BY SPENCER BARBACK
A 2012 survey of top law firms had results that left many in the profession concerned about how to increase profitability. Some of the findings included:
Ӣ Revenue was up in most firms, but so were expenses.
Ӣ Profits were up, but at a pace that is likely to be permanently slowed.
Ӣ Firms were raising their rates, but many do not expect to realize the full increase.
Ӣ Fully 96 percent of law firm leaders expect the pace of change in the profession to remain the same or accelerate.
”¢ Leaders in firms of 250 or more lawyers were especially likely to believe that the recession served as a “permanent accelerator of trends that already existed” or a “game changer.” More than 90 percent of these firms held that opinion.
Ӣ Three quarters of firms of fewer than 250 lawyers also agreed.
These findings suggest that law firms face increased competition from a variety of sources, which has demonstrably affected the bottom line. To survive in today”™s competitive climate, law firms must transform themselves from reactive to proactive when managing their business. There are some key factors that firms can use to help increase profitability.
Realization is what you bill as compared with the time entered into time and billing. For example, if you enter 100 billable hours and you bill the client for 85 hours, your realization is 85 percent. You want to make sure that on a monthly basis you review the realization for everyone. If members of the firm and staff are not meeting the realization goals you want to help them. The higher the realization, the more profitable you will be.
Reviewing your billing procedures is critical. Everyone at your firm should have a billing rate. You should review these rates at least once a year. You also want to consider adjusting rates twice a year. You want to make sure that what you charge is appropriate for the services you are rendering. Are your rates competitive for the community you practice in?
You should be requesting retainers. Make sure you explain your payment terms to your clients. What are your follow-up procedures when a client”™s bill is more than 30, 60 and 90 days old? Surprisingly, many firms don”™t sent out bills to clients on a regular basis. Bills should be sent out on a monthly basis; for larger clients/matters you might consider sending bills twice a month. In special situations, consider “value billing.” Professionals are sometimes reluctant to value bill a client. However, if you save your client a lot of money because of your knowledge and expertise, but it did not take a lot of time, you still earned the rewards of a good result and value billing is appropriate.
Another critical aspect of profitability is controlling costs. No matter the size of your firm, you should prepare a budget for the year. The budget should show projected income and expenses on a monthly basis. Every month compare the actual revenue and expenses with the budget. If there are large differences you need to ask and answer the question, why?
You should be reviewing the number of staff you have and set target chargeable hours for each associate/staff. Is the firm operating as efficiently as it should be? We all get used to having staff assist us in our work. However, is there work you could be doing yourself that would make you more efficient and just maybe reduce your need for the number of staff?
Other costs need to be reviewed on an ongoing basis, such as insurances and benefits. Are the deductibles too low? Consider getting at least three proposals for all insurance. Should associates and staff pay a larger share of their benefits? In addition, the cost of major recurring expenditures such as copy paper, office supplies, equipment and furniture should be reviewed often. Can you reduce your costs by going to other vendors or by negotiating with your current ones?
Through effective financial management, your firm can thrive, when so many others are struggling.
Spencer Barback is a partner at Citrin Cooperman”™s White Plains office. He can be reached at (914) 949-2990 or via email at sbarback@citrincooperman.com. Citrin Cooperman is a full-service accounting and consulting firm.
