Some key areas to look at to improve your law firm profit strongly…

Apart from the opportunities in out-sourcing discussed in an earlier post, most firms with low profits and tight cash flow have long since explored most avenues for keeping expenses down.

Joining a co-operative purchasing arrangement with other firms has benefits but you’re not going to do a heck of a lot for your profit by saving on copy paper, or even interest rates or insurance premiums.

The much richer pickings lie elsewhere in my wide, and continuing, experience.

With relatively fixed Expenses the quickest route to greatly improved profit is to get revenues up a bit, and that can be done by having your expensive people resources spending closer to reasonable amounts of time actually doing billable legal work, and having the confidence to charge properly for all or most of that work.

Of course having enough work to do is important within this equation, so Business Development is essential, not just to ensure you have enough to do, but also to ensure that you have more than enough enquiry for your services so you can have some control over the quality of the work you accept, and its fee levels.

You must not be in the position of mainly getting asked to do the work other people don’t want. (Think “John West and salmon” in reverse)!

In the debate about the future of the billable hour, please do not become confused about the necessity to track where you and your employees are investing your time.

Humans are infinitely fallible, and in almost every case, grossly over-estimate the effective time they spend on the right things in their working day or week, if they don’t track it accurately.

Interestingly, when they don’t track accurately, they also grossly under-estimate the time they have put into individual client matters.

When coupled with any lack of confidence and courage in estimating, quoting and billing, revenues get hurt badly by less time than necessary being spent on billable work, and less being billed than appropriate on that under-production.

We’re not talking “peanuts” here. My assessments of many hundreds of lawyers over the years indicates that lawyers who do not properly plan and track their investments of time, and lack billing confidence and courage, still bill on average $150,000/year less than those of their peers who get it mostly right.

Simply put, that can be the difference between a firm being happily profitable or not.

People are potentially the key drivers of proper profits in almost all law firms, yet never in the 1335 small-medium law firms I’ve looked at closely have the majority of people been really effective.

Almost universally they’ve been very nice people, well-educated, and well-intentioned, but very often afraid to genuinely put their actual performance under the microscope in search of far better outcomes than they've been used to.

A big part of the answer is to stop the over-focus on rendered/collected fees as the main performance indicator.

There are many roles that need to be performed in a successful legal firm, and many tasks within each of those roles.

Some of them are directly responsible for fees being billed and some indirectly.

The biggest inhibitor to revenue improvement across the bulk of the legal profession is the focus on what are considered “reasonable” averages for billable hours.

In almost all cases this leads to too little time being spent on client legal work, rather than too much as the myths so often suggest.

In many of the practices I have assisted over the years the proper planning of how people spend their time, and careful monitoring of that, is the first time it has ever happened, and it makes a huge difference to outcomes.

Without working any harder, just a lot smarter, people get a lot more of the right things done than they ever have before.

The simple starting point is to accept that everyone is different.

For a wide variety of reasons people will actually want to work in, and on, their legal firm for different hours a day, days a week and weeks per year…that’s a given.

Rather than focusing simply on what they should spend per day in potentially billable hours, the starting point should be an examination of how much of their individual day should be spent on FirmTime given the firm’s Business Plan and the interests and skill sets of that person.

By this commonsense method you arrive at different goals for FirmTime for everyone both in volume and nature.

Automatically then the ClientTime hours for everyone are also different.

To illustrate simply, a principal managing the practice may need five out of eight hours for FirmTime as a daily average…leaving three for ClientTime, while a first year lawyer may need 1.5 hours a day FirmTime average(including a lot of on-the-job training) leaving 6.1 hours a day on average for ClientTime.

Both because it is important work, and because its utilisation directly impacts available ClientTime, investments in FirmTime are tracked as carefully as all investments in ClientTime.

Using this approach for over twenty years I have been able to get law firm revenues up to where they should be, creating excellent margins over the largely unchanged expenses.

Improvements in profit of 100% are a given and many times that quite often achieved.

Finally, a comment on the psychology of pricing. Don’t underestimate its importance.

Learn from the retail arena where buyer psychology is well understood.

Don’t estimate or quote in round numbers on most occasions. Almost all your clients and potential clients will view $985 as considerably less than $1000. This will increase take-up of your proposals.

On the other hand, those who will see good value in, and agree to, $1000, will in the main also have found $1285 equally acceptable. If your true profit on $1000 was 20% or $200, your profit on $1285 is an improvement of over 140%.

If almost all proposals you put out there are taken up you might  like to consider if you are setting your price point way too low and dramatically impacting your profit.

Lawyers may wish they didn’t need to learn about such matters, but to be concerned about levels of profit and not take the time to come to grips with these sorts of fundamentals is not a sound approach.