PROFITABILITY TECHNIQUES OTHER THAN MORE HOURS AND HIGHER RATES
by Joel A. Rose
The new challenge for law firms today is how to increase profits and reduce clients’ legal fees. This article describes 15 proven approaches for enhancing profitability—other than by working more hours and charging higher hourly rates.
1. EXPAND YOUR CLIENT BASE THROUGH BETTER FIRM MARKETING INITIATIVES
The most important initiative to increase profitability is the successful marketing of your law firm. Such initiatives require a commitment on the part of your partners to seek new sources of profitable business. That buy-in will likely vary significantly depending on what the partners are being asked to do. The firm must determine whether its principal marketing focus will be individually or departmentally driven, or a combination of some sort.
2. CROSS-SELL YOUR FIRM’S EXPERTISE
Cross-selling of your firm’s legal expertise is the least expensive type of marketing. It is easier and less costly to obtain new work from an existing client than to attempt to attract a new client. Every client should be asked about other legal needs where the firm might offer assistance. And always, when an opportunity arises, the client should be offered help so that they do not go “down the street” for such assistance. For example, contingent-fee clients should be offered estate planning services when their settlement or verdict is collected.
Cross-selling can be promoted by introducing clients to other lawyers in the office who provide services your clients may need in the future, even if you don’t perceive a need right now. Your client or the other lawyer may identify a need after a brief conversation. It is also a good idea to learn about clients’ needs in practice areas outside your firm’s areas of expertise. Once you identify the client’s need—e.g., Americans With Disabilities Act (ADA), Employee Retirement Income Security Act (ERISA) or sexual harassment—you can refer the client to a specialty practitioner. The specialist won’t steal your client and will refer others back to you.
To promote cross-selling, your lawyers must be motivated to cross-sell. The firm’s compensation structure must encourage sharing and internal referral of clients. This discourages the hoarding of clients by the originating lawyer. To make this work, you will need to track internal referrals just as you track external referrals.
Cross-selling might not come naturally, so you may need to develop a cross-selling program and teach selling techniques to your lawyers. For example, your plan may provide that:
Every lawyer will schedule at least one planned introduction a month between an existing client and a lawyer from a practice area or department that is not now servicing the client.
Organize breakfast or lunch seminars to acquaint existing clients with new legal developments in areas where you do not represent them (of course you should be doing this with clients in areas where you do represent them).
Make a casual introduction of each client to a lawyer in a different practice area whenever the client is in your offices.
Weed out unprofitable clients. Non-paying or poor-paying clients will keep you from working for the profitable ones. You are ethically obligated not to neglect any client, but in most circumstances you can discontinue the attorney-client relationship.
3. ESTABLISH AN ANNUAL BUDGET FOR MARKETING
Establish an annual marketing budget. Today, many firms’ marketing budgets range between 2.5 and 3.5 percent of their revenue. Your budget should identify how and by whom the money shall be spent. Each practice area should solicit input from the lawyers in that group and then submit a marketing proposal and budget. Marketing efforts should be monitored by an internal marketing coordinator who will be supervised by the marketing committee.
Direct your marketing and advertising dollars toward the practice areas that your firm wants to grow and develop. Keep in mind that direct advertising has been demonstrated to work best in only a relatively few practice areas, such as personal injury, workers’ compensation, family law and estate planning. Other practice areas should not be short-changed—particularly if they are your firm’s strength.
4. AVOID OBVIOUSLY UNPROFITABLE OR OTHERWISE TROUBLESOME NEW CLIENT MATTERS
Lawyers often try to justify taking on a bad client or a bad case from a good client by rationalizing why they should do so. If you ever find yourself using any of these rationalizations, don’t take the case:
- “If I don’t take this client, I’ll never get another one.”
- “If I take on this unprofitable matter, the client will someday bring to me a profitable one.”
- “This client already gives his or her better referrals to another lawyer who is more selective than I am.”
- “If I represent this client at a discount, he or she will refer all of his or her friends to me.” (Don’t forget that they will also expect a discount.)
5. BETTER MANAGEMENT OF BILLING, RECEIVABLES AND PAYABLES
Delays in getting bills out and following up on slow-paying clients invariably lead to unnecessary write-offs and write-downs of unbilled time and receivables. 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. Look 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 you were successful or not, and at appropriate intermediate times. For example, send a bill:
- When the deal is signed, even if the closing is coming later
- When you have just won an important pre-trial motion or discovered something valuable at depositions
- 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. Cash checks. Make deposits every day instead of letting them accumulate.
