Improving the billing turnaround time, increasing the number of attorneys, cutting the expenses: All help the bottom line, but there are higher level issues that require as much or more of the financial attention.
The firm’s success calls for going past counting the money to evaluating the data, optimising the profit margin, keeping the billing rates up, and getting rid of the year-end collection carnival. These apply to every firm, regardless of size.
1 Crunch the numbers
Start with an evaluative look at the financial reports. Use those numbers to see just where not just where the firm is but where it is going. Compare the current numbers to the firm’s history and express them in terms of trends.
The numbers themselves aren’t the end of the road. They lead to a view of what is happening and where changes need to be made.
Suppose there is a 5% increase in the revenues. It is easy to look at that and be happy about it. But look at the history of the revenues. If the money grew 6% last year and 8% the year before that, then 5% says the firm is actually on a downward trend.
Compare the revenues further to items such as the change in the attorney population. If the income is going up each year by an average of 4% but the numbers of attorneys is declining each year by an average of 5%, the revenue per lawyer is actually going down and the firm is slowly losing money.
Talk about what was going on in those earlier years and use the data to make decisions about ways to improve the financial picture. When data comes out of an accounting system, it needs to be turned into information.
2 Give the partners a realistic view
Keep the finances on track further by managing the partners’ expectations of the profits. Show them how the numbers are faring throughout the year so they aren’t struck with unanticipated bad news at the end of the year.
The partners will often accept bad news as long as it is not a surprise, there is a reason for it and there is a plan in place to manage it. What they won’t accept is being ambushed at the end of the year with negative financial results that they were never warned about.
You should start the year off by outlining for the partners the year end possibilities: what the best case scenario could be, what the middle of the road expectations are and the lowest profits that can be expected.
In other words, “If collections are A at midyear, our bottom line will be B, if they are at X, our bottom line will be Y” and so on.
Then at every meeting show them how the actual numbers are falling in line with those three possibilities. Staying constantly aware of that’s going on, they have no surprises to meet in December. What is more, the periodic checks give them opportunity and time to make changes.
Nobody wants bad news delivered right at the end of the year, particularly if it is completely unanticipated. Let that happen and expect a decrease in trust and an increase in ill will—toward the administrator.
3 Getting a better profit margin
Another necessary move the firm needs to make is to pass along as much work as possible to its associates and paralegals.
Most partners are reluctant to do that because they equate their own high billing rates to equally high profits. The concept that they can make more money on less revenue is foreign to them.
But with the heavy draws they take, the partners can be the least profitable service providers. It is the non-partners who are usually the most profitable because their cost to the firm is less. Staff the billing matters with associates and paralegals, as long as it is work that they can do, and the profits go up.
Let the partners focus on the work only they can do. One of those jobs is to generate more work and bring in new business. Let them do the rainmaking and let the associates and paralegals do the hourly work and the firm can see a significant increase in profit.
4 Don’t lower those rates
Next is the question of billing rates. Don’t drop them. There’s a psychology to pricing. Clients see the price as indicative of quality.
Charging the lowest rate in the market devalues your service. Charge a high rate and the service suddenly becomes high value.
Lowering the fees to compete for the work also starts a domino effect in the legal community not unlike a price war. Lower prices don’t help anybody’s bottom line.
Raise the rates as high as the market will bear. The partners’ response is apt to be, “Oh we can’t raise our rates to our clients!” However, as long as the firm keeps its rates within the range of what others in the community are charging for the same service, there should be no problem.
What’s more, some services are of such high value to clients that there is little price sensitivity if the firm is an industry leader in some area or was involved in the formulation of the law. There is no reason to set a moderate rate because the value of that service is higher. Raise the rate if necessary. You may be surprised how little pushback there is.
If someone does question the price, point out that the expertise makes it possible to deliver the service more expeditiously and more successfully. But never compete on the price.
5 Motivate with more than money
Then there’s the question of how to keep the associates motivated and on board.
Again the firm needs to look beyond the numbers because while money is indeed a motivator, attorneys look for more.
They want prestige within the firm. They want the ability to take on risks they ordinarily would not be allowed to undertake. They want to be heard on issues. And they aren’t above needing a pat on the back now and then.
Most attorneys says money isn’t the leading reason they join a firm or leave for another position. If the salary is at the market rate, they are satisfied with it.
What drives them away? Things such as not getting the type of work they want to do, not having access to the partners not having direct client contact, and not getting positive feedback from the partners cause associates to leave.
Focus on these issues and periodically ask the attorneys if they are happy with their work and if the firm can do anything to help them succeed.
Punishing attorneys via compensation can be equally ineffective. If a partner is performing poorly, the goal obviously is to improve the performance. Without discussion and guidance, a pay cut will produce no more than a partner who is upset with the compensation committee.
6 Avoid the collection carnival
Then there is the issue of the year-end push to get money in the door. Many firms dedicate December almost entirely to collections, and often there is a game show mentality about it. Some forms have gone so far as to ring a bell in the lobby every time check comes in.
The year-end carnival is a mistake. There is nothing to celebrate because those accounts should already have been collected.
There is nothing to be proud of either. It’s simply proof the firm hasn’t focussed on the collections throughout the year as they should have.
What is worse, when December goes to collections, the month is a wash for billable hours and new business generation, which means there isn’t much in the pipeline for January. The firm starts the new year without any money coming in and often winds up having to borrow money to make up for lack of cash flow.
Worse still, waiting until the end of the year to make the collection calls gives the clients too much leverage to demand discounts. They realize the firm wants to get paid something, and the logical response is “if you give me a 5% write-down on this, I might see my way clear to paying you now.”
