issue of Less-Than-Productive
Partners and Associates

Every partner and associate should be subject to continuing scrutiny. 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 and/or the continuity of their affiliation with the firm should be re-evaluated.

7) Exploit New Systems, Methods and Technology

In today's practice environment, it behooves lawyers to determine whether they can substantively improve their practice, accomplish more work in a given time, do a better job in the same time, retrieve and use prior work product more efficiently, and in short, provide benefits to their clients and themselves by using modern hardware systems and software.

8) Increase Specialization By Lawyers and Paralegals

Today's social and economic climate is no longer practical for the general practitioner. Lawyers and paralegals who have specialized in particular practice areas should have the capability to work more efficiently and effectively, produce a higher-quality work product faster, and presumably can charge higher fees. Even in smaller firms, when practical, it may be beneficial to divide up the legal work by substantive practice areas, the ability and interest of each lawyer.

Lawyer management should insist that work be assigned to the correct department or lawyer who possesses the appropriate level of expertise in your firm. Further, the firm's compensation system should reward referrals to the right specialist, and perhaps even punish inappropriate retention of work by the originating lawyer.

9) Enhanced Management of Substantive Practice Areas

Lawyer management should be able to rely upon those partners within discrete practice groups to deal with issues of attorney workload, staffing, rates, realization and billable hours within the group. Partners within the practice group must be sensitive to the distinction, and managing partners must be equally sensitive to this distinction in addressing profitability issues.

10) Controlling Costs

Following are some of the standard techniques for controlling law firm costs: budget ahead of scheduled activities; time expenses to match firm initiatives and strategies for achieving particular objectives; centralize office purchasing; review performance against both budget and prior-year expenses; make these reviews with other lawyers and/or administrative staff responsible for line items; and compare ongoing performance and/or starting conditions, i.e., salaries, rent, etc., with published surveys. Remember, there is no average law firm. Your analysis must be tailored to your practice.

11) Modernize In-House Organizational Procedures and Controls

There is an absolute need for the managing partner, firm administrator and other management personnel for the whole firm to give attention to the above recommendations to enhance firm revenue and profitability, to give attention to the operations of the various practice areas and offices, and to avoid ignoring problems that may adversely affect profitability. These organizational control steps are the only way in which some law firms may maintain control over cost elements in a rapidly changing economic entity. Write a Limits of Authority statement for all who have the right to sign checks or commit the firm to any financial obligations, including partners; and designate those individuals who can hire and approve overtime.

12) Improve Banking Relationships

Bank wisely. Shop for the best banking relationships you can, using your escrow accounts, checking accounts, etc., as a bargaining chip 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.

13) 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 use in your practice.

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 form because he or she may craft 20% to their own liking than for the lawyer not to use it at all because the rules are too rigid.

14) Profitability and e-Discovery

In effect, the advent of alternative fee arrangements and e-discovery has provided the “perfect storm” where incentives to form alternative fee arrangements have increased as parties face the potential costs of e-discovery and the need for e-discovery experts and vendors to handle the discovery of electronically stored information in litigation. The introduction of e-discovery costs may require that law firms and e-discovery vendors join together to capitalize on inherent efficiencies to offer electronically stored information discovery services for lower costs. The law firm/third-party e-discovery expert/e-discovery vendor nexus has led several of our law firm clients to cut deals with the team working together.

One of the biggest costs regarding electronically stored information is the screening of the stored information held by the vendor and produced by the law firm. Long-term vendor or vendor team relationships, to the extent that they may be maintained for a sufficient amount of time or over a series of matters or projects, may bring with them lower transaction costs and allow outside counsel to negotiate for better work at discounted rates.

Joel A. Rose, a member of this newsletter's Board of Editors, is a certified management consultant and president of Joel A. Rose & Associates, Inc., Management Consultants to Law Offices, in Cherry Hill, NJ. He has extensive experience consulting with private law firms, and performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, mergers and acquisitions, and legal services marketing. He has extensive experience planning and conducting retreats, and special expertise resolving problems within firms. Rose may be contacted at 856-427-0050 and [email protected].

The new challenge for law firms today is finding ways to increase profits and reduce clients' legal fees. This article describes 14 approaches to enhancing profitability other than working more hours and charging higher hourly rates.

1) Marketing: Expand Client Base Through Better Client and Matter Selection and Cross-Selling

The first and perhaps the most important initiative to increase profitability is the successful marketing of your law firm to 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 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 these 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 shall be spent. Each practice area should be asked to submit a proposal for marketing with views having been solicited from all partners within the practice area, and a mechanism to monitor the marketing efforts should be sensibly created. An internal marketing coordinator can be very useful, but must be carefully supervised by the Marketing Committee and might be best executed with the assistance of an outside consultant.

Cross-selling of your firm's legal expertise is the least expensive type of marketing that 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 do things your clients may need in the future, even if you don't perceive a need right now.

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.

2) Better Management of Billing, Receivables and Payables

Some useful tips are: Adopt a procedure for automatic billing when a partner fails to act within a certain period of time. Institute automatic statement letters to clients. Analyze firm write-offs and write-downs of both unbilled time and outstanding receivables by billing attorneys, looking for patterns, and address reasons for such write-offs and write-downs 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 successful or not, and at appropriate intermediate steps. Stagger billing dates for greater efficiency and more even cash flow, i.e., 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, make deposits every day instead of letting them accumulate.

Schedule your payables according to due dates and take advantage of early payment discounts, when appropriate. Use available payment deferrals, and negotiate for lower prices and greater discounts.

