5 Tips to Improve Profitability at Your Law Firm
By Sophia Lee
As a law firm, you have two main goals: the first is to provide top-notch service to your clients, and the second is to maximize your profits. In this overview, we’re focusing on the latter. We’ll explore some impactful ways you can increase the profitability of your business.
The Difference Between Revenue and Profitability
Most people are familiar with revenue, which refers to the amount of money your business brings in. However, it’s just as important to focus on profitability. This refers to the amount of money your business brings in after accounting for all expenses.
If you want your law firm to succeed in the long run, you need to know how much you’re spending in relation to the amount of money you’re making. Here’s an example to illustrate what this means.
Let’s assume that your revenue is up almost 30% since the last quarter. That’s good news, right? Not so fast. Even though your revenue is up, your expenses—between overhead and administrative costs—have also gone up. At the end of the day, your profit margin isn’t much different than the previous quarter— even though you’re making significantly more money.
This demonstrates the importance of maximizing revenue while also minimizing expenses.
5 Ways to Improve Law Firm Profitability
In this section, we will share five tips to help you improve your law firm profitability.
1. Identify KPIs
If you want to improve your law firm’s profitability, you must identify the metrics you want to track. These are commonly known as key performance indicators (KPIs). This first step will provide a sense of your firm’s current situation so that you can set future goals. What are common KPIs for law firms? Here are a few to consider:
This KPI is a measure of how much time is spent on work that is billable to clients. You can calculate the utilization rate by dividing a lawyer’s billable hours by the total hours worked. So, if you or your staff work 200 hours in a month and bill 150 hours, their utilization rate is 75%. The goal is to get as close to 100% utilization as possible.
This is another important KPI that measures an attorney’s recorded time compared to the fees that clients pay. You can calculate the realization rate by dividing fees recorded by fees collected. So if a lawyer records 200 hours in a month, but clients only pay for 130, then the realization rate for that individual is 65%. The goal is to get as close to 100% realization as possible.
It’s essential to track outstanding accounts receivable balances as well. This is a measure of the firm’s uncollected fees. Why is this important? High accounts receivable balances could signal deeper problems with the business—whether that’s unhappy clients who refuse to pay the bill, inefficiency in the invoicing process, or discrepancies in the bill.
Similarly, you can also track outstanding work-in-progress fees, which measure the fees that are reported but not yet invoiced to the clients.
2. Run a law firm profitability analysis
This sounds scarier than it is! A law firm profitability analysis simply refers to tracking key metrics for understanding your business’s profitability. Use one of the KPIs above to get started.
For example, let’s say you want to run an analysis on your utilization rates. Your lawyers have an average billable rate of $300, meaning they should generate around $12,000 of revenue weekly if they’re 100% billable. However, you discover that most of the lawyers at your firm are only at 75% utilization, which means they’re only generating $9,000 each week—a $3,000 difference.
When you look closer, you discover that your employees spend most of those non-billable hours on manual, administrative tasks. From there, you can either re-evaluate your rate or introduce new ways to reduce or automate these time-consuming activities.
3. Set goals
Once you’ve run your law firm profitability analysis and identified inefficiencies, it’s time to set some goals. This will allow you to measure progress and have a clear objective.
Below are examples of goals using KPIs:
- Boosting the firm’s utilization rate by 5% by the end of Q2.
- Addressing 60% of the firm’s outstanding balances by the end of the month.
- Increasing the firm’s realization rate by 20% by the end of the year.
Try to set achievable goals. While it would be great to have all your lawyers at 100% utilization, this is unrealistic and sets you up for failure. Instead, choose numbers that are challenging but within reach.
4. Introduce the right technology
After setting goals, develop a game plan for achieving them. The most profitable law firms implement technology as a path forward. You might be wondering: how can I increase profitability by spending more of my resources? With the right investment, technology can save you money in the long run.
For instance, consider the billing process. If done manually, it can take up a significant amount of your lawyers’ time—reducing their utilization rate. On the other hand, if you automate billing with a software like MyCase, you can streamline the entire billing, invoicing, and payments process. This would provide your staff with more time to focus on billable work. In fact, firms using MyCase Payments have increased legal payments collection by up to 46%.
Another example is time tracking. It’s incredibly laborious to log every hour worked manually—and it may even lead to underreporting time. But with the right tools, your lawyers can plan, track, and report billable time as it occurs—so they don’t have to rely on memory when it’s time to invoice.
5. Cut fat where needed
Another way to accomplish your goals is to look for areas where you can cut excess fat. Here are a few ideas that the most profitable law firms consider:
Real estate is frequently one of the largest line items in your budget. If you’re not fully utilizing your office—whether due to a smaller team or remote work—you may consider downsizing to a smaller space. This can save you a lot of money over time.
High turnover rates can be harmful to profitability as well. In fact, when an attorney leaves, it can cost the firm anywhere from $400,000 to more than $800,000.
If you’re experiencing significant turnover, it may be time to assess the source of the problem. Do you have a cultural issue? Are your salaries lower than the industry average? Identify what’s preventing people from staying and find ways to address it.
Does your law firm use tools that aren’t working well or aren’t used at all? These technologies may be draining your resources without delivering much value. Assess all the software you’re currently using and, if it’s not useful, either remove or replace it with a better solution.
Boost Your Law Firm Profitability Today With MyCase
Increasing your law firm’s profitability is key to experiencing long-term, sustainable success. By creating KPIs and using them to create actionable, realistic strategies, your law firm will experience greater productivity and cash flow. MyCase’s software solutions can help you boost your firm’s profitability. Give us a try—it’s completely free.