Law Firm Profitability - MyCase

1 | An Attorney’s Guide to Law Firm Profitability

Law Firm Profitability

By Jared D. Correia, Esq.

AN ATTORNEY’S GUIDE TO


Literally everything you do in your business affects profitability in some way. How you

market your law firm directly relates to the revenue you bring in. How efficient you are

can increase the amount of work you progress through and charge for. How effective

your collection procedures are determines how much you’re actually paid for the work

you’ve done. Consider any action you take as an attorney, especially as a managing

attorney, and there’s a downstream effect respecting profitability. It’s like the butterfly

effect, legal edition.

Because small changes can make a big difference to your bottom line, increasing your

law firm’s profitability is about winning on the margins. So, in this ultimate guide to

law firm profitability, we’ll show you how small changes to your processes can reap big

benefits for your bank account.

Law firm profitability is like a prism, shift your perspective slightly and

it affects a different segment of your law practice management.


CHAPTER 1 Adding Financial Controls to the Law Practice Environment | Page 3

Knowing how to identify and discourage employee theft is the best

way to stop revenue leakage.

CHAPTER 2 Derive New Insights from Reporting Tools and KPIs | Page 6

Properly utilizing data is the best way to make more intelligent

decisions about increasing profitability.

CHAPTER 3 Increase Your Revenue by Discerning Financial Trends | Page 10

Being able to recognize and act on financial-related trends is a

huge competitive advantage.

CHAPTER 4 Capture, Bill, and Collect More Time | Page 11

When there are too many steps between tracking time and having

it coalesced on an invoice, profitability is bound to suffer.

CHAPTER 5 Eliminate Accounts Receivable by Embracing ePayments | Page 14

ePayments not only reflect modern payment preferences

for clients, but offer significant advantages to law firms.

An Attorney’s Guide to Law Firm Profitability | 4

CHAPTER 1 Adding Financial Controls to the Law Practice EnvironmentOftentimes, law firm owners conflate profitability with revenue generation.

But, being profitable means a whole lot more than making a lot of money.

Profitability is about maximizing what you keep from the revenue you earn.

Law firms experience all sorts of revenue leakage, with perhaps the most

obvious example being uncollected billing, or accounts receivable that are

never actually received. However, there is a more nefarious culprit in the realm

of law firm revenue loss, and that is the willful theft of the firm’s and client’s

money, usually by a crooked employee.

The fact is that law firms are major targets

for embezzlement, in large part because

they lack financial systems and controls. If

you’re telling yourself that you scrutinize

paychecks, payment of invoices, and account

management to the extent that you could

spot all or most potential problems as part

of your normal procedures, you’re lying to

yourself. However, there are significant red

flags that can be used to out embezzling

employees. Dishonest employees tend to

be reluctant to take time off so that they

can continue to control the processes

that empower their schemes. Those same

employees often lead lifestyles inconsistent

with their paychecks — In other words, if

your secretary drives a nicer car than you,

there could be a problem. Law firms that

still take cash payments, and utilize business

credit cards are even more susceptible to

fraud if proper controls aren’t employed.

Common Examples of Internal Law Firm Theftn Fake employees on the payroll

n The slight adjustment

downward of employee

withholdings, to accommodate

a slight adjustment upward

of another’s in order for that

other employee to acquire a

larger tax refund

n Invoices created and paid to

dummy corporations

n Accounts receivable payments

diverted to special accounts

n Manipulation of bidding

processes for law firm vendors


Law firms that want to discourage theft by employees

need to create a ‘sentinel effect.’ In other words,

there has to be a belief on the part of employees

that someone is monitoring their activities. That

belief alone can significantly reduce the potential for embezzlement in your law firm.

Of course, you need to rely on more than just a belief. Real, actual systems need to be

implemented to buttress any sentinel effect. Common law firm financial controls reflect,

and create barriers around activities associated with embezzling funds.

Since one of the most common ways an employee can gain access to law firm funds is

by controlling an entire process, it’s essential for law firm management to segregate

financial responsibilities, and also to rotate those duties from time to time. So, the

person who opens the mail and collects checks might not be the same person who

deposits those checks; and, maybe a third person reconciles the accounts where those

checks land.

n Making vacation time and time off mandatory is another way to break an

employee’s iron grip on a process.

n The creation of clear and reducible audit trails is another method for compelling

honest behaviors.

n Monthly reconciliation of all bank accounts, including trust accounts, is probably

the best way to pick up on accounting errors that could be more than simple

mistakes.

n The involvement of independent, third party financial auditors is another effective

hedge against fraud, as are surprise audits and reviews by internal operators.

