Law Practice Management Skills Are Critical For Profits

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Personal Productivity for Lawyers

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While perusing the ABA website recently, I came across an article that piqued my interest. The title: “Restoring Profitability” by Arthur Greene, a law firm consultant.

Best Law Practice Management Leads to Best Profits

A subheading read: “Skilled management has become the ‘price of admission’ for lawyers who want to remain competitive.” Further along, the author noted that “law firms with the best management practices return the highest profits.”

I had hoped to learn a few practice management tips that I could pass along to my lawyer coaching clients. First, the bad news. There was nothing particularly novel that this particular law practice management consultant had to say.

Now, the good news. What Greene did say reaffirmed my own master list of “best management practices.”  This list includes a handful of relatively simple rules. One hardly needs an MBA to be able to understand and apply them.

Over the past 30 years that I’ve been practicing and regularly interacting with lawyers, it has never ceased to amaze me that extremely capable lawyers can be so clueless when it comes to the business side of the practice.

And I don’t mean just solos and small firm lawyers. Big firm lawyers can be just as helpless. Today’s latest Exhibit A of that fact is the demise of Dewey & LeBoeuf.

Here are some of the items the author noted, with my own spin added.

Conduct a Revenue Capacity Analysis to Increase Profits

That’s fancy financial lingo for answering the basic question, “How much can I make?” We’ll keep this simple and assume that a lawyer bills by the hour. Let’s further assume all time is properly recorded, billed and paid. (Yes, I know these assumptions are unrealistic, but this is just an example.)

Pick the number of hours that you either want to bill per year or can realistically bill per year, given your practice area and market. Multiply that by your hourly rate.  For example, 1200 hours times $250 per hour yields $300,000 in revenue. Thus, if your annual revenue is that amount, you are operating at 100 percent of your revenue capacity.  $225,000 in revenue and the percentage is 75 percent of capacity.

Why is this information valuable? If you come up short of 100 percent, you can easily identify whether the issue is insufficient business (perhaps it’s time to enhance your marketing efforts), or problems in your billing process (more on that later).

Find Hidden Revenue Opportunities to Increase Profits

That’s fancy financial lingo for how do I get my arms around the problem of why I’m not operating at 100 percent. There are usually two suspects:

  • You are writing off too much time (your realization rate is under 100 percent) or
  • You are not collecting everything that you bill.

Recognize the Underlying Causes of Revenue Shortfalls to Increase Profits

The author writes that an increased focus on client expectations and satisfaction should go a long way to solve the two problems noted above.  I certainly agree. Of course, there is more that can be done. There’s plenty of material out there on the web already about how to improve realization rates and collections. The roadmap is not particularly complex.

What about Expenses?

Of course, revenue constitutes only one side of the ledger. You can’t forget expenses. For whatever reason, the article doesn’t touch upon these issues at all.

I would like to note, however, that the fundamentals of expense management are no more complicated than the above revenue enhancement suggestions.  For example, you don’t need a sophisticated economics background to determine whether one should office at home, in a virtual office or in a traditional office, or whether to create your own website or hire someone else to do it.

Why Do Lawyers Make Such Bad Law Practice Management People?

IMHO, it is because attorneys use bad judgment and poorly execute procedures when faced with business issues. But that answer sort of begs the question. The harder question to answer is why the lousy judgment and execution. To be quite frank, I wish I knew. It has never made sense to me.

Think about it.  In virtually every practice area, attorneys first must exercise good judgment to determine what tasks need to be done to resolve the legal issue at hand.  Then, they need to exercise discipline to properly execute these tasks. Lawyers seem to do that well. However, substitute “business” issue for “legal” issue and lawyers seem helpless.

Manage the Business the Same Way You Manage a File

Stop whining and making excuses. Managing the practice management end for your law firm is no more difficult than managing the legal issues of clients. It requires sound thinking and disciplined actions.  These are the stock and trade of any decent attorney — including you.

