TEN WAYS TO INCREASE FIRM PROFITABILITY

by Joel A. Rose
 

     When managing partners and members of law firm management committees start talking about increasing firm income, one of the first things they think of is reducing overhead. But some of the most profitable law firms have found that cost cutting is not the only way to improve the firm's cash position. By identifying the major factors that impact directly and indirectly on the generation of gross receipts, a firm can change practices that adversely affect firm revenue, and thereby increase income. One or more of the following ten factors could be inhibiting profitability at your firm.

1. Inadequate Firm Management

     Many firms lack a management system that provides for long-range planning, day-to-day administration and appraisal of results. Typically, no partner or group has authority for overseeing the successful operation of the firm. Partners tend to direct their attention to specific problems only as crises occur. By the time partners identify and resolve these problems months may have passed, and year-end dollar results may be less than expected.

     A well-administered firm requires mechanisms for overseeing the firm's finances and operation and for on-going communication among firm members.

2. Inadequate Management/Coordination of Practice Areas

     Pressures on law firms to provide high quality legal services in a timely and profitable manner have encouraged partners to consider the systematic application of basic management principles to substantive practice areas when the management of the firm begins to ask, "Is this particular practice area really profitable? Should the firm re-direct its efforts to other areas? Should certain partners be re-assigned accountability for managing particular practice areas? Should we decrease the number of lawyers?"

     Implementing practice management varies greatly from firm to firm because of lawyers' personalities and abilities, their relationships with clients, their perceptions of themselves, their attitudes towards being managed and the extent to which they are willing to relinquish a degree of personal and professional independence.

3. Absence of a Marketing Plan

     As a law firm grows, the ad hoc marketing strategies and efforts which may work for a smaller firm become less effective. Responsibility is diffused. Lawyers can be working at cross purposes. Many lawyers dislike the idea of marketing or are unwilling to put forth the necessary effort. As a consequence, in a larger - mid-size firm there is the risk that lawyers will assume the marketing task. In this competitive environment, partners in law firms of all sizes need periodically to remind themselves that every good existing client they have is a potential new client for some other law firm.

4. Absence of a Financial Plan

     Unless a firm has a projected financial plan for income and expenses against which actual performance may be measured, the firm will have little opportunity to identify and correct economic problems. A basic financial plan that includes income and expense projections based on the firm's past experience will enable attorneys to prepare for unusual contingencies and avoid financial surprises. In addition, the plan will inform partners and associates of their obligations concerning billable hours and collections.

     Review of monthly financial and management data by designated partner or committee will identify potential problems and undesirable trends in time for corrective action to be taken.

5. Inadequate Expectations and the Absence of a Lawyer Business Plan

     Many firms fail to articulate economic standards and nonbillable activities for their lawyers. Surveys of law firms generally show that partners record between 1,400 and 1,700 billable hours annually; associates, between 1,600 and 1,850 billable hours. Partners should be concerned if the billable hours or collections of firm members habitually fall below expected levels.

     Inability of unwillingness of partners to reach a consensus on what they want the firm to be and how to achieve their objective on a firm-wide basis, on a departmental basis, and on an individual basis will detract from their ability to maximize the synergism which exists in progressive and profitable firms. Many law firms expect their partners and associates to prepare for review by the managing partner or other lawyer management a "business plan" that shows what each lawyer intends to do, of a fee producing and nonbillable nature, to progress the firm. Typically, this plan is prepared prior to the beginning of the new year and includes information about anticipated billable hours and revenue projections, activities the lawyers intend to pursue to enhance the firm, i.e., marketing, training of associates, management of the firm or its substantive practice areas, etc. Each attorney reviews his or her business plan with a member of lawyer management to reach a consensus about what each attorney intends to do to progress the firm. Quarterly, each attorney is expected to report to lawyer management about the status of implementing their plan. This allows management to monitor the progress of each attorney in implementing their plan and to offer suggestions for improvement, as required.

     6. A Compensation Plan that Discourages Partners from Performing those Activities that Addresses the Firm's Needs and Priorities.

Partner compensation programs mold partners' behavior patterns. Partners will

do what they are paid to do. A compensation system that overemphasizes partner billable hour production rather than providing incentives to encourage partners to achieve the appropriate balance between their personal billable hour production , marketing, associate training , delegation of work, management of the firm and its practice areas, etc., may increase revenue in the short-run, but will be detrimental to the longer term financial success of the firm

7. Imbalance in Types of Cases

      An imbalance in the number of contingency and non-contingency cases can cause a cash-flow crisis for an undercapitalized firm. Such an imbalance may not become apparent until the firm finds itself in a "cash crunch" because too many attorneys are working on cases that promise a pot of gold at the end of the rainbow rather than on matters that produce a systematic cash flow.

     Firms generally, and especially undercapitalized firms, should carefully review their caseloads of contingency matters to determine whether too much lawyer time is being devoted to cases that do not provide a steady stream of income.

     To ensure against cash flow problems, firms should obtain retainers or deposits from clients and suggest that clients pay directly for major out-of-pocket expenses such as expert witnesses and depositions.

8. Unclear Fee Agreements

     Most fee disputes, write-offs and discounted bills result from the attorney's failure to confirm in writing the nature of the representation and the arrangements for fee payment. Firm policy should require the attorney to draft a confirmation letter as an integral part of the procedure for accepting a new matter, especially from a new client.

9. Poor Billing and Collection Practices

     Lawyers are notoriously slow to bill. They frequently defer billing for completed work well beyond the time at which it could be reasonably billed. Yet the decision about when to bill is an important one, since working capitol is required to cover unbilled time and disbursements. Consequently, a firm must force its attorneys periodically to focus their attention on billing.

     The smaller the inventory of unbilled time and the shorter the time between service and billing, the more likely the work can be billed at full rate. Frequent billing in smaller amounts usually produces larger overall fees. To enable firm management to identify clients and matters that are not being given necessary billing attention, the managing partner should receive monthly a list of matters in which the unbilled time and costs exceed a predetermined amount. (A firm may also wish to establish controls for matters on which no attorney activity has been recorded for a predetermined time period, say three months).

     Timekeeping is a most difficult discipline for attorneys to learn. Having in place an efficient timekeeping system is not a guarantee that attorneys will use it. Generally someone in the firm - usually the managing partner - must take responsibility for seeing that the timekeeping function is performed systematically and accurately.

     Many of the more profitable firms centralize billings and collections through a managing partner supported by an administrator, office manager or bookkeeper. This is generally more effective than having each attorney be responsible for collection. The billing procedure should be programmed to enable billing work sheets to prepared for attorney review by a bookkkeeper or office manager according to the billing arrangement the attorney and client originally agreed on (for example, quarterly or at specific stages of the matter).

10. Inadequate Billing Rates, the Absence of Non-Hourly Billing, Risk or Bonus Billing Arrangements with Clients

     The minimum hourly billing rates for partners and associates must be sufficient to produce a reasonable income for the firm. Among the factors that should be considered in determining fees are the hourly rates charged by law firms in the same legal market. A number of local, regional and national surveys provide such information.

     Non-Hourly billing arrangements for wills, closings, etc., is one of the best ways to recover for efficiencies created by the effective use of automated systems, etc. Creative billing arrangements with clients through forms of risk billing and bonus billing for particular kinds of work that law firms have had experience performing have become important approaches for enhancing revenue and profitability.

     Periodically, law firms of all sizes and types need to review their organization and procedures to determine how they can increase their revenue and improve cash flow. The result would be greater efficiency and profit.

©1999-2014 Joel A. Rose & Associates