How to Run a Profitable Law Firm

Law school curriculum doesn’t cover what it takes to run a profitable law office. To be successful, you have to look at running your practice like running any business, which means putting some key tactics into place and focusing on data to make business decisions. In this guide, we’ll cover what they don’t teach you in school, so you can take action toward higher profits.

Being profitable frequently requires some active work in law firms, requiring a clear strategy and focused implementation. Tackling this will have you running your practice the same way the top firms in the world do: efficiently and cost-effectively.

1. Know where you are and where you want to be.

Without numbers and analytics, knowing where your firm stands and if it’s progressing in the right direction is just a hunch. You need real data to be able to make informed decisions, guide strategic moves, and figure out if goals are being missed. After all, what isn’t measured can’t be improved.

This information is necessary if a firm wants to not just earn a lot of revenue, but also have high profits. This data will determine what fixed fee pricing should be, tell you how to balance unbillable time with billable hours, and if overhead needs to be cut. Having a solid system in place is the only way a firm can make sure they’re making adjustments as needed. Otherwise, expenses can quickly become an issue for even a robust firm.

Data-driven decision making can be intimidating at first. Not only do you need to track the right numbers, but you also need to be able to interpret them. Thankfully, it’s not as complicated as you might think.

WHERE TO START

You want to look at your law firm just as you would any other business. The very first step is to come up with a strategy, so you have a clearly outlined plan before you start taking any action. You want to think about any unknown answers and information that would be helpful, such as what the increase in profits in a particular practice area has been over the last year or how long client accounts often go past their due date.

Keep in mind marketing, accounting, customer satisfaction, and internal operations as you make your list. While you can’t tackle every area at once, you can work on one section at a time.

Once you have your questions, you should look at what data you currently have and what data you need to figure out the answers. This doesn’t mean you should start figuring out a way to get the numbers you need right away. You should first evaluate the work and cost involved with tracking the information and whether or not it’s essential and worth the return.

After you’ve determined what data you’ll begin to collect, come up with a process for doing so. With that information you can analyze it, looking not just once at the numbers but consistently reviewing them to determine any ongoing trends or necessary action items. You can plot this data on a graphic for a more visual approach or invest in analytics tools to search these insights for you.

With a thorough analysis, you can present your conclusions to the rest of the firm to make sure everyone is on the same page. These learnings should be incorporated into the business. It’s a concerted effort to track this information and analyze it, so you want to put all that effort to good use. Applying what you’ve learned can be used to create incremental improvements.

KEY METRICS TO TRACK

Every practice is made up of countless moving parts and departments, but certain metrics are more important than others. When determining which measurements your firm will track and analyze, the following should be heavily considered.

WIPS/AR by Aging

You may have a large number of clients, but are they paying you? High billable hours do you no good if invoices constantly go past their due date. Keeping track of this metric will keep you on top of accounts as needed and also help you evaluate any potential issues that are causing high past-due invoices.

Revenue by Practice Area/Timekeeper

With this information, you can see which practice areas or individuals are most valuable to the firm, guiding decisions on which practice areas to grow and how to handle internal efforts.

Utilization & Realization Rate by Timekeeper

You need to track this to make sure you’re charging the best rate possible, looking at work completed versus the fee paid for that work. If the realization rate is low, that’s an indicator there should likely be a change in processes.

Fixed/Contingency Fee Case Profitability Ratios

Similar to the above metric, this one will help you make sure you’re charging an appropriate amount by looking at how your billing compares to your case profitability.

Client Cost Analysis (Incurred/Billed/Collected)

Look at client costs and what is being incurred, billed, and collected. These fees are often paid out of pocket by the firm and then fail to make the invoice. If you’re not recovering these costs, that can add up to considerable missing funds.

Profitability by Case, Practice Area, and Partners

While your revenue for a particular practice area or partner might be high, if your profitability doesn’t reflect the same level of numbers this could be an indicator of necessary cuts to overhead.

Administrative/Overhead Cost Proportion

There’s no way to get around having to do unbillable work, but you want to make sure the costs of doing so aren’t so high that they’re eating into all your profits.

