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

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 expended. 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 sensibly be created. An internal marketing coordinator can be very useful, but must be carefully supervised by the Marketing Committee and might be best with an outside consultant.

If your local Rotary Club has more of the potential clients you are seeking than Kiwanis, then resign from Kiwanis and join Rotary. Avoid the obviously unprofitable or otherwise troublesome new matters. The following rationalizations for taking on this kind of work are not justifications or good reasons: If I don't take this client, I'll never get another one; If I take this unprofitable matter, the client will someday bring to me a profitable one; This client already gives his or her good work to a lawyer who is more selective than you are; If you represent me at a discount, I'll refer all my friends to you (who will also expect a discount).

If your firm has a general practice and is advertising - television, radio specialty publications - be sensitive to whether only a relatively few practice areas have demonstrated that advertising works, i.e., Personal Injury, Workers' Compensation, Matrimonial and some Estate Planning, and be sure these are the practice areas you want to invest in for further development.

Cross selling of your firm's legal expertise is the least expensive type 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. Your client or the other lawyer may perceive the need after they've talked with each other. Inquire even about practice areas outside your firm's areas of expertise. Identify the client's need, i.e., ADA, ERISA, Sexual Harassment, whatever and refer him or her to a specialty practitioner. The specialist won't steal your client, and will refer others back to you - and it requires no investment of money or time on your part.

Your lawyers must be motivated to cross-sell. 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.

Develop some cross-selling methodology and techniques, and teach them to your lawyers. For example: (1) Every lawyer will schedule at least one planned introduction a month between an existing client and a lawyer from a department which is not now servicing the client; (2) Organize breakfast or lunch mini-seminars to acquaint existing clients with new legal developments in areas where you do not represent them (of course you are already doing this with clients in areas where you do represent them); (3) Try to make a casual unplanned introduction of each client to a lawyer in a different practice area whenever the client is in your offices.

Weed out unprofitable clients ruthlessly. Just as weeds will choke out the good plants in your garden, non-paying or poor-paying clients will keep you from working for the profitable ones. Remember, you are ethically obligated not to neglect any client - even losers, but in most circumstances you can discontinue the attorney-client relationship.

Better Management of Billing, Receivables and Payables:

The slogan "time is money" is no truer than concerning billing and collection activities. Not only can one easily calculate the costs of delays, but the inescapable fact is that delays invariably lead to unnecessary write-offs and write downs of unbilled time and receivables. 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 attorney, 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. For example, (1) When the deal is signed, even if the closing is coming later; (2) When you have just won an important pre-trial motion, or discovered something valuable at depositions; (3) When an item of due diligence has just turned out to be favorable. 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 ab considered before implementing action. Also, cash your checks. 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. For example, always pay your bills to avoid automatic, largely non-discretionary collection actions such as utility late charges and service disconnections; maintain alternate services where practical, i.e., office supplies, court reporters, equipment vendors, etc. Use available payment deferrals, and negotiate for lower prices and greater discounts.

Attack your receivables early and often. Many financially successful firms use the end-of-quarter and end-of-year bank reporting excuse to follow up on late payers. Further, by providing incentives to clients to pay dated bills, such as a one time twenty-five percent discount credit for cleaning-up of accounts receivable and unbilled time that are more than 180 days old. Obviously, this type of discount could serve as a double edge sword. Therefore, 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. Further, these monies should be utilized to fund certain of the firm's strategic planning activities or operations, not automatically distributed to the partners. Depending upon the nature of your firm's practice, it may be prudent for you to accept credit cards.

Unbundle Operating Costs from Bills for Fees

Whenever possible and practicable, do not serve as your client's banker. 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. For example, the following cash out items should be billed at 100%: outside printing, outside messengers, automated databases, local transportation, mailings, etc.; The following may be billed at other than 100%: photocopying, Lexis/Westlaw, in-house messengers, telephone, etc.

The justification for charging clients for the recapture of some automation capital outlays which give lawyers and secretaries word processing capability is that the efficiencies of automation enable the attorney to complete a client project in less time than would otherwise be the case. The client benefits by lower hourly charges for legal services, even counting somewhat increased secretarial charges for automation.

Alternative Billing Methods:

The concept of alternative billing methods to hourly rates is of growing importance. It is one of the best ways to recover for efficiencies created by the effective use of automated systems, etc. Demands of 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.

Generally, if the firm is taking the engagement, it should try to price its work consistent with what the client wants and needs. Structuring a fee arrangement which does not match up to what the client values, frequently spells trouble for the relationship as well as for the collectibility of the account.

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, the costs associated with flex or part-time and temporary attorneys and staff lawyers are traditionally lower than full time attorneys, and there is frequently no need for health care or benefits nor partner track.

