The Legal Executive Institute (LEI) recently released its 2018 Dynamic Law Firms Study, providing some valuable lessons on how law firms can achieve better financial performance. The study looks at some of the most successful firms from year-end 2015 through year-end 2017 to determine strategies that have the best potential return on investment. The bottom line? Productivity—not billing rates—is critical.
The study analyzed the three-year compound annual growth rates experienced by law firms included in the Thomson Reuters Peer Monitor sample. It ranked each firm on its individual performance in overall profits, revenue per lawyer and average profit margin.
Every firm was placed in a quartile based on performance. Firms with the highest compound annual growth performances across the three metrics landed in the top quartile and were labeled dynamic. Those that fell into the bottom quartile were dubbed static.
Dynamic firms placed, on average, an additional 96 billable hours per lawyer into work-in-progress in 2017 compared to static firms. Notably, this gap trickled down to affect other aspects of financial performance, from a firm's ability to generate additional top-line revenue to the efficacy of its investment strategies.
For example, a drop in productivity hurts a law firm's ability to execute its investment strategies. These strategies often stretch over several years and can take just as long to produce returns. When productivity falls, it shrinks the funds available to carry out investment plans. It is no surprise that dynamic firms vastly outpaced static firms when it came to investments in technology improvements and marketing and business development.
The study provides several takeaways, including:
- Focus on Protecting Rates
Rather Than Hiking Them
Practices related to discounts and write-downs negatively affect a firm's billing realization level.
- Make Money Without Raising
Firms can grow revenues if they increase profit margins, even while holding rates steady. Moreover, increased demand can lead to greater productivity if a firm adds lawyers in proportion to climbing demand.
- Beware of Productivity
Lower productivity means lower bills and lower revenues, thereby undermining longer-term investment priorities. Firms that struggle to increase their rates but still experience standard expense growth will suffer dramatic consequences if their productivity declines.
According to this study, any firm, regardless of size, can improve its financial performance without relying on rate increases. The key is to maintain or boost productivity, resist unnecessary rate discounts and write-downs and improve profit margins.
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