Overall Financial Trends

Don’t look at your data as a singular instance. Instead, view it over a period of time to see if there is a particular trend. If the firm had a bad month but has been consistently on an uptick over the past year in other months, the slight dip shouldn’t be cause for concern. However, if the decline continues for several months, then the firm should look to see what the cause is.

Percentage of Repeat/Referred Business

Certain practice areas see more repeat clients than others. Either way, you should know what percentage of clients are repeat business. Additionally, look at the percentage of referrals-to-client ratio to see if your clients are sending business your way. If the numbers are low, you may want to look at a customer satisfaction survey.

Business Development Effort & Cost Analysis

You want to know the return on investment of your marketing and business development dollars. Certain channels may seem like they’re generating a return, but without evaluating the true ROI you won’t know if your budget is going to waste or worth the investment.

2. Eliminate inefficiencies

No matter what type of law your firm specializes in, time is money. You want to focus on billable activities as much as possible. To do this, you’ll need to look for inefficiencies that are taking up valuable potential billable time while leveraging technology to help streamline and automate many daily tasks.

Many firms find themselves suffering from three common inefficiencies, all of which can be easily addressed.

MULTI-DATA ENTRY

When systems are separate but the same data is necessary for each of them to function correctly, such as in accounting and billing programs, firms often waste considerable time inputting the same data in both.

Not only does this present an inefficiency, but it also increases the likelihood of errors. To make sure the information is correct in each program, it needs to be cross-verified, which takes even more time. When dealing with crucial data, such as financials, accuracy is critical.

Use integrated systems to eliminate double data entry. You can also use programs that have multiple systems built into them, so you don’t have to worry about any potential issues with data transfers that you may run into with integrated programs.

DELAYED BILLING

Clients can’t pay invoices they don’t receive and if they receive them late, there’s an increased risk of it being contested. The further away from the actual service provided, the more likely it is you’re going to run into an issue getting paid. When invoices are delayed, you can also wind up with missed time or inaccurate billings, leading to revenue leakage.

Evaluate your internal billing process. If there is a drawn-out review and invoicing process, you’re not only expending additional admin resources but also delaying payment.

You should also offer mobile access for time tracking and have it connected to your billing software for real-time recording of billable hours. When the time comes to invoice a client, all of the time spent working on the case has been tracked accurately.

You can then automate as much of the process as possible, using batch billing and sending to quickly get invoices out the door.

LACK OF SYSTEMIZATION

One of the most effective ways to save time is by creating systems for your firm. This means creating standardizations for how processes work, so you can then automate as much of that process as you can. Before you can even begin to think of creating automation for a particular task, you first need to have documented systems in place.

These systems aren’t required by any means, but not having them in place severely limits a firm’s ability to grow. Without creating standardization, this means all tasks have to be handled manually, costing you time and leaving more risk for errors. It also means that the way tasks are carried out can vary from person to person, creating a lack of consistency that can result in a feeling of constant panic and unhappy clients.

The benefits of systems, however, create an opportunity for structure, regularity, and time to focus on big-picture, higher-level thinking tasks. Once you put systems into places, it becomes clearer to employees what’s expected of them and tasks can be completed in a repeatable, predictable pattern. Through the use of technology, that we’ll discuss in more depth later in the guide, you can then evaluate these processes to see where automation can be implemented.

There are a wide array of situations where it makes sense to apply standardization and automation in a firm including:

• Pre-defined checklists
• Document merging
• Batch invoicing and delivery
• Automated collections
• Letter and email templates

To create these systems, consider all of the tasks involved in running your firm. It can be helpful to think in terms of case handling, recurring time-triggered tasks, and employee responsibilities. Once you have these tasks, you can start to document a procedure, writing it as though a new hire would be handling the responsibility. You don’t want to make it so detailed that unnecessary information is included, but it’s critical to include any relevant details and steps, even if they may seem obvious to you.

While this can seem overwhelming, it typically is much easier than anticipated once you start writing. Once completed, it will introduce efficiency, clear expectations for your staff, and create consistency.

