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Core Concepts in Measuring Law Firm Client Profitability

Core Concepts in Measuring Law Firm Client Profitability-header

Note:  This is a guest post by David J. Caiati, manager of Professional Services with the LexisNexis software division.

Law firms continue to struggle with finding innovative ways to sustain a traditional business model.  The key issue confronting firms of all sizes is how to maintain the same profit margins enjoyed over the years while at the same time addressing client concerns about the cost of fees.

They’re under constant pressure to drive down the cost of services as both the law firm and its clients keep looking for ways to squeeze more dollars out of the bottom line.

New creative pricing, innovative billing models and alternative fee arrangements are forcing law firms to get creative with how they pitch a potential client. While it’s a start in the right direction eventually they will need to face the real question of whether a client, practice area or attorney is profitable.

So let’s talk profitability. Every law firm wants more of it, but what exactly is it?

Simply stated, profitability is revenue minus expenses.

To improve profitability, you can work harder, work smarter, or “double down” and do both.  Most attorneys love what they do and put a lot of time into it. Nothing wrong with that.  Except that working harder doesn’t necessarily mean you are working smarter. Below are a few ways to work smarter.

Core Concepts in Measuring Law Firm Client Profitability-joelRegister to View the Full Presentation
Profitability, Realization and Utilization
Presented by Joel Eaton

Improving realization

If you work it, but don’t bill it…or even if you bill it, but don’t collect it…its wasted time.

Use of compliance checking tools to help identify potential work done that cannot be billed or potentially may be written off is key to controlling the collectability of your fees.  Partner mentoring and periodic monitoring of work on a case they are responsible will also help to keep the younger associates on task and delivering work product that is closer to both firm and client expectations.

Waiting until the pre-bill comes out for review is much too late in the overall scheme of things.  Identifying time entry issues early on is both a learning tool for your timekeepers and also an accelerator for your billing process.  Time that is correct on entry is billed quicker, collected at a higher percentage of realization and speeds up the overall “Work to Cash” time frame.

Improving utilization

Managing staff utilization is another key metric with respect to overall firm profitability.  The factor that is often overlooked however is just because an attorney is billing lots of hours, it doesn’t mean that timekeeper is profitable for the firm.  While you want to be sure work is assigned to the right resource, bringing profitability and attorney carrying cost into the equation adds a whole new layer to managing the bottom line.

What’s this all about?

There are lots of ways to look at the numbers affecting profitability.  The best and most efficient way is with financial reporting.  After all, while the numbers don’t lie, they don’t always tell the entire story.

For that, you have to learn the real facts behind the numbers.  Be forewarned however digging to this level of detail requires a certain level of firm maturity.  Running a profitable business is not about luck or chance, it’s about managed thought, focused attention to detail and deliberate action based on comparable consistent data.

Finding a profitable sweet spot needs to be a process that is guided not only by data but also by a clear understanding of the impact driven by the change along with anticipated results that will be achieved.

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Readers are invited to view Joel Eaton’s entire presentation, which is complimentary with registration here: Profitability, Realization and Utilization

If you enjoyed this post, you might also like:
Top 10 Law Firm Collections Challenges and How to Solve Them

Photo credit:  Flickr, Jason Devaun, Monopoly Money [Explored] (CC BY-ND 2.0)

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About Contributing Writer

Contributing Writer
This bio page is used to publish submissions by contributing writers. We welcome contributions from the legal community and are especially keen for contributions from our customers. Please review previous submissions published here and the “About Us” section to get a sense for what topics work for this blog. All posts must be original content not published elsewhere for at least 30 days. To submit an idea for consideration, please email blsssocial@lexisnexis.com.