Law firms that truly want to control against nefarious activities by employees should

consolidate these controls into accounting policies and procedures that are approved by

management, and understood by employees.

Law firm managers who

want to eliminate fraud

and embezzlement need to

increase controls over financial

processes in their operations.


Derive New Insights from Reporting Tools and KPIs

While leveraging financial controls is the best method for decreasing law firm

theft, utilizing data is the best way to make more intelligent decisions about

how to increase profitability.

Law firms generally eschew data in favor of gut feelings, as managing lawyers

try to advance the firm’s profitability based on best guesses and ad hoc decision

making. But, law firms, like every other business, have more data available in

day-to-operations than ever before. The advance of technology and law firm

software has made that possible — yet, the large majority of law firms continue

to avoid reacting to data that has immense effect on law firm profitability.

Most lawyers have probably heard of the term ‘big data’; and, it’s likely an

overwhelming concept to wrap their heads around. But, every law firm has

‘small data’ by comparison, that relates directly to the management of the

business, and it’s profitability. In order to put that data to use for your law firm,

you’ll need to understand what that data is and how it is rendered; then, you

can act on it to increase your profitability.

CHAPTER 2


Almost every business software offers reporting capabilities. When you consider

all of the data that exists in modern business systems, it makes sense that those systems

would also offer useful methods for rendering that data. Reports consolidate law firm

data so that lawyers can better understand and act on it. These days, those reports are

more often than not being constructed and viewed as visual dashboards, utilizing color

coding, charts and graphs for a more coherent presentation, better rendered for the

modern data consumer.

In terms of managing and increasing profitability, it starts, for attorneys with case

management. Breaking down your cases by case types and revenue for case types is

an effective way to understand what the most profitable areas of your law practice

are. Beyond taking a case list and sorting by practice area revenue, law firm managers

can use software to:

n Drill down to revenue collected versus revenue billed

n Get revenue-producing statistics for individual attorneys and staff persons

n Determine current work in progress (WIP) and accounts receivable (A/R)


At this point in time, software is so invasive in the law firm ecosystem that

managing lawyers can now sort, filter and rearrange any law firm financial data into

any report they wish — not only do most law practice management systems include

template reports, but each of those systems also offer the ability to create reports of

various types using a wide array of fields and options — including for trust account

funds, as well.

But, since profitability is affected by more than just the data appearing on

traditional financial reports, more and more law firms are turning to the analysis of

marketing data as it affects revenue. So, just as law firms can parse financial data

for cases, features are also available to reconstruct revenue data as it is generated

by marketing sources. Law firms can now create reports based on leads, lead

sources, as well as revenue per lead source, via systems built exclusively to manage

legal marketing, as well as through features of traditional productivity systems that

recognize the value of marketing data.


Reports are highly valuable because they aggregate

law firm financial data in a way that is easily digestible and

understandable for owners and managers. But, there’s a way to

get even more granular; and, that’s by adopting KPIs. Law firms

that utilize KPIs are better positioned to make major changes,

because they understand the numbers that underlie those

major changes. KPIs are the metrics that move law firms —

forward or backward. Common KPIs include call backs to some

of the reporting features discussed above, and in some cases

can even be generated by reporting tools.

Every employee of a law firm should be a ‘profit center’, to

the extent that you’re not trying to break even when you

hire — when you hire, you want to make even more money,

potentially lots more money. So, examine KPIs such as:

n Revenue per employee

n Percentage of partner/associate/staff hours in relation to total hours

n Revenue per square foot (are you effectively utilizing your space)

n Revenue per matter, new matters opened and matters per client (to further detail

how your case intake breaks down)

n Estimated case duration (to get a better idea of when you’ll get paid)

Other popular KPIs relate back to efficiency, collections and marketing. Utilization rate

represents how efficient you are. Utilization rate answers the question of how much

billable work a lawyer does in a day. For example, if an attorney bills 2 out of every 8

working hours, her utilization rate is 25%. Believe it or not, utilization rate is probably the

most effective predictor for big law firm revenue increases. Realization rate captures the

nexus between billing and collecting, by spitting out the percentage of billed revenue

a law firm actually collects. Net promoter score attempts to provide a single number

for marketing effectiveness, taking into account promoters, detractors and passives, to

determine how likely any customer/client is willing to actively promote your business.

A KPI is a ‘key performance indicator.’ It’s a single number that can help to identify significant aspects of the success or failure of your law firm on its own.


