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INCREASING PROFITS

4 steps to planning for a successful 2018

Don’t go into 2018 without setting goals for the year.

“Goals force the firm to stretch out and do more than just plod along in a disorganized fashion,” says Wayne, PA, law firm consultant Robert Denney. “They improve efficiency and performance, and they help the attorneys achieve the highest bottom-line results possible.”

To set goals, Denney recommends a simple but direct approach: Evaluate the revenues, the marketing, the profit margin, and the client satisfaction and from there determine where each should be this time next year.

Step 1: Be realistic about your revenue projections

First, set a reasonable goal for the year’s revenues.

To get realistic projections, Denney recommends looking at two main factors.

One is the percentage change the firm saw between last year and this—and take into account what caused that change.

For example, if the revenues jumped eight percent, it might be plausible to expect another eight percent increase for next year. But if that increase was due to a few isolated cases, a more realistic target might be a four percent increase. Or, if the revenues saw a five percent dip for that period, it may be enough just to make it a goal to get back up to the last year’s level.

The other factor is the elements that will play a role in next year’s performance.

If a few one-time cases were responsible for the bulk of last year’s income or if there’s a chance the firm’s single biggest client will leave next year, the income is going to take a hit.

If the firm has lost a big producer or rainmaker, that’s going to affect the attorneys who have been relying on those people for work.

Or on the positive side, if new clients are scheduled to come in next year, the revenues will move up.

Then make adjustments to accommodate those changing circumstances. If a real estate attorney expects to see a tremendous drop in business because of a change in the local market, for example, don’t just wait for it to happen. Start moving that attorney into a more profitable practice area.

Don’t try for the unattainable, Denney says. Generally, the goal should be to see some sort of revenue increase, but if business losses are unavoidable, it’s a reasonable goal simply not to go beyond those anticipated losses.

Step 2: Ensure your marketing is geared toward the right target

Next, evaluate the marketing.

Decide what type of clients the firm wants to reach next year—perhaps a move from small businesses to Fortune 500 companies—and see if the marketing is focused on that audience.

Look also at the economic environment of the firm’s current clients. “If a lot of the clients are in the restaurant business and restaurants are suffering,” Denney says, “then now is the time to plan ways to reach other more profitable areas.”

And look for new clients in that area as well as for additional business from the current clients.

Step 3: Establish a realistic profit margin

Next, look at the profitability of the equity partners and determine what profit margin is feasible for next year.

Denney uses a simple formula for measuring profitability.

First, figure the partner’s gross revenues. That includes the partner’s own billable hours as well as the billable hours of the attorneys, paralegals, and secretaries working for that partner.

Then subtract the direct costs. Those are the partner’s draw plus the associates’ and paralegals’ salaries and benefits.

The result is the gross profit. For the firm to break even, that amount has to be enough to cover the partner’s overhead. Whatever goes beyond that is the actual profit.

So suppose Partner A has two associates working half the time for him plus a full-time paralegal and a full-time secretary, and the gross revenue comes to $500,000.

As for direct costs, suppose A’s draw is $125,000 and suppose each of the two associates has a salary of $80,000 plus benefits. Benefits generally come to about 20 percent of the salary. They work for the partner only half time, so together their direct costs for that partner are $96,000.

Along with that, the paralegal’s salary is $50,000 plus 20 percent benefits, or $60,000. And the secretary’s salary is $30,000 plus 20 percent benefits, or $36,000.

All total, the partner’s direct costs are $317,000. Subtract that from the $500,000 gross revenues, and the partner’s gross profit is $183,000. That has to be enough to cover the overhead.

To get the profit margin, divide the gross profit ($183,000) by the gross revenue ($500,000). Partner A’s profit margin is 36.6 percent.

“If the firm figures each partner’s overhead at 25 percent, that partner is bringing in an 11.6 percent profit to the firm,” says Denney.

Step 4: Check in with your top clients

Finally, Denney recommends you look at the clients. If they’re going to stay with the firm, they have to have a good level of satisfaction.

To get a picture of just how satisfied they are, interview the top clients, probably about 10 in all, Denney recommends. “Those are the ones who bring in the most revenues and also the ones who provide the most referrals.”

Survey these clients with two purposes in mind: One is to make sure they are satisfied with the firm’s services; the other is to look for opportunities for more business.

On the firm side, the interviewer needs to be someone other than the billing attorney. On the client side, if the client is a business, speak with the highest ranking person available in the company.

Start off by explaining that the firm is looking for candid feedback on the service the client is getting and also wants to learn more about the client’s business plans and operations. Emphasize that the client is not being charged for the meeting.

Denny recommends that the survey covers four areas:

  1. The firm and its services:
  • Are any of our services not being performed satisfactorily?
  • Is your work being completed in a timely fashion?
  • Do we keep you sufficiently informed on the status of matters?
  • Can our communication be improved? If so, how? How can we improve our services?
  1. The fees and billing:
  • Are the billing arrangements satisfactory for you?
  • Do we give you good information on ways to reduce the legal expenses?
  • Can we help you budget for these expenses?
  1. Overall satisfaction:
  • Have you ever felt that we let you down?
  • What’s your opinion of the attorneys you’ve been in contact with throughout the matter? The staff?
  1. The client’s business: (At this point, look for new business from the client.)
  • How is your business going?
  • What successes or developments are you seeing?
  • Are there any problems you’re having now or see on the horizon?
  • Are there any new trends or developments in your industry? If so, what effect will they have on your business and on your legal needs?
  • What publications can we read or what seminars, conferences, or meetings can we attend to learn more about your industry?
  • Are you aware of the other services we provide? Would you refer others to our firm?
  • What are your goals and objectives for the business?

If the client plans to buy out a competitor, the revenues are going to increase and so are the legal needs. Knowing that, the firm can offer its services now and be first in line to get the business.

Conclusion

When you complete each of these four steps, a clear picture of the firm’s strengths, weaknesses, threats, and opportunities will emerge, allowing you to set applicable goals for a successful new year.


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