Attack your receivables early and often. Further, provide incentives to clients to pay dated bills, such as a one-time, 25% discount credit for cleaning-up of accounts receivable and unbilled time, that are more than 180 days old. This extraordinary action plan should be undertaken by the individual lawyers who provided the services, with the approval of the managing partner, the financial partner or the management committee. These monies should be utilized to fund certain of the firm's strategic planning activities or operations, not automatically distributed to the partners.

3) Unbundling Operating Costs from Bills for Fees

Unless internal pressures or competitive practices justify advancing money for clients, the client should be expected to pay out-of-pocket expenses directly (or to the firm as an advance deposit) for major cost items such as experts, extensive travel, etc. Every effort should be made to recapture various operating costs as separate billable items.

4) Using Alternative Fee Arrangements

Demands of some clients and competition among law firms are causing fairly dramatic changes in the pricing of legal services, away from straight hourly billing, i.e., task-based billing, contingent fees, modified hourly rate with a success factor, fixed-fee or combinations of the above. One key to pricing legal services effectively is to understand what the client values most in the engagement: Is it highly specialized expertise? Is it labor (i.e., is this an engagement many firms can handle and the client is looking for inexpensive labor)? Is it speed of production? Is it the reputation and credibility of the firm? Is it a contact or connection? Or is it risk sharing? What the client wants and needs will generally frame how legal services for the engagement can be fairly priced.

5) Attorney Staffing: Flex-Time, Part-Time and Other Options

Where and when appropriate, flex-time, part-time and temporary lawyers may allow a firm to call upon trained lawyers to work as needed, and reduce the amount of unproductive time, seasonal fluctuations and expensive carrying costs for attorneys and staff. Also, there is frequently no need for health care or benefits or partner track.

6) Partnership Track: Addressing the Issue of Less-Than-Productive
Partners and Associates

Every partner and associate should be subject to continuing scrutiny. 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 and/or the continuity of their affiliation with the firm should be re-evaluated.

7) Exploit New Systems, Methods and Technology

In today's practice environment, it behooves lawyers to determine whether they can substantively improve their practice, accomplish more work in a given time, do a better job in the same time, retrieve and use prior work product more efficiently, and in short, provide benefits to their clients and themselves by using modern hardware systems and software.

8) Increase Specialization By Lawyers and Paralegals

Today's social and economic climate is no longer practical for the general practitioner. Lawyers and paralegals who have specialized in particular practice areas should have the capability to work more efficiently and effectively, produce a higher-quality work product faster, and presumably can charge higher fees. Even in smaller firms, when practical, it may be beneficial to divide up the legal work by substantive practice areas, the ability and interest of each lawyer.

Lawyer management should insist that work be assigned to the correct department or lawyer who possesses the appropriate level of expertise in your firm. Further, the firm's compensation system should reward referrals to the right specialist, and perhaps even punish inappropriate retention of work by the originating lawyer.

9) Enhanced Management of Substantive Practice Areas

Lawyer management should be able to rely upon those partners within discrete practice groups to deal with issues of attorney workload, staffing, rates, realization and billable hours within the group. Partners within the practice group must be sensitive to the distinction, and managing partners must be equally sensitive to this distinction in addressing profitability issues.

10) Controlling Costs

Following are some of the standard techniques for controlling law firm costs: budget ahead of scheduled activities; time expenses to match firm initiatives and strategies for achieving particular objectives; centralize office purchasing; review performance against both budget and prior-year expenses; make these reviews with other lawyers and/or administrative staff responsible for line items; and compare ongoing performance and/or starting conditions, i.e., salaries, rent, etc., with published surveys. Remember, there is no average law firm. Your analysis must be tailored to your practice.

11) Modernize In-House Organizational Procedures and Controls

There is an absolute need for the managing partner, firm administrator and other management personnel for the whole firm to give attention to the above recommendations to enhance firm revenue and profitability, to give attention to the operations of the various practice areas and offices, and to avoid ignoring problems that may adversely affect profitability. These organizational control steps are the only way in which some law firms may maintain control over cost elements in a rapidly changing economic entity. Write a Limits of Authority statement for all who have the right to sign checks or commit the firm to any financial obligations, including partners; and designate those individuals who can hire and approve overtime.

12) Improve Banking Relationships

Bank wisely. Shop for the best banking relationships you can, using your escrow accounts, checking accounts, etc., as a bargaining chip 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.

13) 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 use in your practice.

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 form because he or she may craft 20% to their own liking than for the lawyer not to use it at all because the rules are too rigid.

14) Profitability and e-Discovery

In effect, the advent of alternative fee arrangements and e-discovery has provided the “perfect storm” where incentives to form alternative fee arrangements have increased as parties face the potential costs of e-discovery and the need for e-discovery experts and vendors to handle the discovery of electronically stored information in litigation. The introduction of e-discovery costs may require that law firms and e-discovery vendors join together to capitalize on inherent efficiencies to offer electronically stored information discovery services for lower costs. The law firm/third-party e-discovery expert/e-discovery vendor nexus has led several of our law firm clients to cut deals with the team working together.

One of the biggest costs regarding electronically stored information is the screening of the stored information held by the vendor and produced by the law firm. Long-term vendor or vendor team relationships, to the extent that they may be maintained for a sufficient amount of time or over a series of matters or projects, may bring with them lower transaction costs and allow outside counsel to negotiate for better work at discounted rates.

Joel A. Rose, a member of this newsletter's Board of Editors, is a certified management consultant and president of Joel A. Rose & Associates, Inc., Management Consultants to Law Offices, in Cherry Hill, NJ. He has extensive experience consulting with private law firms, and performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, mergers and acquisitions, and legal services marketing. He has extensive experience planning and conducting retreats, and special expertise resolving problems within firms. Rose may be contacted at 856-427-0050 and [email protected].