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How to Increase Profitability in a Shaky Economy

By Marylou Steeden

Yes, even in a shaky economy, law firms can increase their profitability. To accomplish this, law firm managers need to understand the drivers of profitability and there really are only two—revenue and expenses. After all, Profits are defined as Revenue minus Expenses.

When revenue takes a dip, the knee-jerk reaction often is to focus on reducing expenses. And, while it is always important to keep your expenses under check, law firms can more easily increase profitability, especially in the long term, by focusing on revenue, instead.

Increasing Revenue

There are a few simple steps that any attorney or law firm can take to increase their revenue. The first and most important step is to get closer to your existing clients. That means picking up the phone, getting in the car, or getting on an airplane. Take some time to listen to what your clients are worried about, and you will often find that you can offer them some solutions to their worries. Whatever you do, do not bill your clients for these “listening sessions.” Just make sure that your client knows you are there for them, that you care about their problems, and that you are willing and able to partner with them to help them find solutions.

The next thing to do is very basic administrative work. Make sure that you capture all of the hours you work every day to ensure you capture all time worked. Clear and detailed time entries are key to making sure your clients understand the value of your work. When you communicate value to your client, you are less likely to arbitrarily write down WIP time and your client is less likely to feel like they are being overbilled. When you convert your time into a value statement on a daily basis, it helps you evaluate how efficient and effective you are with your time and makes you a better lawyer.

The last and probably most dreaded step is to collect those receivables. If you have communicated the value proposition of your bill to your client, then it shouldn’t pain you to pick up the phone and find out if your clients have any concerns about the bill. See step one—getting closer to your client. This is the opportunity to ask your client how you are doing.

This feedback loop is necessary to get more business. If you have clients who are unable to pay their bills, then perhaps you weren’t close enough with them in the first place. If you really need help collecting from clients who are in financial trouble, don’t become their bank of choice. Get help from your administrative staff who are more than happy to be the persistent, yet professional reminder that they have obligations to you.

Controlling Expenses

The other side of the equation should not be ignored. Expenses must be controlled in rocky times as well as in good times. The highest expense item in law firms is staffing, so make sure that you are properly staffed. One reaction is laying off junior staff and associates. This often does not produce the reductions needed to match the dip in revenues nor does it make the firm more efficient or productive. The more appropriate way to keep personnel expenses in line is by evaluating the key ratios.
Make sure that the associate-to-partner ratio is appropriate and don’t be afraid to address non-productive partners. Make sure the attorney-to-assistant ratio is appropriate and evenly distributed. Also look at your overall staff-to-attorney ratio to make sure your attorneys have enough support to enable them to concentrate on billable hours and not on administrative tasks. Finally, look at the paralegal-to-attorney ratio to make sure that junior associates are not doing work more appropriately delegated to paraprofessional staff.

The next highest cost to the firm is benefits. Make sure that your benefits providers are helping you to find better solutions to the rising costs of health care and not just operating on auto-pilot. If they do not have suggestions for you, then you may need to find another benefits provider who is more creative. In fact, all of your business partners, insurance brokers, facilities or IT management companies, etc., should be your partners in helping to keep costs down. Make sure that they are presenting you with creative ideas to reduce costs. If they are not, it might be a good time to request proposals from other vendors who do.

Finally, it is important to pay attention to how you are dividing up those profits. Make sure that you are rewarding the behaviors you want from your attorneys, including new business generation and client satisfaction.

Conclusion

About the Author

Marylou Steeden, CLM, is the Executive Director of Klein Horning, LLP, in Boston and Washington, D.C. She is a past President of the Minnesota Chapter of the Association of Legal Administrators.