3 Steps to Increase Your Law Firm's Profitability

Blog post originally shared on iridium-technology.com. Iridium Technology is now part of BigHand. Learn more here.

What would happen if everyone in your law firm administrators, partners, and each and every timekeeper – felt personally responsible for increasing your law firm’s profitability?  

You’d tap into the full earning potential of every lawyer and employee in your firm! And your firm would continually build on its successes.  

How can you achieve this dynamic? Work toward creating a firmwide profit-centric culture that:  

  • Promotes appreciation for using BI reporting and data analytics to uncover revenue-boosting opportunities, reduce bias in decision making, identify early-stage trends, and more. 
  • Prioritizes monitoring the many varied metrics that impact law firm profitability and understanding the stories behind the numbers, and  
  • Rewards an ongoing commitment to implementing and optimizing profit-building strategies.  

Here are three concrete steps to build a profit-focused culture that will increase your law firm’s profitability for years to come.  

Step 1. Education: Why Focus on Law Firm Profitability Drivers?

During leadership conversations, you will likely encounter a reluctant team member or two who hesitate to analyze a broader range and increased variety of profitability metrics.  

Education is key. Skeptics need to see first hand how increasing your focus on profitability drivers will help your firm remain economically sound and competitive in today’s unpredictable market.  

Demonstrate the various ways you use BI reporting and data analytics to capitalize on firm strengths. Make it personal. Discuss “what if” scenarios such as, “How would a 5% increase in realization rates affect revenue and partner distributions?” Quantifying how specific financial drivers impact wallets can tap into powerful personal motivations! 

Craft an Initial Two- To Three-Year Profitability Plan

Ideally, you’ll want to define and communicate a two- to three-year plan with multiple phases. Be prepared to discuss your plan again and again, repeatedly showing how to apply metrics in context and proving your methodology works every step of the way. In addition to initial presentation materials and live discussions, you may create a FAQs list and training materials that illustrate “what-if” examples.  

Implement a Quick Win for Increasing Law Firm Profitability

Increasing profitability is not a single project. It’s the result of a cultural shift that occurs in steps and phases. That said, billing hygiene is the quickest way to initially improve profitability. Start by explaining how automating and streamlining billing processes affects profitability. Lead “what-if” discussions such as: 

  • What if we reduced write-downs by 5%? 
  • What if we improved collection rates by 3%?  
  • How much faster would billing attorneys open, review, edit and approve prebills if we digitized the entire prebill process? 

Through examples like this, partners see how higher quality processes reduce write-downs, write-offs and bad debt while simultaneously accelerating billing and collection rates. They also grow more comfortable discussing metrics and more engaged in proactively improving profitability. 

A Couple Tips for Maintaining Early Momentum:

  • Keep your “profitability committee” small.  
  • Keep your profitability calculations simple. Avoid:  
    • Numerous and complex allocation methods 
    • Excessive rules and exceptions 
    • Varying rules across practice groups or offices​ 
    • Going too granular (allocating pencils)​  

Keep things simple to achieve positive results sooner. Simplicity also makes it easier to explain—and for partners to accept—the resulting calculations.   

Step 2. Incorporate Profitability into Partner Compensation

It may take time for some partners to appreciate how analyzing metrics helps drive higher profits. The best way to achieve partner buy-in is to incorporate a profit component into determining their compensation. A year-by-year implementation plan could look like this: 

  • Year 1: Educate. Provide information and engage in theoretical “what if” discussions. e.g., What happens if we see a 20% boost in profits? Encourage questions. Help partners visualize success and get comfortable with change. 
  • Year 2: Implement. Base 10% of compensation or bonus on profit. Listen to feedback. Fine-tune your implementation and calculation processes while still striving for simplicity. 
  • Year 3: Increase the stakes. Base 20% of compensation or bonus on profit. Adjust according to partner input and changing market conditions in the years that follow.  
Step 3. Establish Your Law Firm Profitability Rollout Plans

Rome wasn’t built in a day, and you won’t release every profit-focused plan to every stakeholder on day one. Your implementation processes should be iterative, and the goal is to increase distribution over time.  

Roll out your plans in phases. This allows you to polish your processes and reports, which will win confidence in your methodologies. We recommend two frameworks for rollouts: Roles and Slices.  

Proposed Rollout by Role

A top-down approach gives you the benefit of strong executive commitment and leadership that encourages those in the next phase to get on board and give it their all. Rollout by role according to:   

  • Executive Director/COO/CFO/Finance team. (They are comfortable with financial calculations and can help streamline your efforts.)  
  • Managing Partner/Managing Committee. (They typically enjoy the same familiarity with numbers and can help align the plan with the firm’s vision.) 
  • Practice Group/Office Leaders​ 
  • All Partners​ 

Proposed Rollout by Slice

Firms often start with a focus on analyzing the profitability of clients and matters. It’s an excellent opportunity for partners to see in detail how discounting affects overall profitability. Rolling out profitability analytics by slice may progress like this: 

  • ​All clients and matter 
  • Area of Law 
  • Practice Group/Office​ 
  • Billing/Originating Partner ​ 
  • Attorneys​ 
  • Phase/Task 

Achieve Law Firm Profitability and Continually Capture More Value

Building a culture based on profitability is an ongoing journey. As you progress, your law firm becomes better able to price work strategically, manage matters cost-effectively, evaluate lateral hires, and captures a plethora of additional benefits.  

Iridium offers a broad range of products to address your firm’s profitability and budgeting and forecasting needs.

About BigHand Business Intelligence

BigHand’s Legal Business Intelligence is the most advanced BI solution for law firms. It’s flexible, autonomous and source agnostic data warehouse solution, replaces manual law firm finance reporting with a real-time digital overview of your financial data.

Specifically tailored for lawyers, finance and management teams, it strips the complexity away from the mountains of information you generate. The self-service tool gives users controlled access to the appropriate legal finance data which can be quickly and easily shown through any visualisation tool of choice, including PowerBI.

BigHand BI