Increase Your Revenue by Discerning Financial TrendsAll of the business data a law firm manager has access to is overwhelming until

it is distilled into reports and metrics. But even then, that data is useless until it’s

acted upon. Holding the winning lottery numbers doesn’t mean a thing unless

you play a ticket. That’s why, for law firms, acting on the data available is a key

to increasing profitability.

Part of that task involves identifying trends. If a law firm manager understands

which practice areas and employees are trending up or down, she can make

business decisions based on those trends. If a family law firm specializing

in divorce continues to see numbers reflecting the fact that mediation and

collaborative law are continually becoming a larger percentage of the firm’s

caseload, that has to affect decisions related to marketing and retention,

at some point. Similarly, the DUI/OUI law firm that spots a trend related

to motorcycle accidents may act to revise its advertising program. Or, the

medical malpractice firm that sees an inordinate number of cases arising from

one hospital can tweak its outreach based on that fact. Uncovering trends

grants law firms the ability to exploit those trends for revenue generation and

increased profitability.

The legal industry is a

highly competitive market,

especially small to mid-

sized law firms. Recognizing

and acting on financial-

related trends becomes

a large-scale competitive advantage against those law firms that ignore,

misinterpret or misrepresent data. As most other businesses build toward a

crescendo of data-driven decision making, law firms continue to roll the dice on

old school business models that ignore sideline data analysis. Law firms that

catch up to the curve will dominate their competitors moving forward.

A clear view of trends and executing on them allows law firms to stay ahead of the market, and to make more money.

CHAPTER 3


Capture, Bill, and Collect More TimeThis is perhaps what you’ve been waiting for: the most obvious way to increase

law firm revenue is to do a better job of capturing time, billing and collecting.

Unlike data analysis, which is largely a new concept for law firms, these truisms

have existed in legal for as long as legal has existed. Even Abraham Lincoln

knew that a lawyer’s time was his stock in trade. And today, it’s still the

essential component of running a profitable law firm: get paid for more of your

time, to make more money. Of course, in this category, it’s more about lawyers

actually performing on what they know to be effective tactics, rather than

beginning to acquire an understanding of those tactics in the first place.

Generally speaking, attorneys lose time like a train conductor with a broken

pocket watch. Much of that lost time stems from the many steps law firm time

tracking tends to take before coalescing into invoices. And, this is especially true

in traditional law firms. Many law firms still track time on paper time sheets, or

use multiple time tracking systems before a ‘final’ time entry is made. In either

case, time entries may pass among many people before rounding into the final

form. The whole thing then becomes an ugly

rendition of the telephone game. Add to the mix

the fact that many lawyers don’t track their time

contemporaneously with their activity; these

lawyers instead rely on their memory, such that

they’re also likely to miss things that they actually

did, or recollect those things incorrectly. Worse

still, many attorneys working on contingency or

for subscription plans don’t track their time at

all, because they don’t recognize that even in a

non-hourly billing environment, time spent is an

important contributor to value.

CHAPTER 4


For modern law firms, time tracking is about reducing leakage. And, the best way

to accomplish that is for lawyers to track time exactly as they perform work, including

developing coherent narrative descriptions, using a single-entry time system. For

attorneys who eschew time tracking because they dislike manual time tracking tools,

automated programs now exist, that track device time. And, because further revenue

leakage also accrues at the billing and collection level, time tracking is the law firm’s first

line of defense.

Even assuming that law firms capture a

significant percentage of the time that its

attorneys bill, getting clients to pay those

invoices can be a difficult sell. Of course,

the point that law firms often miss is

that the invoice creation process is more

about creating a sales narrative than it is

about anything else. Because clients never

actually rush to pay law firm bills, creating

invoice that ‘speak’ to clients is essential.

Every interaction with a client is a new

sales segment, a time in which you must

re-convince your client that choosing you

for their lawyer was the correct decision,

and that is most true about billing

interactions. Therefore it’s essential to

include narratives that clearly and effectively relay what the law firm has done for that

period. That includes updated trust account information, compelling work descriptions,

NO CHARGE components where appropriate and clear contact information. Law

practice in the modern era is more science than art; but, law firm invoice drafting

remains more art than science. The poetry with which you draft your bills has a broader

effect on your profitability than you might imagine.


Of course, no matter how lovely your prose, the fact of being in any business is that

not everyone is going to pay you. This is why even the oldest of old school lawyers will

tell you to get as much money as you can upfront — because you may not see another

penny. That’s less true than it’s been; but, the advice about getting paid in advance

as much as possible, especially in an industry still largely driven by hourly billing (still),

makes sense. Even so, you’re unlikely to be able to collect everything, and when it

comes to collecting anything, your law firm will require a system to effectively reacquire

revenue that would otherwise be lost. And, in the first instance, regardless of whatever

processes a law firm adopts for collections, the law firm needs to be able to segregate

outstanding invoices by age. Because 30-day-old receipts are easier to collect than

60-day-old receipts, which are easier to collect than 90-day-old receipts, it makes good

sense to focus collection efforts on delinquent accounts that have been outstanding for

shorter periods of times — remember: run your reports, and act on the data generated.

