The majority of legal firms don’t fare too badly when it comes to growing their total revenue. That is not a bad thing, but if that revenue is accompanied by additional costs such as administrative expenses, it does not necessarily lead to an increase in profitability. That is why below we clearly distinguish between the two terms and specifically focus on ways to improve law firm profitability.
Total revenue is the sum total of all billable work carried out by the firm over a certain period, e.g. a month or a year. Law firm profitability, on the other hand, refers to that part of total revenue that remains after all expenses have been deducted. These can include rent, salaries, wages, electricity bills, equipment rental, stationery, and similar costs.
If a partner takes on a major new job it will significantly increase total revenue. If at the same time, administrative and other costs also increase, there might not be a huge increase in your law firm profitability though.
Taking into account that according to last year’s Legal Trends Report the average lawyer is only able to bill 2.5 hours a day, it’s clear that billable hours have to increase. But how do you ensure that law firm profitability gets a similar boost? Below are a few valuable tips.
Don’t waste your time on low-income high-overheads work
Admin costs and other overheads typically devour a much bigger percentage of the income brought in by smaller, less specialised jobs than is the case with bigger, more specialised work. If your practice concentrates on the latter and sub-contract less profitable work to smaller law firms or freelance lawyers, and then bill the client at the (higher) rate you normally charge for that type of work, both revenue and profitability should increase.
Spend less time on non-billable work
While it might be fun for the senior partner to play around with new ideas for the firm’s website, this type of non-billable work should rather be delegated to people inside or outside the firm who cost the firm less than the hourly rate of the partner in question.
Improve law firm profitability by increasing your realisation rate
Another way to improve law firm profitability is to simply get more clients to actually pay their bills. Let’s say currently around 85% of the amount you invoice is actually paid, i.e. 15% goes unpaid. Let’s further assume that expenses devour 50% of the amount billed, then the firm is left with a profit of only 35% of the amount billed. If you could collect 95% of all billings instead of 85%, the ‘bottom line’ law firm profitability ratio will go up from 35% to 45% of all billings. That is a very significant increase of nearly 30% in profits (10/35 x100).
Don’t lose out on the benefits offered by technology
If you currently use highly-paid staff members to work in admin, salaries, wages, accounting, etc., you are most likely losing out on opportunities to rather use those people for billable work and employing technology to do take care of routine tasks. Examples include:
Practise management software to take care of time tracking and paying bills
A variety of payment systems to make it easier for clients to pay you, for example, credit cards, debit cards, online payment options, and even monthly payment plans
Using chatbots on your website to handle routine questions
A FAQ section on your website to deal with the type of questions that are most often asked by current and prospective clients
Offer good old-fashioned client service and stay ethical
Let’s face it, without clients there will be no profits to increase. Not only is a happy client who respects your firm more likely to recommend it to other people, he or she is also more likely to pay their bills on time. You will most likely also spend less money on cost disputes. All of these can have a significant impact on law firm profitability.