4 Ways Law Firm Profitability Will Change in the Future
In this post, we’ll cover four methods by which modern law firms can increase profitability. it’s actually a great time to be running a law practice, and even innovating just a little more than your competitors can generate big revenue returns. It’s time to seize the opportunity.
Nostradamus boldly predicted the future (but not really) via quatrains = four-line poems, which he organized into ‘centuries, or groups of 100 quatrains. Though while I like the 4-fold form, I won’t be organizing my predictions into quatrains, or even trying to rhyme them. In this post, we’ll cover four methods by which modern law firms can increase profitability. it’s actually a great time to be running a law practice, and even innovating just a little more than your competitors can generate big revenue returns. It’s time to seize the opportunity.
So, without further ado, these are 4 ways law firm profitability will change in the (near) future.
Billing Models Will Catch Up to the Rest of the Culture
Over the past decade, as competition has ratcheted up among law firm, and consumers have more regularly accessed free and available online resources to choose among law firms, there has been a downward pressure on legal fees. Modern consumers want cost certainty; and, law firms charging via the traditional hourly rate structure have an impossible time answering the question: How much will this cost me? And, just quoting an hourly rate is not good enough. Telling a potential client that your services cost $400 per hour — for however many hours it takes — only applies cost certainty to the rate, not the total amount of the representation, which is what consumers really want to know. Not that this should come as a surprise to any lawyer reading this. Just think about how you pay for everything else: via monthly or annual subscription, with a defined, total cost. Now, consider how far away from that modern pricing structure your old school law firm is.
“Modern consumers want cost certainty; and, law firms charging via the traditional hourly rate structure have an impossible time answering the question: How much will this cost me?”
Even now, law firms are beginning to modernize their rate structures, to reflect these cultural changes, wrought by the internet, and exacerbated by the expansive use of cloud-based technology. More and more law firms — especially in certain practice areas, like corporate law — are beginning to build out their own subscription models. These offerings, though, can benefit both law firms and consumers, since the obverse of predictive pricing for clients is more consistent income for law firms. A step beyond subscription pricing is offering products through law firms, which have traditionally been viewed as service businesses. But, there’s no reason that a law firm can’t sell template documents with limited support services, as Legal Zoom does, and at comparative prices. This is also a method to attract clients who would otherwise try to represent themselves, thereby creating revenue where there was none before — that’s a great way to drive your bottom line. Lastly, some law firms are billing at more frequent intervals (weekly versus monthly, e.g.), as an effective measure against the sticker shock clients experience when larger bills arrived at less frequent intervals.
Online Payments Will Become the Norm, Including for Business Clients
It’s staggering just how many law firms continue to rely on check-based payments. Consider, however, the law firm client who is told to go out and acquire a cashier’s check for $5,000 before representation with a particular law firm can even commence. That client has to have that sum accessible right away, and then overcome the many steps it takes to actually acquire and deliver the check to an attorney. I swear, it’s a wonder that lawyers make any money at all. With online payments, usually made via credit cards, the law firm gets paid right away; and, the client sets up a de facto payment program with her credit card company. If that client defaults on that payment . . . well, that’s the credit card company’s problem now, not yours.
Use this guide to take control of your firm’s finances and increase profitability.
The arrangement is better for the clients of law firms and for the law firms themselves. And, that’s not just for consumers; more and more businesses are using credit cards to pay for legal services, in order to access rewards program benefits. That’s what we call a win-win in the business. But, credit card payments can be used outside of the retainer construct. Regular and recurring client payments can be collected automatically via online payment processing tools —just make sure to update your engagement agreements, to reflect your new collection practices. A byproduct of all this automated payment collection is that the law firm using online payments is often able to reduce (or even eliminate) accounts receivable, including the time and costs associated with collecting on delinquent accounts in a traditional business environment.
Fast-Growing Law Firms Won’t Charge (Much) More, They’ll Just Be (Much) More Efficient
The funny thing about law firms is that, accounting for geography and practice area, they all pretty much charge the same fees. So, as long as a law firm is willing to relay a cost certain for services, a consumer’s ultimate choice largely comes down to likability. It turns out, though, that law firm profitability mostly turns on efficiency, not intake. Law firms that work faster turn over more work, and make more money. Believe it or not, even less than a 5% increase over the industry average utilization rate in legal (which is 29%) can lead to massive revenue increases for firms, which can double their revenue on that efficiency metric in five years.
“…even less than a 5% increase over the industry average utilization rate in legal (which is 29%) can lead to massive revenue increases for firms.”
It’s perhaps not surprising to learn, in a business driven by hourly fees, that working faster means making more. I think most lawyers intuitively understand as much; the challenge for law firms is implementing the technology changes necessary to get more efficient, to work faster, from more places. There are a lot of technology options out there that will increase law firm productivity; but, a law firm’s greatest enemy is often inertia. So, adopting that law practice management software, or that document automation program, or that CRM . . . becomes essential to your bottom line.
Budgets Will Shrink for Tech-Conscious Law Firms, Again
The best thing to ever happen to modern law firms was cloud technology. It flattened software costs across the board, and also eliminated replacement costs for traditional premise-based hardware. This made it easier to start a new law firm (by reducing buy-in costs), and to manage an existing one (by stabilizing overhead). Cloud technology in legal really started to gain at the beginning of the 2010s.
Of course, lawyers are highly risk-averse, and habitually late adopters of new tools — so, more law firms than you think (that is, most of them), did not fully give themselves over to the sweet embrace of the cloud during the 2010s. The 2020s, then, represent an entirely new opportunity to do so; and, during this next decade, there will be a separate wave of cloud adoption by law firms who missed the first one.
And, after they figure out this part of the equation, those law firms can enter the 2030s catching up on what they missed out on in the 2020s.
About the author
Jared D. Correia, Esq. is the CEO of Red Cave Law Firm Consulting, which offers subscription-based law firm business management consulting and technology services for solo and small law firms. Red Cave also works with legal institutions and legal-facing corporations to develop programming and content. A former practicing attorney, Jared has been advising lawyers and law firms for over a decade. He is a regular presenter at local, regional and national events, including ABA TECHSHOW. He regularly contributes to legal publications, including his column, ‘Managing,’ for Attorney at Work, and his ‘Law Practice Confidential’ advice column for Lawyerist. Jared is the author of the American Bar Association publication ‘Twitter in One Hour for Lawyers’. He is the host of the Legal Toolkit podcast on Legal Talk Network. Jared also teaches for Concord Law School, Suffolk University Law School and Solo Practice University. He loves James Taylor, but respects Ron Swanson; and, he tries to sneak Rolos when no one is looking.