Rinse, Repeat, Regret: Three Financial Errors That Law Firm Owners Make Over and Over Again

Jared D. Correia, Esq., is an internationally recognized legal technology expert and the founder and CEO of Red Cave Law Firm Consulting. With nearly two decades of experience helping thousands of law firms—from solos to Big Law—streamline their businesses, Jared brings unmatched insight into law firm operations and innovation. He wrote the following blog as part of our new Counsel Corner blog series, which will feature expert insights shaping the future of legal practice. He will also be speaking at Kaleidoscope, our upcoming customer conference.

Most lawyers are objectively good people. If you ask an attorney who manages a law firm why they decided to become a business owner, the answer is usually that they wanted to help people. That’s a great thing. Of course, from a practical standpoint, that often means that those same managing attorneys end up helping their clients while forgetting to help themselves.

That’s largely because they’re solely focused on the work and not managing their businesses. It’s okay to focus on the work; in fact, it’s quite literally the job, but ignoring the running of a law firm usually does not reflect well on the financial position of said business owner. Some lawyer finds out—the hard way—while others remain unaware, in perpetuity. Either outcome is suboptimal.

The way to arrest potential revenue-related issues is to pay some more direct attention to law firm financial management, including trends. But simply doing that allows for another potential issue to slide. Sometimes, law firm revenue is indirectly affected by the choices law firm owners make in other areas. Yes, it’s true—every decision you make about running your law firm affects the financial bottom line, in some way.

Those knock-on effects can be addressed across three main categories: technology management, marketing strategy, and billing oversight.

Tech Tangles 

Almost every lawyer you run into would love to delegate technology implementation, management, and maintenance to instead focus on moving cases forward. Unfortunately, that’s not a realistic solution—both from an ethical (the rules of professional conduct require oversight) and logistical (you have just got to understand how the tech employed in your business works, unless you want to be actively taken advantage of) perspective. 

This leads to some financial-related problems, because it means that attorneys will often: 

1. Spend additional sums on technology they already own—yes, that actually happens all the time.

2. Underutilize the software they do own, since they’re unfamiliar with its full capabilities. 

Primary software for law firms, like productivity tools (Microsoft 365, Google Workspace), case management software (MyCase, CASEPeer), customer relationship management software (CRMs, like Lawmatics or PipeDrive), and accounting products (like QuickBooks or Xero) are all chock-full of features, likely more than you expect or anticipate. So, your best approach, as a managing attorney, is to look in those spaces before buying any new technology product. The number of features accessible in productivity software these days goes well beyond email and calendar programs; both Google and Microsoft contain multitudes, including: VoIP software, internal communications platforms, generative AI products, booking tools, high-level reporting features, and much, much more. Similarly, law practice management software also includes tools lawyers traditionally had to acquire and pay for separately, such as e-signature programs, payment systems, intake management tools, reporting dashboards, AI features, and even more. 

Plus, these products effectively function as the main hub of a law practice, taking in data and organizing it, while also pushing data out to other systems, when necessary—including the movement of time and billing data into accounting programs, which themselves features time and billing systems, AI support and significant integration options. CRMs are massively underutilized by law firms, but offer many of the same additional features that are now present in productivity and case management software, including scheduling tools, payment systems, signature options, etc. In sum, these primary law firm products make it so that attorneys can rely on fewer ‘point’ systems, to acquire the technology coverage they need—that means fewer silos, and reduced cost. 

Of course, if you’re currently reading this and thinking, ‘Well, geez—that sounds great’—but that’s the last cogent thought you’ll ever apply to this line of analysis: that is quite clearly not enough. Not only do you need to understand, at the first level, that these tools are available, but you also have to know how they can be deployed and how they work together. Your law firm’s technology platform should be an interconnected hive of activity, surfacing the correct datasets to you at the right times. That’s only done when the head of the machine—the managing attorney- intimately understands what the rest of the body is doing. That cannot be delegated away. And, you can use your technology infrastructure to drive efficiency in your law firm, which inevitably leads to revenue gains.

Marketing Missteps

The big myth in relation to running a law firm is that lawyers don’t have to promote themselves to make money. That is an utter lie; yet, it is buttressed by some common talking points among attorneys. And, it starts with notions around launching a law firm. You’ve likely heard the term ‘hanging a shingle’ before—the underlying concept is that to get business as an attorney, you simply need to put up a sign, and it will begin to roll in. Spoiler alert: It won’t. 

