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Managing a winning major league ball club and operating a highly profitable law firm have more in common than meets the eye. It all comes down to numbers. You wouldn’t be in practice if you didn’t have talent, skill and vast knowledge of the law — just as baseball players wouldn’t be in the Major Leagues. But it’s how these skills are managed and used that makes the difference between success and failure.
In the award-winning movie “Moneyball,” Billy Beane, the new general manager of the Oakland Athletics, is tasked with assembling a winning team on a meager budget — and with very little management experience. Instead of relying on traditional methods, he studies data and uses metrics to make hiring decisions — creating a surprisingly winning team. Just as Beane did, you can use data and metrics to build and sustain a successful law practice.
In reality, the legal market mandates it. According to an Altman Weil study, in 2012, 90 percent of attorneys said that nontraditional price competition is here to stay. At the same time, legal work is being commoditized, with 84 percent of attorneys acknowledging that development as a market certainty. And use of alternative fee arrangements is steadily rising. In short, competition is fierce and running a successful law firm should be fiercely managed — with hard data.
Effective management starts with the right questions and focuses attention on the right areas. The needle starts to move when you use numbers and metrics to inform business decisions, rather than relying solely on billing rates or assumptions. Attorneys who turn their attention to providing value to their clients and home in on law firm profitability will have a greater likelihood of success, just like Mr. Beane.
Here are six numbers that you should have on your radar:
1. How much it costs to get a client. To calculate how much it costs to attract a client — and how much you need to be paid to provide the service in order to cover that cost, add up all your marketing costs for lunches, dinners, tickets, sponsorships, advertising, social media, website, holiday cards and everything else you do to bring in clients — don’t forget to include the cost of your non-billable and staff time spent on business development! And the amount of your time you give away free to chat on the phone before they hire you. Once you arrive at that total number, divide it by the number of clients served in that same period and you’ll have a number that represents how much it costs, on average, for your practice to get a client.
2. Profitability. In addition to the firm’s profitability, you want to know profitability by practice, partner, timekeeper and client. This will help you better understand factors that impact your overall profitability. For example, profitability by partner helps you understand who is contributing what to the bottom line so that you can make informed compensation decisions. Watching these numbers can help predict trends and help you adjust your strategy — are profits down consistently for all partners in a particular specialty, or is it a one-off?
Equally important, tracking profitability by client will help you understand which types of clients you should be targeting with your marketing — and which ones to avoid. Most firms find just 20 percent of their clients are responsible for 80 percent of the firm’s revenue. This means you could be spending 80 percent of your time on clients that generate only 20 percent of your revenue. But by focusing on the data, you can turn your attention to keeping your highest revenue-generating clients happy and focus on marketing to similar clients instead of draining the firm’s energy and resources on the wrong clients.
3. Marketing budget. The third number to focus on is the firm’s marketing budget and how it is being allocated. While marketing budgets and goals vary based on the priorities of the firm, it is important to measure expected versus actual results. Having a marketing plan in place will help make sure your firm’s marketing spending aligns with your lead generation and revenue goals.
4. The technology budget.Technology, when properly deployed, allows a firm to service clients in a timely and more efficient manner. You can lower overhead costs by using practice management software to handle back-end law firm tasks such as billing and accounting. In addition to equipping the firm with necessary hardware, your technology budget should also include additional software applications and upgrades that help you better serve and collaborate with clients.
5. Your realization rate. Quite simply, a law firm’s realization rate is the cost of how much an attorney works versus how much they bill and ultimately collect. According to results from a recently commissioned internal LexisNexis survey of more than 450 small firm attorneys, law firms with 1 to 20 attorneys say they are missing out on 40 percent of their actual billable time due to inefficient billing and time-tracking practices. By taking steps to get bills out faster, more accurately and more completely and by accepting online bill payment, many firms can increase realized revenues by 30 percent or more, with no additional work. In essence, when you start taking the billing and collection process more seriously, clients will too. It all has a direct impact on the firm’s bottom line.
6. Industry benchmarks. It’s challenging to measure success in independently owned firms since there are few people to talk to about it. However, it’s not impossible. A good way to be sure the firm’s numbers are aligning correctly starts by looking at benchmarks in the general market to better understand how the firm is doing against those numbers. Measure your numbers against others in similar situations to see how you are doing. Many industry organizations or industry surveys can provide good data for benchmarking a firm, such as:
Just as Mr. Beane proved, despite his team’s comparatively limited resources, building a major league ball club — or law firm for that matter — is well within reach when you use hard data to inform the business.
Tate Davis is Director of Small Law Product Management for LexisNexis.
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