How to Identify and Fire Unprofitable Clients

The business of practicing law can be fraught with challenges that include time scarcity, business development hurdles and issues with billing rates and service quality. Amid these common challenges, an adversary of a sustainable practice — unprofitable clients — is often left unchallenged.

These clients drain resources from other engagements, resulting in lost productivity — which is detrimental to the firm’s long-term success. This makes it essential for law firm leaders to recognize and tactfully part ways with such clients. This article aims to guide you through this often-neglected yet imperative aspect of managing a successful law firm — how to identify and fire unprofitable clients.

According to the Thomson Reuters 2022 State of U.S. Small Law Firms Report, firms consider solving this problem as one of the top five means of improving performance. In the last two years, 27% of law firms have already addressed the challenge of “cutting unprofitable services or clients,” and 43% “likely will” or “definitely will” do the same throughout 2023.

In spite of the “culling” already done, many firms feel there is still room for more. It isn’t uncommon for firms to report up to 20% of their client engagements to lose 25% of their profits. However, while the benefits of firing a profit-draining client are obvious, the assessment, implementation and implications aren’t.

Lawyers are trained to be detached, skeptical and professionally suspicious, thus are good at assessing facts and data impartially. Yet, with an exception of soloists, a concern often lurks in the background: “Wait, are we considering cutting my client?”

Both emotions and personal practical considerations get in the way of objectively evaluating what is good for a firm. With an attempt to preserve relationships among partners, decisions are often postponed, if not avoided.

This article is, in part, an attempt to help partners establish rules prior to facing the challenges of firing a client.

Assess the Data First

There are numerous ways law firms measure profitability such as analyzing margins, realization, leverage, utilization and hourly rates. Whatever formula you use to determine profitability, if you’ve identified an unprofitable client and are considering cutting them, there are steps you can take to qualify this decision before taking action. The guidance below uses an example that:

1. Describes a situation for a typical small-size law firm with repeat clients

2. Assumes the firm is at or nearing maximum client capacity. Otherwise, it may not be the right time for the firm to fire any client, unless:

• The relationship is toxic
• The firm is constantly losing money
• The engagement negatively affects other client work
• The firm is increasing its client capacity

3. The client in question is not of a strategic nature to your firm

For the purpose of this article, a fictitious law firm has been created with the following profile:

• The group average blended hourly rate is $300
• An average of 2,000 billable hours per full-time professional
• A total of 16 repeat clients per annum (one-off clients are not included in this scenario on purpose as it’s a one-and-done situation)
• Net client fees from repeat clients only total $3.2 million

A repeat client distribution for our hypothetical law firm might look like this:

Number of clients	Fees per client	Fees per client group	Hours per group	Hours per client
1	$805,000	$805,000	2,683	2,683
2	$483,000	$966,000	3,220	1,610
4	$257,600	$1,030,400	3,435	859
4	$64,400	$257,600	859	215
5	$32,200	$161,000	537	107
Total: 16	NA	$3,220,000	10,733	NA

The hours per group, and subsequently hours per client, is an estimate based on the total amount of fees per client group divided by the blended hourly rate. For example, if the firm receives $60,000 in fees with a blended hourly rate of $300, it must have spent at least 200 billable hours on the client work. (Collection, realization and utilization rates are not being taken into account for this exercise. If they were, the hours per group would have been much higher.)

Typically, but not always, unprofitable clients can be found among the lowest in the fees per client column. Let’s examine one such client with $32,200 in fees and estimated 107 hours per client:

1. Is this estimated number close to the actual hours spent on this engagement?

If the actual hours spent on the work were more than the estimated 107 hours while the blended rate was close to $300, the project wasn't productive for the firm.

2. Who was involved in the work for this client?

If the actual hours were around 80 hours but a senior partner did all of the work at $500/hour, this scenario would not be considered productive either. The firm should have made $40,000 (80 hours x $500/hour), which is greater than the actual fees, $32,200 in the hypothetical firm’s case.

3. Did the assignment process include considerations for staff availability and preferences, project fit, service quality or skill building?

If it did not, the allocated resources would’ve been better utilized on other engagements.

4. Are there ways to better leverage this kind of engagement in the future?

Perhaps money was lost on this engagement. If there is an opportunity to staff the next one differently or leverage technology, the firm should be able to turn this into a profitable account and become more efficient, hence more competitive.

The question of profitability regarding repeat clients isn't only about post factum events but about future engagements as well. If the firm hasn’t been great at staffing in the past for example, this doesn’t mean it can’t identify ways to do better on future projects. A thorough assessment of what makes a particular client unprofitable is the foremost step in turning the tables.

