Implementing Alternative Fee Agreements at Your Law Firm
Profit Basics
In simplest terms, profit is revenue minus cost. It’s what’s left after you pay the bills. The “bills” here might include you, if you’re in the dual role of owner and lawyer. That will tempt you to say you’ve already been paid when you cut yourself a paycheck. But quarterly dividends should be part of your financial planning, if you’re a business owner.
You should talk to an accountant and financial advisor about how much to pay yourself as owner, but it’s time to grow your profits. Here are a few suggestions:
1. Eliminate your least profitable clients
Start with the Pareto Principle, a.k.a. the 80/20 rule. Applied to profitability, the rule suggests that 80% of your profits probably come from about 20% of your client list. Or, to apply the inverse, 80% of your headaches and overcharges probably come from 20% of your clients. Increase profitability by identifying your most unprofitable clients and ending your engagement with them. (You likely know off the top of your head who these cost-intensive clients are.)
2. Add more clients like your most profitable ones
Did you identify the 20% of clients creating the most profit during step 1? Even if you bill hourly, you can name these people. They’re usually return clients who don’t come with the administrative costs of marketing, sales, and onboarding. What characteristics do these clients share? Do they all come from a particular industry or referral source? Do they have similar problems or interests? As you discover the similarities between these clients, target more prospects who share those commonalities. They’ll likely bring the same kind of profits.
3. Calculate your utilization rate
Utilization rate is a number that defines how well you’re using available resources. To oversimplify: In a firm that bills hourly, the utilization rate asks how many of a worker’s available hours are spent billing time. Although an obsession with this number can cause you to overvalue billing hours, try to define what value you and your team create for your clients. How many of your available hours are spent creating that value? Are there ways you can improve?
4. Know your revenue per FTE
A firm owner can track many numbers, but do you know your revenue per full-time equivalent employee? This number asks how much revenue you’re bringing in per person, assuming your person is full-time. So, if you’re full-time but use two half-time contractors, you have two full-time equivalent employees. You should bring in a minimum of $150,000 per FTE, or $275,000 per FTE on the higher end, if you’re really doing well. If you aren’t getting that, your costs to fulfill promises may be too high. See what labor steps you can automate or eliminate.
5. Incorporate innovation
Vendors and consultants probably reach out to you regularly with offers that promise efficiency, effectiveness, and higher revenues. Rather than turn all those calls away, make a goal to incorporate one innovation that supports your goal to increase profitability. A call-answering service could improve your revenue per FTE by lowering labor costs, document automation could up your utilization rate by reducing time spent on activities that create no value, and a quality CRM system might help you find your best clients.
If you make tweaks like these once or twice per year, at the end of the year you could be significantly more efficient. Iterative changes can add up to massive jumps in profitability over time. If you're looking for advice on managing change and onboarding new technology, we've got a great article for you.
Focusing on profits can feel awkward for many law firm owners. They often see themselves as professionals with a lifestyle-driven income rather than owners of profit-seeking businesses. But profits put you in a position to better serve your clients by hiring more help, or worrying less about meeting expenses.
Profits allow you to reinvest in innovation, to grow with a diverse and healthy team, and to keep your mind worry-free when trying to focus on client needs.
As you evaluate your current clients, attract profitable new clients, and maximize the client value impact of your daily activities, you’ll create a firm that serves you as well as your community.
Clio Draft has helped thousands of law firms find a better way to create legal documents and increase profitability at their practice. We'd love to chat about the challenges you're trying to solve.
