Apart from being a fantastic bedtime read, the Law Society 2024 financial benchmarking study states that for an average 20-fee-earner law firm, increasing recovery rate and productivity by 1% each – will equate to an £80k increase in annual profits.
So in this blog, I’m going to try and show how to actually do it. I consult and train around the commercial stuff for law firms. To be clear, I am most definitely not an accountant, and this isn’t meant for your finance team. This is meant for those that drive change in a law firm, the Partners, HOD’s, Marketing & BD.
Getting more people to hit target
Don’t Manage people purely by their turnover, as it's rarely useful on its own. A target of 1200 hours a year or £300k is hard to conceive and hold people to account against. So break it down into something useful… how many billable hours per working day? 5 hours per day for staff with no management responsibility is a decent starting point – with at least an 80% recovery rate.
Do focus on measuring and managing the lead indicators of success. What gets billed today was won by the work in marketing and BD up to 9 months ago. It's often too late to shout at people to work harder when their billings drop this month, as the damage has already been done some time ago.
However, you can manage people on their BD and marketing activity today.
Do work out the average file value, and calculate how many new file openings per month are needed to hit the target. A £300k target sounds hard, 15 new file openings per month at £1700 a file sounds much more achievable!
Time recording
I know, I know, it's hard and really boring. And to misquote the band Primal Scream, really your lawyers just want to be free, to do what they want to do and that isn’t filling in their timesheets. Tough luck. Everything you think you know about your business is vapour without good time data.
If a firm or a dept loses control of its time, then its lawyers work longer hours. Always. For free… It's commercially weak and morally it’s just awful. Leaders who make a show of talking about workplace wellness & mental health should hang their heads in shame if in parallel they allow poor management of time.
Do time recording well as a firm and you will likely be very profitable. Do it badly and it’s virtually impossible. I know I’m repeating myself, but really it does matter.
Sainsbury's doesn’t sell a tin of beans without knowing how much it costs to put it on the shelf & sell it. I have a client, who is a big biller and a consummate deal maker and no doubt terrifying to the other side. She wanted to reduce her working hours – when I asked how much time she had budgeted to spend on a forthcoming deal, she didn’t know… she just quoted a fixed price and crossed her fingers.
Don’t let departments that charge fixed fees get away with poor or zero-time recording. This seems to be the norm, and they are the villains of this topic. If you do let them get away with it then every management decision is probably wrong from then on. Strategy, pricing, resourcing, training needs, marketing, and investments in efficiency tools like AI. All choices without the context of the cost of the product you sell will likely be wrong.
Do capture all use of time not just billable/recovered. It's hard to get lawyers to spend their time differently if you don’t have that full visibility. A bit like one promising young lawyer I know who had a remarkable 100% recovery rate… It turns out he was just putting his hours on so it perfectly added up to the fixed-price bills so he wouldn’t get shouted at. Everything else got tagged as ‘BD’.
Most firms need to ‘re-do’ time tracking completely as a project. From the categories themselves to the system training to the discipline of actually doing it. If you only played golf once a month you’d find it hard to get better.
Do pick one dept, and run the end-of-month reporting weekly, fix/train the errors each week with the team and keep doing it till its correct.
Do use the data to help work toward seeing profitability at a file level – not just ‘is there any money left over at the end of the year. Non-law firms would be crazy if they didn’t know which of their clients or products made a profit, right? Your accounts team might need help to achieve this, but if your external accountants don’t know how to help them – find others. It really matters.
Team Structure
It’s hard to make a big improvement in profit without getting this right. As a rule of thumb, think of a pyramid shape… lower cost people doing the lower-skilled work is essential to drive profit.
Do give junior staff billable time as early as possible in their careers – good discipline for HODs and them. Paralegals should have a target too (50%)
Don’t handcuff one client to one lawyer. It cripples dept growth because the people who are good at winning work then have to do the work and then stop going out to win more work. I always hear ‘I’d love to delegate it but my client expects me to do all the work’. And its wrong. Your client trusts you. Full stop. If you say the right person to do that job is your colleague, then the majority of the time the client will believe you.
Education
Do make sure every fee earner knows how the firm makes money. Topics might include Revenue vs GP vs net, the real cost of employing them. The byproduct is pricing confidence… £300 an hour might sound like a lot at first glance… but understanding why they need to charge that amount will make a big difference to your recovery rates…
Do try and beat the breakeven point listed in the Law Society report. The average, including non-salary costs, is around £593 per working day. However – I don’t think in smaller firms that is accurate. There is the complication of elasticity of free labour… all those extra hours that don’t get tracked or charged for.
Technology
New productivity tech like drafting tools, case management systems and AI everything are all very exciting but only when properly implemented. According to industry-leading IT Solution architects Platform Smart, 80% of new software fails to deliver expected ROI, mainly due to poor training and poor optimisation.
If your IT Dept isn’t good at project work you might need to use external specialists – both to select the vendor and run the project. It is a specialist skill set that most smaller IT depts just don’t have. You wouldn’t use the people who service & clean your car to build you a new one… or teach you how to drive it. Hiring an expert is rarely a bad idea.
Cross-selling
US law firms wrap a multi-disciplined team around a client at the sale stage or as a minimum on matter 1, without a second thought. Lots of UK firms seem to deliberately make it hard for the client to work across the firm. Cross-sold clients are more likely to pay full fees without a discount, they typically spend twice as much, stay 3 times as long and are six times less likely to complain.