3. Embrace technology

Technology plays a crucial role in any business, providing greater efficiencies, improved communication and collaboration, and increased customer satisfaction. Law firms also stand to benefit significantly from the use of technology in their practice. While adopting new tools can disrupt the normal flow of business during the transition period and often come with a learning curve, the benefits they provide are necessary for firms who want to increase their bottom line.

There has been a rise in recent years of tools created specifically for law firms, designed to address their unique needs and provide solutions for challenges that were previously lacking. As a result, firms can take advantage of technology to improve every area of their practice.

AUTOMATIONS

Once you have standardizations in places as we discussed above, you can then automate those processes. Technology is the only way to turn those manual tasks into ones that can be completed with just a few clicks, turning what used to take hours a week into minutes.

Here are just a few of the many ways automation can cut down on how long tasks take you.

Pre-defined task templates

When you start a certain kind of case, there are going to be deadlines and task items that are always part of that matter type. These types of recurring task lists can be created for any process in your firm where you’re consistently repeating the same tasks once triggered by a particular event. With technology, you can create task templates and eliminate the need for manual creation and calendaring of these to-do items.

Many practice management programs have this feature, allowing you to program these task templates to be created once a particular trigger takes place.

Batch invoicing and billing

Rather than creating and sending out invoices one at a time, batching billing lets you generate multiple invoices at once with the click of a button. Once created, you can send multiple invoices at the same time, meaning you don’t need to spend countless hours on invoicing and billing any longer.

Document merging

With today’s modern practice management programs, you can also create templates for your commonly used documents and merge them with matter data.

Automatic collections

Following up on past-due invoices can be a job in and of itself. Automate the process by using a billing program that will send automatic reminders and past-due notices to clients, staying on top of your cash flow so you don’t have to.

SAFEGUARDS

Being a lawyer comes with a lot of responsibilities and compliance requirements. Relying on memory to not make any missteps can be risky, so look to legal-specific technology with built-in safeguards for common errors to help act as a backup. Trust accounting, in particular, comes with a large number of potential pitfalls and legal-specific accounting software can contain mechanisms designed to avoid issues like overdrafting a client trust account or commingling funds.

MOBILITY

Thanks to cloud-based solutions, lawyers have the ability to work anytime and anywhere. With real-time access, the cloud provides a way to access matter documents, track time and billing as it happens and stay on top of your cases. All of this results in better service for your clients, even when you’re not in the office.

4. Increase your value

At the end of the day, law firms are service-based businesses and income comes directly from your clients. The happier you can keep a client, the more likely they are to use you and refer you. The goal is to always provide top-notch legal services, but there are additional ways you can create an even better overall experience that leaves your clients thrilled.

For all the time and money that’s invested in marketing and business development, don’t underestimate the power of a happy client. A truly satisfied client can be an excellent referral source, providing the best “free” marketing you can ask for.

To make yourself as valuable as possible to your client, consider simple upgrades meant to be a value-add.

Well designed website

For a potential new client, the website is often one of the first points of contact. Make an impression with a well-designed website and set the tone for what their experience will be like with your firm.

Client portal

Client portals are a great way to provide easy access for your clients to key documents and information, while also benefiting from a secure means of communication. Most practice management programs offer a client portal, giving clients a sense of control with anytime access. Another added benefit: they won’t have to call or email you to request copies of a document – they’ll all be listed in their portal.

Online payments

Having to mail in a check or fill out a credit card authorization form can seem time-consuming and frustrating to many clients. In an age where people are used to paying online, you want to make it easy as possible for them to get their payment completed. Implement an online payment system, which is easy to put in place thanks to legal-specific processors such as LawPay, and you’ll see improved cash flow as well as satisfied clients as a result.

Planning for Profits

A profitable law firm doesn’t happen overnight. Planning, execution, and consistent evaluation and adjustments are necessary to maximize your profits.

You don’t need to implement every technique in this guide to see results. Start with one and work your way through the list, beginning with what will have the most significant, immediate impact. These changes are more than just a short-term boost, though, and you’ll see long-term benefits as a result.

For firms that are looking to be as profitable as possible, a few key changes can make all the difference in their bottom line.