Today more lawyers than ever before are in private practice. Almost 90% of today's firms employ 10 or less attorneys. In this competitive environment, the challenge for every law firm is to maximize their profitability and to establish a plan for future growth. Below, we will focus on how successful law firms can improve their profitability.
Four Ways to Increase a Law Firm's Profitability
In good times or bad, the number one priority for the management of a law firm is profitability. Although economic conditions are beyond your control, plenty of factors that drive or impede profitability are not. To boost your bottom line, here are some points to consider in order to take control of the following:
- Improve Management of
Billing, Receivables and Payables
Delays in issuing and collecting on invoices often lead to costly and unnecessary write-offs and write-downs. To streamline the process, consider pre-billing your clients for major expenses such as expert witnesses, depositions and travel. In addition, you should bill clients as soon as a matter is completed, regardless of the result, and in the interim, as appropriate service milestones are reached (for example, after a successful pretrial motion).When clients submit their payments, process them immediately, making daily deposits, rather than letting payments stack up. If your clients delay in paying their bills, follow strict schedules for following up with them. You might cite quarterly and year-end bank reporting as a reason to reach out on delinquent payments. Consider offering one-time discounts as incentives for clients to satisfy aged receivables, and encourage payment by credit card. It is incumbent for firm managers to review unbilled time and each attorney's outstanding receivables.As for payables, pay your bills as close to the due dates as possible so you benefit from any early payment discounts without transferring funds unnecessarily early. If available without additional fees, take advantage of deferred payment options; regularly negotiate with vendors for discounts and lower prices.The Sidebar below offers some tips on how and where to cut your costs. - Cross-Selling Services
It is a marketing truism that it is easier and more cost-effective to generate new work from an existing client than to attract a new client. That is where cross-selling comes in.Attorneys need to set aside time to spend with their clients to learn more about them, and to recognize if they may require additional services, now or in the future. Lawyers should be ready to introduce their client to other lawyers in the firm, or to other firms outside of their firm's area of expertise. Note that members of your firm may need a primer on your firm's specialties and services to help them identify cross-selling opportunities. Some might be resistant to sharing "their" clients, so you should explain the benefits of cross-selling for the firm and, ultimately, their own bottom lines. You also might want to tie cross-selling to compensation. - Increase Specialization
Law firms that specialize in specific practice areas often see greater profits than those that take a more generalist approach. Attorneys and paralegals who specialize in an area generally work more efficiently and effectively, and produce higher quality work at a greater pace and for higher fees. Even small firms can benefit from dividing up legal work by practice area. - Reduce the Number of Your
Clients
This tip no doubt seems counterintuitive. More clients means more money, right? Not necessarily. Every firm has had its share of troublesome clients who take up time and resources without returning profits that justify such expenditures. It should be a firm policy to not take on unprofitable matters in the hopes that someday they will bring in a project that makes it all worthwhile.It is generally better to focus on having fewer but more profitable clients. When you work with a handful of large clients with continuing matters and numerous needs, you can develop a deeper understanding of your clients that leads to more lucrative cross-selling opportunities, as well as a stronger sense of teamwork both with the clients and within your firm. You will also likely reduce costs related to client acquisition.Of course, there are exceptions to this rule, but you need to be selective in the clients you choose to represent.
An Evolving Process
Improving profitability is not just a matter of instituting one or two measures and then sitting back. It is a process that requires ongoing vigilance regarding financial and economic conditions so you can spot opportunities and take advantage of them.
Sidebar: Tips for Cutting Costs
One of the easiest ways to improve profitability is to reduce your costs. This is an area where you can think creatively. For example, you might consider adopting alternative staffing arrangements. Flex-time, part-time or temporary attorney arrangements can all result in lower staffing costs. Such options can give firms access to top-notch attorneys who are not necessarily interested in the traditional partnership track, without many of the costs associated with full-time lawyers. Outsourcing might be advisable for non-attorney services such as those provided by a quality CPA firm such as identifying internal control weaknesses and tax-planning
Another idea is to take advantage of new technologies such as those found in the latest software improvements and cloud services. You will be able to find a wealth of options for increasing productivity, improving practice management and saving time on standardized tasks and forms.
And, don't forget to look at your compensation models. Law firms are increasingly moving away from fixed salary compensation to incorporate a variable pay component based on outcomes and achievements. Changes to benefits also can cut costs. For example, employers of all kinds are increasing health insurance deductibles and employee portions of premiums.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
