Digging in on Law Firm Profitability

Do you understand what drives profitability at your firm? How would you create conversations about the topic? Can you demonstrate and succinctly explain how your work affects the bottom line? Can you identify the trends impacting profitability?

Great conversations emerge from questions people demonstrate the courage to ask. In response, members of LMA’s Educational Advisory Committee (EAC) hosted a roundtable to gauge and strengthen budding confidence in the participants’ work to help secure their firms’ financial success. This meant building an individual’s comfort level with day-to-day conversations about profitability, learning how to ask smarter questions and being able to engage in and provoke those conversations internally about what profitability looks like.

The roundtable focused on four subtopics:

1.  Establishing a Framework for Conversations About Law Firm Profitability
2.  Tying Marketing and Business Development (BD) Activities to Profitability
3.  Coaching on Value Proposition
4.  Profitability Trends and What’s Next

Roundtable participants spoke to their enthusiastic interest in profitability and almost all were at the beginning of their journey. All participants’ efforts signal massive opportunities for growth and collaboration. The outcomes will lead to enhanced conversations and practices that enable legal marketers to serve as an integral part of identifying and driving profitable work.

The conversation revealed how participants are educating themselves on law firm profitability, how this knowledge is being captured and shared, metrics and misconceptions. All had been reading a variety of sources on the topic, including content from LMA and the Practising Law Institute (PLI). Most are able to enhance their knowledge by collaborating with individuals and teams responsible for measuring profitability, such as the CFO, COO, LPM, pricing, finance, administrative partners, RFP, practice/industry groups and client teams.

Understanding the factors influencing profitability fit naturally with the various metrics participants either use or could include in their efforts. Items like rate, billability, staffing, WIP, expenditures, a portfolio of work reflecting multiple practice/industry groups, products and historical financial data were all identified as valid metrics and methods to gauging profitability. A rare few reported successful actions they’ve been able to take in advancing the conversation around profitability. Among them was developing financial and marketing-informed dashboards for business development. Another valuable action was capturing relevant information and anecdotes about law firm profitability, then summarizing the information and sharing it with leadership and key stakeholders.

Coaching for Confidence

Legal marketers discovered they are significantly more comfortable discussing profitability than attorneys. This spurred a discussion focused on the human side of the practice of law and three “Ts” to help improve an attorney’s confidence:

Training. Leading firms are investing in training throughout the attorney lifecycle to increase financial acumen, such as:

• Business of law curriculum during associate onboarding.
• Focusing on how to sell value first instead of hourly rates.
• Partner retreats focusing on profitability and strategic growth.

Transparency. Firms with open and regular communication about firm finances are setting the foundation for building attorney confidence when it comes to client conversations about money, including:

• Formalized monthly calls to review the firm’s profit and loss statements.
• Informal attorney education on how billing rates are set.

Tools. Dashboards and other financial tools are examples of positive ways attorneys are shifting their cultures to build a stronger profitability mindset. Providing attorneys the opportunity to visualize how different resource allocation impacts the profitability at a matter or client level helps build confidence in achieving a better result.

Maintaining an Innovation Mindset

Trends in profitability focused on new developments and innovation. The discussion then centered on the “As”: artificial intelligence, alternative fee arrangements (AFAs) and alliances.

Artificial intelligence is poised to upend profitability on multiple fronts in the future by:

• Streamlining an attorney’s work product and minimizing the need for certain areas of focus (for example, in certain areas of contract law).
• Creating efficiencies in time entry and decreasing time leakage, ensuring the work being performed makes it onto the invoice.
• Automating invoice review and payment, leading to rejection of noncompliant invoices/entries.
• Simplifying the review of outside counsel guidelines and other policies, making it easier to comply and collect revenue.

The group shared their most recent experiences with AFAs and found:

• Clients are flattening tiered fee arrangements based on level or type of work. Instead of multiple, disparate tiers, clients are providing only one or two classifications, giving firms fewer options to describe the sophistication of their work.
• Requests for discounts are increasing, leading firms to determine other ways to ensure reliable and positive cash flow, like making discounts contingent on prompt payment.
• RFPs seem to more frequently include a live virtual reverse auction, which is viewed as a race to the bottom. It’s a risky proposition for firms to cut their rates in order to compete for a volume of work that may not be profitable long term.

The conversation seemed to settle on the value of alliances across the firm. For example:

• Cooperation and collaboration between finance/billing and marketing and BD can lead to better rates, more reliable staffing and overall better business opportunities.
• Regular conversations and discussions around the “why” surrounding rates and AFAs help marketing, BD and pricing to better communicate client benefits — whether those happen with a pricing team or with firm leadership.
• Regular communication about profitability, and the key drivers commanding leadership’s focuses, helps legal marketers spur appropriate evaluation of potential client growth.
• Legal marketers can issue-spot — and leadership can address — profitability concerns before they hit the bottom line. This savvy requires a strong relationship with firm/practice leadership.

Coming to the Table With Questions

Not everyone knows or has all the answers. Each firm is unique. There are many within your firm, be it a COO, CFO, pricing, finance, and/or LPM professionals, who welcome collaborative conversations on how legal marketers can enhance law firm profitability. For such a courageous lot, all we have to do is ask!

Here’s a short list of questions to facilitate future conversations:

• What qualifies as profitable work?
• Who can be involved in conversations about what qualifies as profitable work?
• How can we assess profitability in hiring and acquisition?
• What are we doing to get colleagues confident in conversations around money?
• Should pricing/profitability qualifiers exist when pursuing a client or bidding on a matter? 
• Are the marketing/BD dollars used to focus on the growth of the most profitable clients, practice areas, sectors, geographies, etc.?
• How is profitability segmented? (Ex: matter vs. client vs. practice vs. office vs. attorney)
• How does segmentation play into cross-selling or re-engaging a client after matter resolution?
• How is AI playing a role in profitability? (Ex: preventing leakage, streamlining workflows, etc.)
• What technologies help forecast or plan for matter and client profitability?
• How can we reassess profitability with the countercyclical practices that may be growing?

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A special thanks to EAC members Deb Baker, Morgan Horvitz, Ryan King and Megan McKeon for facilitating the “Digging in on Law Firm Profitability” roundtable. Learn more about the LMA/PLI partnership and explore additional available content. 

Related Resources

• LMA Podcast Episode 108: Demystifying Law Firm Profitability
• Interactive Online Course: Improving Law Firm Profitability (FREE for LMA members. Log in to access.)

Learn More About Business of Law The content in this feature correlates with the Business of Law domain in the LMA Body of Knowledge. Dive deeper and access the BoK online.