Have you ever been tempted to discontinue some of the services that your law firm offers? That could be one of the most important things that you can do to improve your firm's profitability.
This is the third in a five-part series of posts that focuses on profitability in small law firms and solo practices.
In our experience and observation, the most dangerous profitability mistakes that these law firms make usually fall into four categories:
- continuing to serve unprofitable clients when there is no reasonable prospect that they ever will become profitable
- continuing to offer unprofitable services when there is no reasonable business case for doing so
- continuing to tolerate unprofitable performance by partners
- failing to make minimal investments in quality assurance tools and methods to improve productivity
Not all legal services have equal value.
In all law firms, but especially in small ones, there is a tendency to assume that all of the legal services that the firm offers are of approximately the same financial value. Of course, almost every lawyer recognizes that services vary in terms such as the cost of producing the service and the fee it can command in a competitive legal market. Some small law firms -- and even some large ones -- are reluctant to discuss these differences candidly, usually out of a well-intentioned, but misplaced, fear of appearing to devalue the contributions of some of the partners.
Lawyers also frequently assume that somehow these variations in financial performance and profitabilty balance each other. "We make a little more on this work and not as much on that work; but it all balances out in the end." However, when examined closely, what really happens usually is that the less-profitable services have a disproportionately negative impact on the overall profitability of the firm or of a practice group.
There can be a "client relations" benefit in doing unprofitable legal work, in terms of helping to retain a client that also produces highly profitable work, but it usually is vastly over-estimated.
focusing in on the "dogs"
We recommend that our clients evaluate the relative profitability and growth potential of each of their practice specialties and service lines. The ones that are relatively the least profitable and have the least growth potential -- sometimes called "the dogs" -- are frequently the source of a disproportionate share of unprofitable matters.
Ask these three questions with respect to each of your firm's "dogs":
- Should you discontinue providing the service?
Will you really lose clients or competitive advantages if you no longer provide an uprofitable service? How do you know that?
Small law firms are especially vulnerable to the assumption that, in order to be competitive for good clients, they must try to be a "full service" law firm. This strategy almost never works.
Some firms have discovered that they can build client loyalty and attract better-paying work from existing clients by referring the client's unprofitable work to another firm that can deliver the service with equal or better quality and at a lower cost to the client.
- Can you improve the profitability of the service, for example by nudging up the fees or using better practice management methods to reduce the cost?
Better practice management can produce dramatic improvements in productivity and reductions in the fully-loaded cost of producing an hour of billable work or a unit of a client service. This is how law firms can transform the "dogs" into "cash cows."
- Could you improve the profitability of the service by spinning it off into a separate business unit?
If your local bar regulations permit ancillary businesses or subsidiaries, it is possible to transform a highly unprofitable service line into one of the most profitable ones, if you can remove the delivery of that service from a cost structure in the main law firm and operate more economically the delivery of services, which frequently have large non-legal components that can be delegated to paralegals or specially trained administrative staff.
If you conclude that you must continue the service in order to retain clients, you should remove the service from your profitability strategy altogether and consider the net losses to be marketing and business development costs. In other words, the only reason why you are incurring these losses is because there is a well-informed business case that demonstrates a good overall return on your investment in the clients.
asking the questions
After going through this analysis, many small law firms conclude that they still must keep providing unprofitable services, even when there do not appear to be credible opportunities to improve their financial performance. Are these firms making bad decisions?
Not necessarily. Asking the right questions usually is more important that arriving at the academically correct answers.
Click here to learn how Walker Clark LLC can help you to build sustainable performance and profitability in your firm.