How to Run Your Law Firm More Like a Business

If your firm is like most, your top goals include growing revenue, and in turn, increasing profitability. You've implemented practice management software, and probably even a customer relationship management (CRM) system to help you achieve those objectives.

And, like most other firms, your six-figure software investment is likely sitting untouched like a prized Porsche in the garage.

A recent study found that although 70% of law firms have implemented a CRM, less than 5% of lawyers at most firms use it regularly (i.e., at least once every two weeks). The Ackert Advisory's 2015 report on “The State of CRM at Law Firms” looked at responses from more than 175 law firms around the world. See http://bit.ly/21tNtle.

One of the primary objectives of law firm management is to maximize profit for owners. If you're not using and championing CRM and practice management tools at your firm, it will be much harder for you to meet that objective.

Data Management Impacts Profitability

Data becomes more valuable as firms grow larger and more complex in an ever-consolidating market. And to make that data actionable, it has to be regularly gathered, reported and reviewed. The managing partner, management committee, and CFO need to understand the elements that impact profitability so they can identify and improve weaknesses, and capitalize on opportunities.

For instance, do you have a complete understanding of the breadth and depth of each client relationship at your firm? Do you know the number of matters for a given client, which practice areas support that client, and the number of professionals who spend time on matters connected to that client? Do you know the potential cross-sell opportunity for that client and the reason she chose to hire your firm in the first place?

A customer relationship management system can help you see the factors that influence opportunities, wins, and losses so you can understand your firm's sales cycle and develop more business. A practice management system can help you track and report on key performance indicators (KPIs) related to productivity, finances and client service.

This invaluable data can translate into higher revenues and greater profitability for your law firm ' but only if you actually use it.

No matter what type of software you have in place for managing your practice, this three-step process can help you run your law firm more like a business:

• Use the tools. Create a culture of adoption, decide on KPIs, and start tracking them.
• Report and review. Select or build the right reporting tools to make it easy to monitor what you are measuring.
• Turn data into action. Establish a process for making decisions based on the data and implementing those changes.

Use the Tools

You cannot manage what you do not measure. Having CRM and practice management systems in place is not enough. In order for these tools to be effective at your firm, attorneys need to input and update information on a regular basis.

Creating a Culture of Accountability

CRMs are most effective when there is a transparent firm-wide sales process, enabling all professionals to see everything that is in the pipeline at all times.

At some firms, this may require changing the culture.

Some attorneys may be concerned about how this increased sales transparency could affect their originations. Management will have to address this concern and other barriers to adoption.

According to the study by The Ackert Advisory, the two primary reasons for CRM underutilization are cultural and behavioral issues rather than problems with the software itself. A lack of accountability and a general lack of technological proficiency are the two issues that most often stand in the way of adoption, said survey respondents.

To break down these barriers, firm management needs to lead the way. Accountability comes from the top. If you are not willing to personally champion the use of the system, good luck getting your partners to use it. If you don't set expectations for minimum technological proficiency and provide training to help attorneys meet those expectations, your firm may soon be falling behind.

Deciding What to Measure

Setting the tone and shifting the culture, if necessary, is the first big hurdle. Next, you need to decide what to measure and start tracking it.

This is the point at which you will identify the key performance indicators for your law firm. We define KPIs as metrics within a business that affect profitability. While there are an infinite number of things you could measure, when we advise law firms on identifying performance metrics and analyzing profitability, we recommend selecting a reasonable number of specific measures you might realistically expect to impact.

In your practice management system, you will track billable hours, billings, collections and certain cost and expense categories. Other basic metrics include WIP, accounts receivable, and write-offs. Collect and measure this data at the lowest possible levels ' per lawyer, practice group level or office location ' so that you can compare to internal and external data, such as industry benchmarks.

One key metric to look at is leverage, which can be an important predictor of a law firm's profitability. The ratio of non-partner attorneys (associates) to partners, or “leverage,” dropped dramatically after the major law firm staffing cuts of the last decade. Having a higher number of salaried associates on staff can result in higher returns for partners.

For a more complete list of law firm KPIs, download a free checklist at kaufmanrossin.com/resources.

In your CRM, you should be tracking the following data per attorney, per client so that you can see across the firm and identify patterns and exceptions to those patterns:

• How long it took to close;
• How many touch points to close and what they are;
• Potential cross-sell opportunity; and
• Reasons the firm lost business (i.e., fit, relationship, price, unknown).

