Study Reveals Hallmarks at Top Firms
KALMAN SHINER, CPA
The Legal Executive Institute (LEI) recently released its 2018 Dynamic Law Firms Study, providing some valuable lessons on how law firms can achieve better financial performance. The study looks at some of the most successful firms from year-end 2015 through year-end 2017 to determine strategies that have the best potential return on investment. The bottom line? Productivity—not billing rates—is critical.
The study analyzed the three-year compound annual growth rates experienced by law firms included in the Thomson Reuters Peer Monitor sample. It ranked each firm on its individual performance in overall profits, revenue per lawyer and average profit margin.
Every firm was placed in a quartile based on performance. Firms with the highest compound annual growth performances across the three metrics landed in the top quartile and were labeled dynamic. Those that fell into the bottom quartile were dubbed static.
Dynamic firms placed, on average, an additional 96 billable hours per lawyer into work-in-progress in 2017 compared to static firms. Notably, this gap trickled down to affect other aspects of financial performance, from a firm’s ability to generate additional top-line revenue to the efficacy of its investment strategies.
For example, a drop in productivity hurts a law firm’s ability to execute its investment strategies. These strategies often stretch over several years and can take just as long to produce returns. When productivity falls, it shrinks the funds available to carry out investment plans. It is no surprise that dynamic firms vastly outpaced static firms when it came to investments in technology improvements and marketing and business development.
The study provides several takeaways, including:
- Focus on Protecting Rates Rather Than Hiking Them
Practices related to discounts and write-downs negatively affect a firm’s billing realization level.
- Make Money Without Raising Rates
Firms can grow revenues if they increase profit margins, even while holding rates steady. Moreover, increased demand can lead to greater productivity if a firm adds lawyers in proportion to climbing demand.
- Beware of Productivity Losses
Lower productivity means lower bills and lower revenues, thereby undermining longer-term investment priorities. Firms that struggle to increase their rates but still experience standard expense growth will suffer dramatic consequences if their productivity declines.
According to this study, any firm, regardless of size, can improve its financial performance without relying on rate increases. The key is to maintain or boost productivity, resist unnecessary rate discounts and write-downs and improve profit margins.
Tips to Keep a Lid on Overhead Expenses
JACQUELINE JANCZEWSKI, CPA, MBT
Lower overhead usually means higher profit margins, but many law firms struggle to contain their overhead costs, from rent and administrative expenses to supplies and services. The good news is that you have many avenues to curb overhead from eating into your profits. Your property leasing and staffing costs are two cost areas ripest for reduction.
What are you paying for rent?
Just about every successful private law firm you see depicted on TV is spread out over what seems like acres of square footage. Thanks to Hollywood, many lawyers and clients have come to see spacious office suites as signs of success.
However, every dollar a firm spends on rent means a dollar less of profit. Moreover, technological advances and changing priorities among younger attorneys—who generally appreciate the opportunity to work remotely—make it unnecessary for many firms to occupy as much space as they have in the past. These days, firm members can easily keep in contact using video conferencing, chat apps like Slack and other cost-effective tools.
Also, smaller space is not just for attorneys. The days of large document storage areas are dwindling. Cloud computing slashes the need for storage space.
If a smaller space is impractical for some reason, you may still be able to reduce your rent costs. Review your lease invoices, checking any increases and escalators against the terms of your lease, and do not be afraid to talk to your landlord about renegotiating it.
Are you overstaffed?
Staffing is another area where law firms frequently can reduce costs and not just in support staff. Attorney headcount may also merit some re-evaluation.
Let’s start with administrative and clerical staff. It is easy to fall into a pattern of automatically replacing every administrative employee who leaves the firm. This results in a support staff that never gets smaller (though it may well grow). But given that more and more software solutions are being designed with law firms in mind, you may be able to reduce positions.
Instead of immediately posting a job ad when a staff member leaves, take the time to determine whether you really need a full-time employee to perform that function. Could those duties be split up among other employees or handled with technology? Could they be outsourced at a lower cost? By lowering staff expenses this way, you also may avoid the potential unpleasantness of layoffs down the road.
Attorney and paralegal staffing also is susceptible to excess. You may find yourself with nonproductive partners or more associates and paralegals than client demand requires. Does your headcount match the workload you have now, or the workload you hope to have in the future? It should be the former.
What about compensation and benefits?
Take a hard look at compensation, including benefits, for both attorneys and support employees. For example, you might think about shifting from 100% fixed salaries to a hybrid approach with a variable component based on performance.
As far as benefits, conduct a survey of current employees and review outside research to determine the perks that your attorneys and staff truly value. Do not simply stay with the same package that you have traditionally offered. You might discover that some of your costliest offerings are rated the lowest by the employees that you hope to recruit and retain.
If your firm seems to bill and collect a good amount, yet struggles to grow its profit margins, one of the culprits could be overhead. Reducing overhead and implementing other lean practices can help you contain those costs and boost profits.