There’s simply too much competition in the space, and modern legal consumers are too savvy to be convinced of the efficacy of becoming a client because you have put out a sign, or even launched a website, and done nothing further than that. Savvy law firm owners launching their new businesses, will create a formal ‘go-to-market plan’, that will drill down into specific tasks and activities that will draw attention to the new venture—that will eventually move beyond announcements, to the creation of a formal marketing plan, that can be utilized as the law firm grows. 

The other lie that gets told to attorneys running practices is that ‘if you do good work, more good work will come’. Certainly not in a vacuum—law firms that rely totally on their professional reputation among their existing clients will find a growth cap, eventually. That’s in part because they’re not marketing themselves more broadly to the people outside of their clients’ immediate networks, but it’s also because they’re not likely to be communicating with their existing and former clients in an effective way to try to generate referrals. ‘Just doing the work’ may have been a fine strategy in the 18^th century; but, modern legal consumers are inundated with information on a constant basis, from all sides, on all devices, in social media, and by their contacts—and, you have to do more than just the work, to break through that noise. 

There has got to be some kind of consistent generation of content outside of the normal course of business that will promote the generation of new referral sources and new clients for the law firm, which goes beyond getting an office space, putting up a sign, or simply publishing a website. Now, most law firms (non-personal injury practice division) do not pay for advertising, at any extensive level. But, that’s okay, because there are a whole host of free/cheap opportunities out there, for thoroughgoing attorneys who want to raise revenue. 

Three to consider would be: 

1. Sending messages to your existing clientbase and referral sources, on a regular basis (perhaps a drip campaign of a law firm newsletter), using a marketing automation tool (like the one built into your CRM, if you have one—or by using a standalone tool, such as MailChimp or ConstantContact), in order to generate additional referrals. 

2. Organizing your networking efforts around specific production goals, e.g., number of referral meetings each month, which also drives business

3. Developing a content marketing program, perhaps by launching an anchor content product (a blog), so that information is available to populate your website, your email marketing program, your social media profiles, etc. 

These are all low-cost opportunities for law firm owners who want to generate additional business; however, planning and execution are required.

Billing Boondoggles

Attorneys do not have it easy when it comes to billing their clients, and there are several factors working against them from the outset. The fact that most attorneys bill hourly, and in arrears, is problematic, because it’s most difficult to ask people for money when the work has already been done—this is precisely why the collection of high retainers is so relevant to law practice. Plus, at the point at which legal consumers are looking to pay legal bills, they’re further disincentivized, as lawyers’ work (again, already completed) is very low on the payment pecking order—behind mortgages, car payments, school tuition, electric bills, etc. 

This all adds up to law firms lagging in cash flow, and making significant efforts to collect money from clients, while also trying to—simultaneously—get new work done for those clients. But, simply getting higher retainers is not a solution on its own, since, in most cases, legal consumers don’t have the financial wherewithal to pay for the entirety of a legal service/case cost, upfront. 

So, it’s incumbent upon attorneys who own law firms to either:

1. Improve their current payment methodologies; and/or,

2. Consider alternative payment methods in order to improve collection on law firm invoices and generate more revenue. 

Lots of times, in law practice, where managing attorneys are being pulled in so many different directions, it’s difficult to impose and follow through on a structure for a ‘soft collections’ program. Simply generating a system of reminders and follow-ups around late (or unpaid) invoices should improve your revenue generation, which would also include deploying penalties for late payment (as hopefully outlined in the client engagement agreement), to compel action. Most law firms do not have a cognizable collection process. Still, the development and deployment of one generally means you will be able to increase your revenue and improve your cash flow. 

The other obvious solution for law firm payment problems is to no longer collect money in arrears, but to instead have it on hand, as you do the work. Now, you can still accomplish that billing hourly, if you adopt some revised practices, potentially including the use of an evergreen retainer—through which a client will ‘top off’ the retainer, on a monthly (usually) basis, to ensure that a settled retainer amount is available at the start of each billing period. 

And, perhaps obviously, law firm owners could also consider so-called ‘alternative’ billing programs, which simply means anything that does not rely on hourly billing, and which could include: flat fees, subscriptions, success fees, products, etc. There’s actually a significant universe of alternative billing methods that attorneys are beginning to deploy, which not only improves top-line revenue but also the cash flow necessary to run a business on a day-to-day basis.

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There are a number of options available for law firm owners to execute on, as a means for increasing revenue generation and stabilizing cash flow. Of course, we’ve only so far scratched the surface.

For more, come see me talk at AffiniPay’s Kaleidoscope event in September on the topic of ‘The 10 Costliest Mistakes Firms Make—And How to Avoid Them’. You won’t want to miss it, and your bank account will thank you!