Professional Services Accounting ARTICLE -
Get Back to Basics and Maximize your Firm’s Profitability

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Profitability Maximization, Business Plan Building Interest

Concerned your firm may be facing some difficult economic times? That’s not surprising, given the recent upheaval in the stock market, the rash of major bankruptcies, a threatening regulatory environment (the Sarbanes-Oxley Act), growing competition from other professionals and the rising costs of running a business.

Start at square one

Unfortunately, most of these things are out of your control. But there is something you can do to improve your firm’s chances for profitability: Get back to the basics. Like the best athletes, improve your game by starting over at square one.

Develop an annual business plan. You don’t know how well you are doing until you have something to compare yourself to. Develop a 12-month business plan that outlines expected production of each professional in the firm, corresponding costs and overhead expenses.

Create performance measures. Now that you have identified some numbers, figure out how you will achieve them. What key performance measures will you need to track? What does each member of the firm have to do to meet or exceed these measures?

Specialize. It’s a well-known fact that specialists usually get paid more than generalists. Look hard at your firm and its partners. What are they noted for? Are there overlooked specialties you can better develop and market?

Focus on client service. The more satisfied clients are, the longer they stay with your firm. Put in place programs that measure client satisfaction, client retention and profitability.

Track client profitability. Not all clients generate the same profit margins. Do you currently measure profitability by client? If not, start today by entering into your practice management system paralegal, associate and partner hourly cost figures. You can then determine the write-up factor for each case.

Know your cost of production. Not only do you need to understand your cost by case, you also need to capture this information by biller, practice group and, for multi-office practices, by office.

Price your services accordingly. Once you know your cost of production, you should use it as a guide in setting bill rates and billing arrangements. Consider alternative pricing structures to the billable hour method. Clients buy value, not hours, from your firm, and they will pay more for more valuable services.

Control support staff growth. Make sure your current ratio of support staff to professional is in line with your size and type of practice.

Take on more valuable work. In every area of practice there is low-value and high-value work. Look for the high-value work. For example, a real estate practice might replace many lower-priced turnkey closings with a few more complex closings that warrant higher individual fees.

Maximize lawyer productivity. Do you require a partner and a senior partner to review associates’ work in your firm? Although this generates chargeable time, can it actually be billed and does it add value to the legal product? Don’t just maximize chargeable hours, maximize lawyer productivity. Decide how your firm should use its technology, associates and paralegals to drive productivity.

Keep track of hours. Billable hours can be lost if timekeepers do not enter daily time sheets. Require all timekeepers to actually enter time on a daily basis. This will provide you with real-time information on monthly revenue. And you won’t be surprised at the end of the month by a revenue shortfall.

Select clients carefully. Develop criteria for client selection. For example, you might want to avoid start-up firms because they often don’t have money to pay for the legal services needed. Re-evaluate clients with past-due receivables. Once you decide which ones you don’t want to work with, let them know immediately.

Bill unbilled time. The sooner you can get work in process (WIP) time invoiced, the sooner you get paid. Develop criteria around billing unbilled time. Some firms require a certain percentage of the biller’s time to be released each month. Others require all WIP to be billed on a monthly basis.

Make collections a priority. What percentage of your receivables is more than 90 or 120 days old? Place your receivables in 30-day buckets so you can determine the total number of days outstanding in each.

The older the receivable, the less likely you will collect it. So start by going after the oldest ones first. Find out if clients are delaying payment because they are unhappy with the service or if you are taking on clients that simply can’t afford your fees.

Focus on fundamentals

The secret to becoming more profitable is to focus on the basics of your business. Although firms face many challenges these days, it is possible to preserve and increase profitability by paying attention to the fundamentals.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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