Law firm profitability: Capturing profitability and its benefits

Law firm profitability: Capturing profitability and its benefits

In this two-part series, we examine how profitability analysis has become a crucial strategy for many smaller or solo-practitioner law firms and how these firms can best capture the level of profitability they need to flourish

In the previous installment in this series, we explored what profitability is (and isn’t), how to think about costs (including attorney wages), the potential advantages of truly operating at scale, and how the price the client pays — whether lower or higher than simple billable hours — can result in better revenue outcomes for the law firm.

But law firm profitability does not end with that portion of the analysis. Of equal importance, of course, are the concepts of client expectations, data and metric capture and analysis, and ultimately, the positive outcomes that law firms can experience by meaningfully examining the full spectrum of their profitability.

Client expectations

A lawyer has clients, and not customers, and for very good reasons. There should be nothing more important to a lawyer than the tasks that their clients have given them. Lawyers owe a fiduciary duty to their clients; however, this duty often has been distorted to justify the pricing of legal services. And while clients cannot always be right in the attorney-client relationship, the relationship has been far too one-sided — the lawyer is not always right, especially when it comes to pricing and methods.

Legal practitioners tend to overlook another key variable that drives profit in nearly all other businesses — customer expectation and satisfaction.

A persistent myth regarding the practice of law holds that lawyers cannot manage these outcomes because the results are simply the results: clients will go to jail, get divorced, pay money damages, not receive enough damages, or feel they paid too much for a transaction.

In reality, the intangibles of client satisfaction, regardless of matter outcome, are key to finding more profit. For example, satisfied clients are more likely to pay the bill, return for more services, refer a friend, and even promote “their lawyer” in casual conversation. Most lawyers consider customer satisfaction anecdotally, i.e., sometimes former clients refer new clients. However, client referrals and the business they generate can be more than just an unintended happenstance. Just as with the other key areas of law firm profitability — costs, pricing, and revenue — customer care must be systematically measured with an eye toward intentional improvement.

How to capture the variables of profitability

While law is a mental exercise, how the practice manifests and grows (or not) can be measured by data, such as client demographics, net promoter scores, client satisfaction scores, conversion rates, return rates, billing & collection rates, in-depth time analysis (not the billable hour), and analysis of fixed and variable costs.

How to gather and measure this data seems like an impossible task to most lawyers, especially those in smaller firms or solo practices. And to be frankly honest, most lawyers do not have the aptitude. They went to law school to help people or because they were fascinated by the operation of law and politics, but not data and economics. The old attorney adage has been said often: “If I was good at math, I wouldn’t have gone to law school.” Yet, it is also true that one of the clearest paths to higher profitability is found by collecting and analyzing that data, then acting on the findings, no matter how small the law firm.

For lawyers pressed by time and budget constraints — in other words, everyone in the legal profession — the only solution is collaboration with technology, even if the lawyer is a proud Luddite. The investment of time and money into technology may be a barrier for some smaller outfits; however, the return on those investments can be seen throughout the legal industry.

Fortunately, technology on the whole is getting cheaper. The right investment in the right technology will quickly recoup the cost. And yes, there is risk in choosing the right technology, but not making a choice is guaranteed to put the technology-inept lawyer behind as more lawyers shift to these more innovative methods.

Profitability analysis is good for lawyers, clients & the profession

Merely raising hourly rates, as has been done for decades, is generally good for no one other than the lawyer, assuming the lawyer or the firm can collect.

Yet, after taking a long hard look at the firm’s profitability — and possibly taking steps towards improvement based on this analysis — who might benefit then?

      • The client might get a lower bill, resulting in a higher likelihood of paying promptly and being a happier customer. And even on a lower bill, the lawyer’s profit and margin could ultimately be higher.
      • After a critical evaluation of the inputs, the bill could be higher but still be paid by a happy client because now the client better understands the value of the work.
      • Through management of firm costs, a higher bill may result in even higher profit and margin due to the firm’s efforts at budgeting and improving efficiency.
      • Work performed more quickly and efficiently frees up time for more lifestyle choices for lawyers, and whether they choose to find and do more work or head home to family and hobbies, there is a clear benefit to lawyers’ well-being.
      • The firm can produce better work product because the work is created with efficiency and therefore more uniformity. Plus, legal malpractice risks are reduced.
      • Finally, lower bills and a better presentation of value encourages more lawyer engagement, which in turn allows for more lawyer availability to protect the fundamental rights of clients.

If your law firm is not engaged in profitability analysis, you’re falling behind. It does not all need to be done at once, and nearly any effort should move the needle in the right direction. And once that momentum begins, the positive results will be obvious.

In the end, however, it is a change in mindset that is more important — lawyers must be taught to seek profitability, not billable hours.

https://www.thomsonreuters.com/en-us/posts/legal/law-firm-profitability-capturing-profits/