In addition, each attorney should be tracking his or her sales pipeline. You can think of pipeline reporting for opportunities as having four main stages:

1. Initial business discussion.
2. Discovery meeting/Scoping.
3. Pricing/Proposal.
4. Negotiation and review.

After moving through some or all of the stages above, each opportunity will eventually move into one of the final stages: “Closed won” or “Closed lost.” Tracking these metrics in your CRM system will help you to better understand revenue drivers and improve the sales process.

Report and Review

Once you have identified what to measure, the next step is reporting and reviewing the data. As our experience advising law firms has shown us, doing this on a consistent and timely basis is not an easy task for management at most firms.

The difficulty may be in gathering the information, or it could be that there is so much information available that it's hard to focus on the right indicators. Sometimes other matters take priority, which means management takes too long to act on the data at hand.

Having a process in place surrounding how and when you gather and report information can make the process easier and give you more time to analyze the information and make the data actionable. Looking at the metrics from different perspectives can give you a more well-rounded view of your firm and can help you to understand the major profit drivers.

For example:

• If you have more than one office, look at the performance of each location individually.
• If you generate revenue from more than one or two practice groups, review metrics at the practice group level in addition to the firm level.
• If some of your work is done on contingency, monitor performance (hours, fees, collections, costs and expenses) and compare to non-contingency work.
• If your firm includes several merged entities, compare performance for each partner group.

There are many different ways to share data with the management team. We'll take a look at a few of the most common:

• Financial statements;
• Management reports;
• FLASH reports;
• Real-time dashboards;
• Exception reports; and
• e-Mail alerts.

Financial Statements

Beginning the year with the right data is critical; your CPA firm can help you get off to a good start.

Setting up your accounting systems properly can create a significant amount of useful reporting. Your general ledger chart of accounts should be detailed enough to provide meaningful information and provide the breakdowns you need.

For example, set up different accounts for revenue and expenses by practice area or by location if these should be tracked separately. Be careful not to muddy the data by grouping too many uncommon items into one general ledger account. This makes the information you are looking at difficult to interpret.

Customize regular monthly reports that provide a snapshot of firm activity during a specific time period, and allow comparison to the prior period, budgets and forecasts. If in-house accounting personnel aren't comfortable with the reporting options available in your accounting package (or if they tell you that what you want isn't available), ask your CPA firm for assistance or check with the software company.

Management Reports

Are you getting the right information from your practice management system and using it properly? Does the data that the management team receives in monthly reports allow them to see strengths and weaknesses across the firm? You may wish to see the data by originating attorney, responsible attorney, office location, practice area, client group, or client matter.

CRM metrics should also be included in management reports. Proposals won, lost and pending can be tracked for the fiscal year to date and can be compared to the same time period in the prior year. Reporting on opportunities can give you a sense of what's in the sales pipeline across the firm and for each attorney. For a quick snapshot, you can look at top 10 won opportunities and top 10 pending opportunities for a given time period. You may want to see CRM data for the fiscal year or calendar year or for a rolling 12-month period.

The distribution list for these reports is an important consideration. If you want to foster a competitive spirit among professionals, then show them all how they're doing compared to each other. If you've recently completed a merger or acquisition, however, you may wish to restrict detailed data to the management team until the cultures become more aligned. This decision will be depend on the culture and direction of the firm.

FLASH Reports

The FLASH report provides a frequent high-level picture of the firm's performance. The report should reflect current data in comparison to prior period data, so you can see trends and variances.

Many businesses divide FLASH reports into three sections:

1. Liquidity. Cash position, WIP and A/R aging summaries, days in WIP and A/R, line-of-credit balances and working capital ratio.
2. Productivity. Key performance metrics of the business, including new clients, hours worked, leverage and average daily fees generated, billed and collected.
3. Profitability. Billings, collections and write-downs.

There may be other sections or indicators that are more important to your firm, such as the dollar value of pending opportunities or percentage of proposals won and lost year to date.

We conclude this article next month with a look at dashboards, exception reports, e-mail alerts and turning data into action.

Steven A. Davis, CPA, is an entrepreneurial services principal at Kaufman Rossin. He can be reached at [email protected]. Tyler Quinn, CPA, CISA, is an assurance and advisory services manager at the firm. He can be reached at [email protected].