Do teach every lawyer the knowledge to become client focussed not file focussed. The well-rounded view of the individual. And yes, trainees should have multiple seats.
Do Set up lunch and learns between depts. Tell each other what you do, and who you want to do it for. If you don’t believe me, then ask non-corporate and commercial lawyers what the difference is between corporate and commercial. £5 says most of them don’t have a clue.. and if they don’t the poor client probably doesn’t either.
Do look at the very practical stuff, such as client onboarding. Surely this only needs to be done once per firm… I frequently see client onboarding needing to be repeated when working with another dept.
Don’t miss out on the obvious opportunities – Commercial Property into Corporate, Wills & Estates into Residential, and for that matter into Corporate clients. I’ve personally seen what happens when business owners get poorly & pass away both their partner and their business partner must deal with it all… running and valuing a business when grieving is hard. It’s a lawyer's job to look after their clients – recommend all the right professionals outside the firm too for that matter.
Pricing
Don’t use the phrase ‘market rate’ glibly. It's often the excuse unprofitable depts wheel out to justify their lack of profit. I know of one town where three competing firms’ commercial property depts are all matching each other on pricing and yet none of them are making a profit.
Just because the other side is doing something doesn’t mean you should too. Do you think the competition and market authority would mind if I took them all out to lunch and suggested a multi-lateral price increase? Yes? Oh. Shame.
Do be wary of comparing hourly rates with competitors, they might be better at scope creep and recovery than you are. I have seen a lawyer with a lower hourly rate charging a considerably bigger bill than their ‘higher priced’ competitor. A five-figure sum difference.
Do recognise that it's far better to increase value to win business than it is to reduce costs & price. You can change your product, for example, Residential conveyancing should automatically include a high-level review of the client's wills & trusts as part of the fee. For those who have heard me on webinars before, no I won’t stop saying this until people give in and do it.
Do train everyone who quotes fees in negotiation & sales (I am bound to say that!). It's a surprisingly easy way to find many 1% increases in profit!
Don’t forget that the tone of voice you use when quoting a price matters. Does it sound like an apology? You’ve just told the client even though you think it’s expensive. Surprisingly they will then shop around.
Do remember it’s often easier to win a negotiation on price just by offering to change the pricing mechanism (fixed to hourly vice versa). Not all your lawyers might know how. So teach them.
Don’t change your price point without looking at your current pricing consistency. Is everyone on the team charging the same amount for the same thing? I saw a firm that had a 100% difference in price for essentially the same type of work. In the same office, in the same team. Imagine if the clients found out.. worse, imagine being a shareholder…
Cashflow
Cashflow can kill businesses. Most lawyers don’t understand it, let alone how to improve it. Look at your firms lock up, this is the sum of unbilled work in progress plus how long it takes clients to pay after the bill is sent. In UK law firms, this lock-up number is an average of 130 days. This should terrify you. Imagine your employer taking over 4 months to pay your salary, imagine trying to pay your mortgage, your electricity bill, and food all without the money being in your bank account. That’s what poor cash flow feels like.
Do tell the client in advance when you will bill and what might change things. Its also something to negotiate around that if you are so inclined.
Do interim bill. Bill on milestones, bill when matters take longer than expected (when its not your fault!) even asking for money on account will all make a huge difference.
Do remember that the £1000 fee you first quoted a year ago that’s just come in, is now worth 3.8% less in real terms due to inflation. Bringing the money in faster actually makes you more profit. Time-limiting quotes is worth doing too.
Don’t forget that lots of firms have had an artificial increase in profitability due to the high interest rates on client money. This won’t last.
Don’t give long payment terms. Why give 30 days, you aren’t selling printer cartidges after all. There’s nothing wrong with submitting bills as ‘due for immediate payment’, taking credit cards or even asking for money on account.
Scope creep
Realising you’ve gone over the scope you agreed with the client & then increasing the bill at the end of the work usually fails. Lawyers just don’t do it and clients rightly so, hate it.
Do set expectations around what might change the work at the point of sale. And say how you will handle it if it happens. You can mix pricing mechanisms – so fixed price work but any additional scope is charged at an hourly rate basis.
Do break work up into individually priced stages. It's far easier to pick up scope creep for each stage, and it's easier for the client to see the real value in the work you do for them. Even if you don’t do this, still have regular internal and external milestones on every file to review progress against budget.
Do run 5x5 Commercial file reviews. I’m sure you already keep your compliance team happy by doing regular file reviews for compliance and quality. But do you look through the commercial lens?
Here’s how:
As a team, pick 5 files to coach each other on.
1. Finding & winning the work – Where did the enquiry come from? How well did you handle the enquiry? How well did we capture the scope of the work?
2. Pricing – Did you charge the right fee, did you use the right pricing mechanism (fixed fee vs hourly rate for example)
3. Efficiency – Did it take as many hours to do the work as we budgeted? How efficient were we in delivering the work? Was it delivered on time?
4. Quality & compliance – Did we do a good job? Did we reply to all correspondence?
5. Opportunities – Could we have done any cross-selling, or up-selling?
To summarise, improving profitability is often challenging but the tip is to start somewhere…
and keep going. I often see firms look at profit as being too hard a nut to crack and it really isn't.
Here are my eight topics to work on:
1. Team structure
2. Hitting targets
3. Time tracking
4. Technology
5. Cross-selling
6. Pricing
7. Cash flow
8. Scope creep
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