According to Matthew Brannelly, there are great opportunities for small law firms to lift profitability, even in this tough economy.
What is the problem?
If the profits of a small law firm are below what the principal’s deem as satisfactory, there are usually two main reasons:
1) The practice management needs improving, or
2) The firm doesn’t have enough good quality work
Clearly these reasons aren’t mutually exclusive and both could apply to the practice says Matthew Brannelly.
Practice Management Improvement
While I could write a whole book on legal practice management, due to space restrictions, I will talk about just two issues.
As a consultant, when you get a new client, you want to make an immediate impact. That way, the client will see immediate results and hopefully see your value says Matthew Brannelly.
The quickest and easiest way to lift profitability in any business including legal practices, is nearly always to focus on price. Many firms are just too cheap!!.
I have a saying that “Whatever you charge, your client will think you are expensive, so don’t disappoint them”.
Of course I am not talking about doubling fees, or anything that dramatic. Let me give you an example of the impact of lifting prices.
The ALPMA ( Australian Legal Practice Managers Association) published a 2011 study ( which is available from their website) showing that profits ( after principal salaries) were around 8% of revenue for the practices in the study. This was the same for all revenue classifications from less than $5 million to $20 million in revenue.
In other words, for a $1million in fees, the practices were only turning $80,000 of it into profit (after principal salaries). If those firms had lifted prices by just 10%, profit could have lifted by $100,000 or an increase of 125%.
2) Average Hourly Rate Analysis
While there are lots of discussion about doing away with time-sheets and pricing matters in advance, practices in the accounting industry that are going down this track, still generally keep time-sheets. Not to charge the client, but to analyse the profitability of the matter, after it is finished.
From a profitability point of view, the challenge is to lift the average hourly rate of the practice. That is, the amount billed divided by the hours it took to do the work.
In order for these figures to be accurate, time needs to be accurately recorded. There are numerous discussions in Linked In and other forums about how poorly time is generally recorded by lawyers.
Many legal practices don’t record or analyse their Average Hourly Rate and as a result, can’t identify with any accuracy, their most profitable and least profitable work and the reasons for that says Matthew Brannelly.
By focusing on just these two areas, practices have been able to achieve significant lifts in profitability. Imagine what would be possible if you could then improve other areas as well.