Attack receivables early and often. Many firms use quarterly and year-end bank reporting as an excuse to follow up on late payers. Provide incentives to clients to pay dated bills, e.g., a one-time 25-percent discount credit for cleaning up of accounts receivable and unbilled time more than 180 days old. This action plan should be undertaken with the approval of the managing partner. These monies should be utilized to fund the firm’s operations, not distributed to the partners. Encourage late-paying clients to pay by credit card.
Schedule payables according to due dates, so that you can take advantage of early-payment discounts. Always pay bills on time to avoid late charges. Use payment deferrals, and negotiate for lower prices and discounts.
6. UNBUNDLE OPERATING COSTS FROM CASE-RELATED EXPENSES
Whenever possible, do not serve as your client’s banker, unless internal pressures or competitive practices justify advancing money for your clients’ cases. Clients should be asked to prepay anticipated major cost items, such as expert witness fees, deposition expenses, extensive travel and other case-related costs.
Every effort should be made to recapture various operating costs as separate billable items.
7. ALTERNATIVE FEE ARRANGEMENTS
Your firm should consider alternative fee arrangements in which an agreed-upon fixed fee is charged instead of an hourly fee based on time spent. Demands of clients and competition among law firms are causing changes in the pricing of legal services away from straight hourly billing to 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?
- Is it risk sharing?
What the client wants and needs will generally frame how legal services for the engagement can be fairly priced.
8. ATTORNEY STAFFING: FLEX-TIME, PART-TIME AND OTHER OPTIONS
Flex-time, part-time and temporary associates may allow a firm to engage trained lawyers as needed, and reduce the costs associated with associates who are on a track to partnership. Salaries of flex- or part-time, temporary attorneys and staff lawyers are traditionally lower than full-time attorneys on a partner track, and the benefits, such as vacation, sick leave and insurance, are often less.
9. 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 stand the test of time. Partners and associates who no longer justify their compensation package should be identified and counseled by management. If their performance does not improve, their compensation should be adjusted accordingly. In extreme cases, their career progression and/or the continuity of their remaining in the firm should be reevaluated.
10. CONSIDER A TWO-TIER PARTNER LAW FIRM MODEL
The conventional pyramid structure was based on the assumption that an associate will produce sufficient income to pay for his or her salary and overhead expenses and still generate a profit for the partners. Associates were recruited with the expectation that over time, if they survived, they would become equity partners. Over the last decade, however, the percentage of overhead costs for associates has risen faster than the fees they generate. Because the profits flowing to the top are decreasing, law firms are unable to continue to admit as many new equity partners without diluting the earnings of current partners. To continue to attract, motivate and retain experienced associates and recent law school graduates, law firms have created alternative approaches, such as the two-tier partnership model, to develop, retain and promote associates in a relatively slow-growth environment while preserving the relative income levels of current partners. Second-tier partners, or non-equity partners, continue to be paid well but do not get a share of the firm’s profits.
11. NEW SYSTEMS, METHODS AND TECHNOLOGY
In contrast to times past, lawyers and law firms need to become more efficient to remain competitive. It behooves lawyers to improve their practice management, accomplish more work in a given time and do a better job in the same time. This can be accomplished using technology more efficiently, such as developing systems to retrieve and use prior work product.
Increase your “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 forms should be entered into your computer system so that they can be retrieved easily.
Circulate hard copies of existing forms to all potential users whenever there are revisions or additions. Lawyers can’t use what they don’t know exists. To gain greater acceptance of standard forms, be flexible with alternate language to suit each lawyer’s style. It’s better for lawyers to use 80 percent of a form because they craft 20 percent to their own liking than for them 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.
12. PROFITABILITY AND E-DISCOVERY
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. The introduction of e-discovery costs may require that law firms and email vendors join together to capitalize on inherent efficiencies to offer electronically stored information discovery services to generate a profit for the law firm by providing a fixed-fee or hybrid-billing arrangement to the client.
13. INCREASE SPECIALIZATION BY LAWYERS AND PARALEGALS
Lawyers and paralegals who have specialized in particular practice areas 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, or 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. 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 specialist, and sanction inappropriate retention of work by the originating lawyer.
14. ENHANCED MANAGEMENT OF SUBSTANTIVE PRACTICE AREAS
Lawyer management should rely upon partners within practice groups to deal with 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.
15. CONTROLLING COSTS
The following are some additional techniques for controlling 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 lawyers and/or administrative staff responsible for line items.
- Compare ongoing performance with published surveys.
- Exercise collective purchasing power through your local bar association. Law firms and businesses may form buying cooperatives.
©1999-2014 Joel A. Rose & Associates