Figure out who will spearhead your collection efforts, what his team looks like, and

then have that team build out a workflow for managing the collection process. That

workflow should include clearly-delineated escalation protocols. For example:

n When is interest applied to outstanding bills?

n When do clients with outstanding invoices get

contacted, by which means and how often?

n Are payment plans offered?

n When is a collection firm engaged?

n When is a fee arbitration program utilized?

n When does the law firm take its clients to court

over unpaid bills?

The answer to that last question is: hopefully never. But, everything else in that list

should be structured; and, one step should let to the next logical step, until the debt is

fully collected or written off. Furthermore, law firms should include information about

collection processes in the engagement agreement, so that clients are fully aware of

their obligations related to payment, as well as the penalties related to non-payment.


Eliminate Accounts Receivable by Embracing ePaymentsNow, that notion just relayed about collecting as much money as you

can upfront remains vital, in large part because it establishes the value of

legal services for the client, and sets the tone for the entire lawyer-client

relationship. It is, however, less imperative than it has been. That’s because

epayments offer law firms several bites at the apple, not just one. ePayments

not only reflect modern payment preferences for customers of businesses,

but epayments also offer significant advantages to business owners,

including law firms.

The chief advantage of ePayments for law firms is the ability to completely

eliminate accounts receivable, one of the major factors limiting law firm

profitability. Clients who pay via credit or debit cards can automate

payments. That technology is most often used for things

like household bills; but, smart lawyers are starting to

catch on that payment automation can eradicate or

reduce collections, because it allows law firms to create

subscription payment models (particularly effective for

lawyers providing outside counsel services) and run

payments on client accounts without requesting payment

every time. Sending an invoice and requesting a check

is a barrier to getting paid; maintaining client payment

information, running bills automatically, and then

generating an invoice that describes the payment and

transaction . . . well, that eliminates any lag in payment,

and largely removes issues related to non-payment.

CHAPTER 5

Law firms that automate invoicing by using ePayments not only reduce or eliminate accounts receivable, these law firms also remove the effort and cost related to collection.


Furthermore, law firms that utilize epayment tools remove themselves from

the creditor role. Those law firms are no longer continually extending credit to their

clientbase. Clients are instead able to manage their own payment plans, in accordance

with the rules for their credit or debit card accounts, while the law firm is paid,

potentially in full, right away. Not only that, but the law firm gets paid faster (thereby

accessing the time value of that money) and gets paid more (studies show that

consumers paying by debit or credit card can, and do, pay more for services). Even

considering that payment processing includes fees for each transaction, the acquisition

of more money, sooner, that law firms don’t have to collect on, means that law offices

executing epayments still make

more money, even considering

those additional fees. And,

epayments are becoming easier

than ever to manage, given that

many legal productivity software

providers now include epayment

tools within their subscriptions.

Sure, there’s no such thing as

easy money per se; but online

payment processing makes it so

much easier to collect the money

your law firm is owed.


Give us a call, or email us today

800-571 -8062 | [email protected]

Increase Your Profitability From adding financial controls to more accurate reporting, capturing

more billable time and eliminating accounts receivable, discover how

MyCase Law Practice Management Software can help

you boost your law firm’s bottom line.

https://www.mycase.com/index-3

https://www.mycase.com/index-3

Jared D. Correia, Esq. is CEO of Red Cave Law Firm Consulting, which offers

subscription-based law firm business management consulting and technology

services for solo and small law firms. Red Cave also works with legal institutions

and legal-facing corporations to develop programming and content. A former

practicing attorney, Jared has been advising lawyers and law firms for over a

decade. He is a regular presenter at local, regional and national events, including

ABA TECHSHOW. He regularly contributes to legal publications, including his

column, ‘Managing,’ for Attorney at Work, and his ‘Law Practice Confidential’

advice column for Lawyerist. Jared is the author of the American Bar Association

publication ‘Twitter in One Hour for Lawyers’. He is the host of the Legal Toolkit

podcast on Legal Talk Network. Jared also teaches for Concord Law School,

Suffolk University Law School

and Solo Practice University.

He loves James Taylor, but

respects Ron Swanson; and,

he tries to sneak Rolos when

no one is looking.

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Law Firm Profitability - MyCase