OPPORTUNITIES IN LAW FIRM PROFITABILITY

All law firms face some issues relating to profitability and marketing, but small law firms in particular often founder and wonder what to do.  Consultant Colin Ritchie specialises in helping small firms in both Australia and New Zealand with a focus on lifting their profits and cash flow.

In this exclusive LawFuel article he explains how small firms can check some boxes to easily to lift profits.

I saw a study posted in the New Zealand Lawyer Group in Linked In, a couple of months ago, published by Thomson Reuters titled “Tough Times at Small to Medium Law Firms”.

Over recent times there have been numerous articles indicating that the legal market is tougher and that firms are doing it tough.

I would like to pose an alternative view.

While there is no doubt that the economy is doing it tough, there are great opportunities for small law firms to lift profitability, even in this economy.

What is the problem?

If the profits of a small law firm are below what the principal’s deem as satisfactory, there are usually two main reasons:

1)     The practice management needs improving, or

2)     The firm doesn’t have enough good quality work

Clearly these reasons aren’t mutually exclusive and both could apply to the practice.

Practice Management Improvement

While I could write a whole book on legal practice management, due to space restrictions, I will talk about just two issues.

1)    Pricing

As a consultant, when you get a new client, you want to make an immediate impact. That way, the client will see immediate results and hopefully see your value.

The quickest and easiest way to lift profitability in any business including legal practices, is nearly always to focus on price. Many firms are just too cheap!!.

I have a saying that “Whatever you charge, your client will think you are expensive, so don’t disappoint them”.

Of course I am not talking about doubling fees, or anything that dramatic. Let me give you an example of the impact of lifting prices.

The ALPMA ( Australian Legal Practice Managers Association) published a 2011 study ( which is available from their website) showing that profits ( after principal salaries) were around 8% of revenue for the practices in the study. This was the same for all revenue classifications from less than $5 million to $20 million in revenue.

In other words, for a $1million in fees, the practices were only turning $80,000 of it into profit (after principal salaries). If those firms had lifted prices by just 10%, profit could have lifted by $100,000 or an increase of 125%.

2)    Average Hourly Rate Analysis

While there are lots of discussion about doing away with timesheets and pricing matters in advance, practices in the accounting industry that are going down this track, still generally keep timesheets. Not to charge the client, but to analyse the profitability of the matter, after it is finished.

From a profitability point of view, the challenge is to lift the average hourly rate of the practice. That is, the amount billed divided by the hours it took to do the work.

In order for these figures to be accurate, time needs to be accurately recorded. There are numerous discussions in Linked In and other forums about how poorly time is generally recorded by lawyers.

Many legal practices don’t record or analyse their Average Hourly Rate and as a result, can’t identify with any accuracy, their most profitable and least profitable work and the reasons for that.

By focusing on just these two areas, practices have been able to achieve significant lifts in profitability.

Imagine what would be possible if you could then improve other areas as well.

Lack of quality work

Due in part, to the tight economy, many practices have experienced a lessening in demand for their services. In Australia, the conveyancing market particularly, has been affected by less turnover of property.

Clearly in an article like this, I can’t explore every strategy to generate work, so again I will focus on two key strategies that I have found can get you highly focused on what needs to be done.

1)    Focus on your existing clients

Who would you prefer to be marketing legal services to your clients?

Clearly your practice is the logical candidate.

I continuously hear principals of small practices telling me that they haven’t heard from some of their clients for many years.

This is not your clients fault.

As many lawyers keep telling me, from a clients perspective, a trip to the lawyer is not something they look forward to. Clients often associate a trip to the lawyer with pain, be it a divorce, a criminal matter or maybe simply having to spend money on an intangible service where they don’t see much for their hard earned cash.

Whatever the reason, left to their own devices, clients will only come and see you when they believe they really have to, which is likely to be as little as possible.

To change that, you (or your competition) have to do something about it.

If your practice provides a range of services, it is highly likely, I believe, that many of your clients have not used all of the services that they could or should have.

If you give your clients sufficient reason to do something, it is likely that a percentage of them will do so.

The cost of marketing additional services to your existing clients is a fraction of the cost of trying to find new clients. Existing clients are far more likely to “Know, Like and Trust You” than a new client.

2)    Clearly Identify Your Ideal Client

Let me focus on the “quality” part of lack of quality work.

Many practices tend to take on as clients, whoever comes through the door. In tough economic times, the temptation to do this, is even stronger.

Clearly some of these clients will turn out to be good clients, but some will not and will drain practice resources, doing barely profitable work, where you are often rewarded by the client not paying you.

The solution I believe, is to get totally focused on the “Who, What and Where” of your ideal client.

“Who” is obvious, who are they? I encourage you to describe them in as much detail as you can. Write down attributes such as industry, location, financial situation, account payment, do they listen to advice etc

“What” refers to their Pain, Problem or Challenge. While you may be having your own pain, problems or challenges, I suggest that your clients or prospective clients, aren’t really interested in those. They are interested however, in how you can help them with theirs.

If you become totally familiar with theirs and target these in any marketing you do to your ideal clients, your chances of success will rise exponentially.

“Where” refers to where do you find these ideal clients. If they are existing clients, that is easy, but if not, where do they live, what associations are they in, what websites do they look at, what trade journals do they read, who else is talking to them etc etc.

This work may take some time, but is not likely to cost you very much, yet many firms don’t do it.

Whenever you see a firm running a general practice advertisement in the local paper, you can be confident, that they have spent no time working out who their ideal client is.

This work will ensure that you marketing efforts are much more targeted and therefore much more effective. It will also increase the chances that the clients it attracts will be exactly who you want to work with.

Clearly the economy is doing law firms no favours, but I dispute the assumption that many are making, that therefore profits have to decrease.

There are many opportunities for small firms to implement strategies to address both shortfalls in practice management or to attract more quality work. By addressing these areas, many firms will find that they are able to significantly improve both profitability and cash flow, despite the current tight economy.