If you’re like us, you’re probably feeling very ready for a fresh start. Spring is just around the corner, and we have three-quarters of the year left to hit our goals. If you want to have a clear view on the year ahead you’re going to need to turn your attention to the past, the present, and the future. Let’s dig in together on some actionable tips that will help you build new habits to set your firm up for increased profitability in 2021. Ready to put pen to paper on those resolutions you’ve been putting off? We thought so.
1. Look Retroactively: What Went Well And Not So Well in 2020 (besides the obvious)
First, let’s take a stroll down memory lane. In order to make improvements this year it’s important to understand what worked in 2020 and areas of improvement for 2021. Many firms look at their overall profitability to assess their performance. While important, firms should also be looking at efficiency and hours billed and not only looking at receivables collected. Now it’s time to dig into your data and conduct a 2020 profitability and efficiency audit. Most of this is quantifiable, but there is a qualitative element as well.
If you’re using a cloud-based practice management system like PracticePanther, the quantifiable aspect of this audit should be easier to access than you think. Pull a report of all your firm’s billables and compare to receivables. What was the delta and what was your overall collection rate? Law firms should aim for at least a 95% collection rate on hours billed. If your collection rate is under 95%, then this is a major area for improvement for you in 2021 (and read on for tips and solutions).
Don’t have this kind of insight at your firm? Schedule a demo today!
Next, run reports on the billables and receivables for specific clients. Are there clients that over or underperformed the 95% collection rate goal? You may be able to find patterns in the data: are there certain clients that consistently pay late or request discounts? Are there others that always pay on time and pay in full? You may find that clients that are handled by specific attorneys or in specific practice areas have a historically higher collection rate than others.
Now it’s time to take a deep dive on the numbers for specific billable attorneys. Did every attorney at your firm hit their billable goal? Were the goals high enough or perhaps too high? It may be time to reassess these goals depending on what you find. Similarly, are there attorneys that consistently outperform others not just on hours billed, but on receivables collected? Are some attorneys working more efficiently than others, or are there clients or practice areas that have higher collection rates than others (or both)?
Taking a moment to analyze each individual firm contributor’s performance in addition to the overall firm performance will help you decide if your billable hour requirements need to be adjusted, or if you need to reframe the goals to be geared towards hours collected, not billed. Similarly, it may be time for a rate increase. This notoriously causes firms to feel anxiety and guilt, but you need to increase your rates over time to account for inflation and increased costs.
Lastly, think outside the quantifiable data and conduct a qualitative audit: what felt like it could have gone better? Are there certain areas where you continually felt behind the ball or stretched too thin? Did you miss valuable networking opportunities? Do you have a desire to elevate your firm’s reputation and take on more thought leadership in 2021? The numbers are certainly important, but how you felt also matters. If there are areas that continually felt stressful, add them to the list of improvers for the new year.
2. Set Up Contemporaneous Time Entry for Increased Profitability
We know, we know: you don’t really want to hear this. As a former attorney myself, I hear you. I much preferred the very scientific method of writing down my time on random post-it notes and scraps of paper in my briefcase and then reconstructing my time in a partially panicked frenzy on the last day of the month. There was just something ritualistically masochistic about it.
It may come as a shock, but my tried and true method is not the best practice. In fact, it was likely the biggest thing eating into my firm’s profitability and productivity. As it turns out, attorneys that wait to capture their time at the end of each week can lose as much as 50% of their billable hours. Entering your time daily doesn’t even solve the problem: lawyers that enter their time the next day still lose up to 25% of their billable hours, and those that enter it at the end of each day will lose up to 10% of their hours billed. Not to be dramatic, but this is literally the equivalent of trying to sail in a leaky boat. No matter how hard you row, you aren’t going to make as much progress as you’d like.
Bottom line: the number one thing a firm can do to improve profitability is to record their time contemporaneously meaning hours are billed as the work is performed, not at the end of the day, week or month. This may seem like a big shift, but like any habit it gets easier over time and will result in you actually working less to hit those billable goals. One recommendation is to conduct a training session for all billable staff on how to record and capture time as they work and make a formal change to your firm’s policy or handbook. If your entire firm starts working smarter by recording their time as they work, your firm will lose less time, increase profitability, and start working smarter.
3. Avoid Client Amnesia by Setting an Invoice Cadence
We’ve all been there: you retain a service provider to perform a necessary project and they do a satisfactory job. You forget all about the project and move on with your life. A month later you receive an invoice and suddenly you’re questioning the value you received. Did they do a really great job, or just a good job? Does the price seem like a good value, or are you craving a discount?
This phenomenon is something we like to refer to as Client Amnesia. It’s a theory that essentially says that the perceived value of services rendered decreases over time as you get further away from the date the services were performed. It’s not something that is unique to lawyers and law firms, but it definitely is something that affects members of the legal profession more than other professional service providers.
Why? In part because the legal profession is especially bad at getting invoices prepared and sent to clients in a timely manner as close as possible to when the work was performed. This is due in part to the fact that many lawyers and law firms require hours to be entered monthly (see previous section) so it can be 30+ days before prebills are finalized and invoices are created. For some firms it may be 60+ days before the client has the bill in their hand, and for others over 90 days.
When the client finally does receive the invoice they may strain to remember the specific project. Suddenly each line item has particular interest and the client is pertaining whether the time spent on each task was reasonable or if the specific task should have been performed by a team member with a lower hourly rate (for instance, paralegal rather than associate). The client will likely reach out to ask for more information on the bill or request a discount. Either way, you’re at risk of losing time, money, and/or the client’s faith trust.
The best solution: take a hard look at your firm’s internal invoice timing and cadence and look for inefficiencies. You may decide to move to sending out bills twice a month instead of monthly, move some clients to flat fee billing instead of hourly, or start requesting a retainer for certain services or clients to avoid eventual client amnesia.
We’re just scratching the surface with our new habits, but these three tasks are crucial first steps for you to start fresh. I encourage you to take some time over the next few days and really think about what it would take for you and your firm to implement these changes in your organization. We’ll be back shortly with a few more technical habits you can begin to adopt to level up your firm’s online presence in 2021. Be sure to check back on the blog soon!