Partnership Track/ Addressing the Issue of Under-productive Partners and Associates:

Every partner and associate should be subject to continuing scrutiny. Profits should be distributed and career advancement should be awarded to those who earn it, not those who strand the test of time. 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 remaining in the firm should be reevaluated.

New systems, methods and technology:

In today's practice environment, it behooves lawyers to determine whether they can substantively improve their practice, 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. By considering the following, lawyers may begin to assess the extent to which hardware and software applications, people and practice systems will accomplish specific results: With hardware systems, how much is enough, i.e., Individual PC's, hand-helds, office networks, multi-office networks, home to office capabilities? Concerning software, which of the selected examples of individual and firm wide user applications are appropriate for your office: Individual user applications, operating systems, phone lists, spreadsheets, time and billing, word processing, calendar, check writer, communications/internet access, data bases, mailing lists, modern telecommunications systems, new PC; firm-wide applications - such as: accounting, banking on line, case management, conflicts, disaster recovery, docket control, document production, file room, LANS and WANS, library, management reporting, new client intake, time and billing, website/marketing, etc.

To address the above applications, lawyers must determine where their firms are at the present time: (1) What do we actually do in our practice? (2) What do we want to do (or what should we want to do?), (3) Can we get there with existing hardware, software, people and operating systems? If yes,... If no,...(4) Do we have the means and technical skill to upgrade and if so, are we ready for this? (5) Should we upgrade as a single project or compartmentalize and stretch the effort over a several year period? Pros and cons, and (6) Have we analyzed compatibilities, training, financing? Are consultants of several kinds appropriate at this time? Should we just out source much of our immediate needs?

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.

All standard or semi-standard forms should be entered into your computer system so that all document preparers can retrieve them easily. Be aware that the secretary's attitude will affect the lawyer's willingness to use a particular form, so make it easy for the secretary.

Circulate hard copy of existing forms to all potential users whenever there are revisions or additions. Lawyers can't use what they don't know exists. Further, 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.

Bill appropriately for form documents. You must be paid for development efforts, and it is both reasonable and proper to charge based on what the document is worth to the client, not for the few minutes it takes you to pull it from the computer.

Increase Specialization by Lawyers and Paralegal:

Today's social and economic climate is no longer practical for the general practitioner. Too much additional time is required for the lawyers who purport to be general practitioners to acquaint themselves about a specific type of law which may be unfamiliar and is not cost-effective. Further, lawyers should focus on complex legal issues and emerging fields of law. To do this, they must recognize tasks which may be best performed by competent paralegal.

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. Hence, lawyers should be encouraged to become well-educated, even beyond mandatory CLE requirements.

Lawyer management should insist that work be assigned to the correct department or lawyer who possesses the appropriate level of expertise in your firm. A personal injury lawyer should not be allowed to write a will or handle a real estate closing, even if it is for a relative and is being done at a discount. 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.

Enhanced Management of Substantive Practice Areas:

Lawyer management should be able to rely upon those partners within practice groups to deal with issues of attorney workload, staffing, rates, realization and billable hours within the group. Clearly, a practice group doing insurance defense m litigation is going to have different rates, billable requirements and activities in sharp contrast to a transnational 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.

Controlling Costs:

After years of consulting to the legal profession, one inescapable conclusion pops out...that profitable firms are revenue driven, and that an hour spent in deriving new revenues normally results in more profit to the lawyer than an equal hour spent in trying to reduce costs. That said, the 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 in one employee Review performance against both budget and prior year expenses. Make these reviews with other lawyers and/or administrative staff responsible for line items. Compare ongoing performance and/or starting conditions, i.e., salaries, rent, etc., with published surveys. Remember, there is no average law firm. Your firm's costs will be higher in some areas and lower in others than survey averages of firms your size. Your analysis must be tailored to your practice. Exercise collective purchasing power. Negotiate for group rates - usually best done through your local or county bar association, or legal administrator's organization. Law firms and other service firms and businesses may form buying co-operatives. Office purchases may be drop shipped or, if your group is large enough, use your own warehouse.

Modernize In-House Organizational Procedures and Controls in Single and Multi-office Firms:

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, for the whole firm, to give attention to the operations of the various practice areas and offices and to avoid ignoring problems that may adversely affect profitability. In multi- office firms, there is an absolute need for a hands-on managing attorney within each office to assume the first level of responsibility for the profitability of that office. Further, branch offices should be able to stand profitability non their own or serve some significant profit-making function that benefits the firm as a whole. If they do not, these offices must be identified, and steps taken to either increase profitability, or eliminate the office and its requisite drain on the firm.

These organizational controls 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.

Improve Banking Relationships:

Banks have become more difficult and expensive to deal with. Customer service for individual and smaller accounts have taken a back seat to larger commercial accounts, and smaller firms are feeling the pinch. Therefore, 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.