Unprofitable clients create risks of making the practice unsustainable, thus they appear to be a bad fit for the firm. However, the idea that all revenue is good revenue still exists among leadership. After all, firms can offset minor profit losses through other, more profitable engagements. A legitimate question in this instance is: Is there a rational justification for keeping an unprofitable client, and, if so, are there any other criteria for client qualification?

You Have the Numbers, Now What?

Once you have cumulated all the data, you will want to utilize the qualification method to determine if firing an unprofitable client is the right choice. Ask yourself and the people involved with a client account the following three questions (based on the Swan-Crawfish-Pike (SCP) model, which seeks alignment between three constituent pillars: stakeholders, clients and profits):

1. Is this client profitable for our firm; will it become one through future engagements?

2. Are we becoming smarter from doing the work for this client?

3. Does our work have a significant impact on this client?

We know profits are a function of hourly rates, leverage, utilization, realization and collection. Improvement on any variable is a boon for the firm. Therefore, to reap the benefits, the firm should develop and enforce a set of profitability rules for partners to adhere to.

Learning from client work is another piece of the fire-or-keep equation. If the firm isn’t making a profit out of the relationship but its people are constantly challenged, they are more likely to develop valuable skills. Challenging, but not overwhelming, work also boosts morale (which affects financial performance) among professionals. As employees become more competent, the firm becomes more valuable in the marketplace.

The impact your firm is making on a client is tied to the value you're bringing to the relationship. If you haven't made a profit and your people haven't learned anything new, but the impact was so great that it could awe other client prospects, the client is considered an asset. The higher the impact, the more powerful the case study. It also raises the chance of everyone involved in the client-firm relationship to spread the word about the firm’s amazing work. In other words, it’s a strong source for referrals.

In assessing the responses to the three qualification questions, even when a client is unprofitable, it isn’t necessarily a bad-fit one. However, if you find yourself answering “no” to all three questions, the client is indeed a bad fit for your firm. Conversely, the best-fit clients are the ones where you can definitively answer “yes” to all three questions.

You’re Ready to Fire a Client. What Options Does Your Firm Have?

Here are a few general rules to consider when firing a client:

Be as candid as you possibly can. If the relationship is no longer profitable for the firm, explain this to the client as a matter of fact. If appropriate, suggest having a conversation on how to make future engagements work for all parties involved. Offer to refer the client to another law firm or association that would be a better fit for them.

Be prompt. The earlier you notify the client the more time they have to take stock of their affairs.

Follow the rules of professional conduct published by your association. Develop a firm-wide policy of rules of engagement, let it be known to the client; notify of any violations or deviations as soon as they occur.

Whatever issues manifest themselves in your particular case, it could be prudent to approach the firing process with a togetherness mindset. Instead of thinking in terms of “they” and “our firm” (or “me”) — an adversarial look — try approaching this through a “we” and “us” mindset. “In what manner with what actions should I proceed for the client, myself and my firm to incur as little damage as possible?”

You’ve Let the Client Go. Now What?

Continuing with our example, after having fired one 107-hour bad-fit client, how do you recoup lost revenue? In no order of importance, your firm may decide to allocate those hours to some of the following:

Develop new business. The whole point of firing bad-fit clients is to find better-fit clients. In firing the client, your firm now has extra time to devote to new business development.

Grow existing accounts. The most efficient and effective way to increase revenue (and profits) is by generating new business among best-fit client accounts rather than prospecting.

Review services and improve quality. Get client feedback to prune less profitable and redundant service offerings or repackage them to deliver more value.

Invest in the future. Engage yourself, partners and junior staff in asset-building activities like seminars, intellectual property, methodology, white papers, articles or a book.

Train your staff. Plan additional training activities, especially (but not limited to) soft-skills development.

Probe new technology. New tech can prove to be of great leverage for the firm; devote time to evaluate applicability of the latest tools for your practice.

Strengthen management skills. Law firms sell expertise of their people. Thus, getting better at managing what makes money will make you more money.

Bringing It All Together

Prior to firing any client, the first thing to consider is whether an account is unprofitable. If it is, the firm ought to assess whether, even if unprofitable, the client is a bad fit for the firm. As the SCP model shows, profitability alone isn’t necessarily a primary justification for culling the client.

Second, firms need to acknowledge the emotional attachment of the partner assigned to the client account. To avoid misunderstanding and resentment, it is better to set the rules of firing any client prior to dealing with a particular case.

Third, the culling must be handled professionally, ethically, in due time and with as little (if any) damage to the client and reputation of the firm.

And fourth, the loss of future fees can be recouped many-fold through various asset-building, managerial and client relationship activities.

By using these guidelines as the foundation for handling unprofitable clients, law firms can preserve resources, maintain staff morale and set their business up for long-term success.