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7 Ways to Increase Law Firm Profitability

by Heidi Fagalde on March 8, 2023

7 Ways to Increase Law Firm Profitability

Running a law firm is a tough business. It can, of course, be highly remunerative. That does not mean that law firm owners and managers do not face challenges. Lawyers, staff, space, and equipment are expensive. Processes and systems are difficult to perfect. Clients are difficult to win and retain. There is increasing competition from all sides — not just other law firms — and outside forces can make it seem as though things are outside your control.

Focusing on and maintaining profitability is critical. Most firms — yours included — probably have a very good idea of their financial levers, but if you are feeling stuck or the margins are narrowing, this post offers some broad ideas about changes you can make that can increase your revenue and decrease your expenses.

Achieve Profitability: Increase Revenue & Decrease Expenses

What makes a margin? Most simply, the difference between your revenue coming in and your expenses going out. Increase one or decrease the other and your margin grows. Shrink the former or increase the latter and your margin contracts. This blog will focus on some big ideas you can consider to increase your law firm profitability, divided into two sets — increasing revenue and decreasing expenses.

Even many large law firms carry less than a 15% profit margin BackDocket

There is one thing to note before we go further. This is not easy stuff. Increasing revenue sounds simple, and many successful firms see incremental growth as a natural function of their practice, but increasing revenue by leaps and bounds is a very difficult task, and will require new ways of thinking. If you do what you have always done, you will get what you have always got.

Decreasing expenses is also much more difficult than firm managers often expect. Take a goal of cutting 10% of expenses, and you will soon find that salaries, rent, contracts, and other major pieces of your operation are not reducible (sometimes at all). If these account for 80% of your firm's expenses, then the 10% cut you wanted now needs to be 50% of everything else, which can be very severe.

Do We Have the Capacity to Embrace Change?

This is an important question to ask before you implement any change.

The suggestions below often require rethinking the way your firm works. Some of these are big projects and, done only halfway, can leave you worse off than before.

Ways to Increase Law Firm Revenue to Boost Profitability

The following ideas can, when implemented properly, create significant jumps in revenue.

Hire Revenue-producing Staff

Hiring new lawyers who join your firm with their own file complement will add an immediate boost of revenue to your firm. This strategy can range from hiring a single lawyer with good practice, to bringing on a whole department (especially one that allows you to diversify your practice), to merging with another firm.

Increasing your firm's lawyer count will bring their revenue under your roof, and it also allows you to use economies of scale to cut down on added costs associated with a growing team — like new equipment or space. Interested in ways to attract top talent? Check out our Legal Survey Report from last year to learn what lawyers care most about when it comes to their employment.

Market Your Service

Your firm should have a modern, marketing machine at work targeting customers where they are searching for lawyers — on the Internet.

Is your website up-to-date? Is it making the best possible first impression?

Marketing tactics such as Search Engine Optimization, Customer Relationship Management software, lead capturing, social media advertising, etc. are all necessary tools if you want to stand out, stay relevant, and make yourself seen in today's market. They allow you to better communicate your message, broaden your reach, and can even fuel an expansion into new areas of practice.

Not only do these solutions increase customer retention, boost credibility, and target qualified leads, when set up properly they can put real, new clients in your office without exhausting legwork. Watch for our next blog post on the marketing methods that are critical to a law firm in 2023.

Ask for Referrals

You may be sitting on a goldmine of new business that you are not capturing — asking for referrals. Word-of-mouth remains a tried and true marketing tactic. If someone needs a lawyer in a new area, the most common first step is to ask a friend or someone in the field. This allows customers to advocate for your services on your behalf and acts as a trust indicator.

Reaching out to those whom you know love your services, your favourite clients, and simply asking them for a referral creates potential new clients who have confidence in your abilities and can make an easy choice. The old axiom is that people are four times more likely to buy when referred by a friend.

Maximise Existing Billings

The tired trope is that lawyers record time with a heavy hand, but most of the lawyers we know do too much of their work for free. They either fail to record time or knowingly omit hours they feel should not be on a final invoice. Break this habit. Record all time (if you work on fixed fee or contingency, record time anyway to track productivity). It can always be written off, but can never be recovered if it is not recorded in the first place.

