It almost sounds like one of those whacky “Lose weight with this one weird trick” internet ads:
Some law firms are improving profitability without having to raise billing rates, win new business or without having attorneys bill more hours.
These partners are improving their firm’s bottom line by rethinking efficient ways to manage the firm.
A Law Firm, a Business
“Dewey collapsed under the weight of a toxic combination of high leverage, lavish financial guarantees to many partners and faltering revenue,” wrote New York Times reporter James B. Stewart in an article titled, Dewey’s Fall Underscores Law Firms’ New Reality.
“But the firm’s messy decline lays bare the harsh realities of today’s law practice, and shatters the perception, still held by many members of the bar, that however transformed in recent decades by the realities of the market, law is at heart still a guild, a brotherhood (and increasingly a sisterhood) — in short, a profession more than a business.”
In other words, Dewey collapse because the firm wasn’t run like a business; perhaps it wasn’t a business.
The distinction between a profession and a business is profound. No education, or bar exam, or higher ethical standards are prerequisite for starting a business. Obviously, the same cannot be said of an attorney at law — and yet despite the high achievement and talent of so many that pursue the noble profession of law, we collectively forget, or perhaps overlook, the fundamentals of business.
“We do not treat our businesses in a business-like fashion,” wrote Bruce MacEwen of Adam Smith Esq. LLC, which studies law firm economics. Yet, law firms are businesses — and require the same mix between the art of leadership, and the science of management. The gut feelings that influenced service offerings, client choices and competition are giving way to data-driven decision-making. The new reality of the legal profession is a return to the basics of business.
Law Business Metrics that Matter
There are three distinct law firm KPIs or metrics that, when analyzed and managed properly, can have an impact on the firm’s bottom line. It’s important to note that none of these metrics are associated with the “traditional money making” tactics outlined previously. That is because these metrics are associated with looking at how the firm is operating from the inside out. It’s about setting the foundation for success.
1. Realization. Realization, in very simple terms, is the rate at which the firm’s bills will be collected and paid. This involves understanding how long it takes from the moment a client receives an invoice to the point at which the firm will be paid. This enables firms to know the minimum amount of money the firm needs to sustain business operations. To do this, establish a good collection system that a.) gets the firm paid faster and b.) reduces write offs by ensuring the right person is assigned to the right work at the right time. If firms can improve in these two areas it can save the firm money. For example, for every $100,000 a year a firm collects, improving the firm’s realization rate by decreasing write-offs by five percent translates into an extra $5,000 in receipts for the firm.
This podcast offers some excellent tips on addressing collection problems in law firms: Attorneys and Billing: The Art of Getting Paid
2. Leverage. In today’s ultra-competitive legal market, law firms are starting to staff their businesses more strategically. In other words, they are analyzing when it makes sense to delegate work to associates and support staff, who not only bill at lower rates, but require less pay to do the same job. This is a winning scenario for the firm because not only does it make the firm more profitable, but it makes all parties happy. In other words, it enables the more seasoned equity partners to focus on the higher level strategic work such as: maintaining client relationships and winning new business, while empowering junior attorneys to take on more challenging projects. This is good for clients too because it keeps legal costs under control. In short, it’s a win-win across-the-board.
3. Margin. Another important step to improving the firm’s profit margins involves looking at how the firm is spending money and finding ways to save. An example of this is looking more closely at administrative procedures and discovering ways to do things more efficiently. For example if the firm is relying on manual entry for things like billing and invoicing, this could end up costing the firm thousands in unnecessary administrative work, not to mention mistakes due to human error. Why not focus on what the firm does best? That is providing clients with great legal counsel and use technology to manage the administrative stuff. Technology can be an invaluable tool because it keeps attorneys billable by eliminating unbillable administrative tasks.
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In today’s client-driven environment, attorneys are starting to see the value in looking at specific metrics to advance the business. Provided the firm has the right technology in place, it can pull from a number of performance indicators including: accounts receivable, work-in-progress, timekeeper, and realization reports to see where the firm can be working more strategically. This information helps the firm see things like hours worked versus hours billed or hours worked versus fees collected. By gathering this intelligence, the firm becomes empowered to make changes that puts money back into the firm’s pocket and who can argue with that?
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Six Business Metrics Every Law Firm Should Measure