Targets and expectations are also critical to keep everyone on track. When it comes to disbursements, implement technology or processes to ensure that even the small stuff — postage, couriers, USB sticks, mileage etc. are recovered. Studies show that up to 85% of these expenses can go untracked without proper systems in place to capture them. That money comes off the bottom line instead of being recovered.

Ways to Reduce Law Firm Expenses to Optimise Profitability

As we said above, cutting costs can be difficult. Many line items are simply non-negotiable. Rather than hyper-focusing on one aspect, a better approach would be to review the entire scope of activity at your firm and think outside the box in certain cases. Consider these ways to reduce expenses without sacrificing on quality.

Upskill Your Staff

We understand there are economic pressures that may point towards making cuts. However, making your staff more efficient in several small ways, can have a huge impact.

Focus on making your staff more skilled, able to handle more files/clients, and on diversifying your staff. Once (incorrectly) viewed as secretarial, the role of legal support staff has increased massively.

Instead of having them dotting i's and crossing t's, increase their value by involving them with high level tasks and projects. This ability to learn, grow and contribute to the overall success will aid in reducing staff turnover. The time and money spent in searching for, hiring and training new staff increases each year, so listen to and invest in the people you have.

Leverage Technology

If your firm is still paper based, you are miles behind in the race. Having even one piece of software reduces time consuming and repetitive processes can give your staff hours back. The use of automation also boosts productivity as your staff can now get more and better work done in a shorter amount of time, leaving you to focus on what really matters.

At the end of the day, clientele go to your firm for the experience and ability to get the job done. How you provide excellent results likely does not matter to your clients, so why not? Technology can allow you to fully outsource work, such as requests, as well, to cut non-billable hours down by 70%.

Unsure where to start? Try analysing The 9 Types of Software Your Law Firm Might Need.

Rethink Your Office Space

Tracument's most recent survey asked employees what factors are most important in choosing an employer. The answer? Work from home or hybrid.

When your lease comes up for renewal, think very carefully about how your space is being used now (as opposed to when you first leased it). Can employees share offices? Are some employees never in the office? Can you replace shelf upon shelf of filing space with a single server containing all your files?

If you haven't already, consider moving part of your office to a less expensive location. Employees often commute from the suburbs, where rent can be 20% of what it is downtown. Consider a branch in that area, shortening your employees' commute, reducing your overall rent expense, and giving you a new place to meet clients.

Use Profitability Metrics

It is key to understand how your law firm measures profitability. It would be ineffective to implement changes without monitoring their effect. It can be helpful to track these changes with Key Performance Indicators (KPIs) to better understand their usefulness. Helpful metrics might include:

  1. For Marketing, website traffic numbers
  2. For productivity, number of billable hours
  3. For client satisfaction, churn or retention rates
  4. For financial, net income as a percentage of revenue

Being able to identify what is or is not working can act as a guide, highlighting what areas require improvement so time isn't wasted. Tracking KPIs can also benefit a firm financially, to easily identify areas that are bleeding, or areas being ignored that could prove to be fruitful.

How Legal Tech Can Make Law Firms More Profitable

The use of legal technology is likely the easiest first step offered in this post. Technology allows firms to run more efficiently, automate tasks, and streamline processes. This cuts down on the need for non-revenue producing staff (and staff costs are likely the single biggest expense your firm has). It allows staff to focus on important tasks with their new found time and during times of crisis, such as the COVID-19 pandemic, allows the continuation of work effortlessly.

Over the next two weeks, we will be revealing the results of our 2023 Trends and Observations Survey, which will highlight areas law firms struggle with, are concerned about and will be focusing on.

A final note on our services — Tracument pays back firms at a ratio of 40:1. For every dollar spent on our software, a firm can expect to put $40 on their bottom line (averaging about $16,000 per lawyer).

Cover of our 2022 Legal Survey Report

If you are interested in learning more about WFH technologies and how to support remote employees, download our free, in-depth 2022 Legal Survey Report.

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