(photo: Success graphic from Shutterstock)

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  • Kevin

    Why do lawyers make bad management decisions? Simple, lawyers are trained to be as risk averse as possible. When faced with a series of choices, offering different levels of risk and payout, lawyers will always take the one that reduces the risk as much as possible, no matter what the cost or payout. I’ve been working in law firms for five years and am currently pursuing my MBA. I’ve seen this over and over again.

  • CKP

    In addition to Kevin’s intelligent point (above), I have another thought about why attorneys make bad management decisions: hubris. Attorneys think they know everything, including about fields for which they have neither background nor aptitude. They’ve tacitly derided “business students” ever since they first confirmed that the LSAT was so much harder than the GMAT.

    Plus, the mantra that “at law school you learn how to learn” contributes. Most attorneys believe they are capable of anything DIY. Attorneys are the types of jerks who assemble their children’s bicycles on Christmas morning without looking at the instruction booklets. Including the brakes.

    I write this as much to remind myself, as to lambaste other attorneys. I’m certainly guilty of attorney hubris, precisely for the reasons listed above, and probably for a lot of other bad reasons too. Risk-averse decision-making is one important factor, as Kevin rightly points out above; self-congratulatory attorney-hubris, I think, is another.

  • Many of the problems described above relate to lawyers’ unwillingness to ask two basic questions that their clients have to ask and answer in order to make their businesses work:

    How much does this cost?
    How does your business work?

    They (almost) always insist that their clients answer these questions and explain the nuances to them. When taking care of their own businesses, all too often, by relying on an invisible hand to run the operation,the shoemakers have no shoes.

  • Great article Roy. A point about revenue capacity. This is a great starting point, but the important point is to also know the market place in which you are competing and where you stand in that market place. Your hourly rate from a capacity perspective needs to be tempered by market realities.
    The second important and key point in every business is attention to expenses and the details of running the practice efficiently. Gross revenue is just the start to having a successful practice.

  • Right on point — we learn how to learn and believe we can learn anything. True, under the strictures of a case we learn what we need to help the client (and maybe a little more), but helping ourselves isn’t the same — we assume (probably) far more about the subject than we would for a client. Lawyers-turned-marketers may suffer the same blind spot, but on a larger scale. This is a debate worth having. lb

  • Shaun Jamison

    I was going to say that a big profit killer for lawyers is the desire to serve, the desire to focus on practicing law, rather than managing the practice. However, I think that hides the real issue. Law practices need to work on systems. Think about the last time you spent a lot of money on something. Was the sales and onboarding process haphazard or was it very structured? I’m guessing if you parted with your money, there was a very definite and planned sales process. You always knew what the next step was. Once a firm has a process in place that’s effective, it gives the lawyer permission to turn away clients that don’t fit the “profile.” Or to let clients know that you have a great process for serving clients and if they want something completely different, there may be a better fit out there. Unless their case is worth bazillions, it’s not worth varying a proven practice. That said, systems need to be revised based on reality. When I was a young lawyer starting out, I found that my clients who scheduled in the early morning showed up for appointments, where more clients would fail to show in the evening. Plus, my irritation for missing supper for no extra pay was greater than getting an early start to the work day. So I encouraged early morning and daytime appointments. Your experience could be completely different. The point is to figure out what works and if you need to make changes, make them consciously and with the health of the firm in mind. Have a system and explain it confidently to your clients. Know when and where you are willing to customize.

  • Roy Ginsburg

    I firmly believe that the vast majority of lawyers, from solos to large firm practitioners, make money in spite of themselves. Believe it or not, this is actually good news. The same attorneys who are clueless about running their practices are the same attorneys who are your competitors. All one needs to do is take a very small risk by trying something just a little bit out of the box, and the sky is the limit for success.

  • I am a marketing consultant, and some of my clients are law firms. I have learned to make this pitch to lawyers: I’m not smarter than you. You CAN probably do your own marketing. But think of how much time it takes you to write a press release, write ad copy, update your own web site. I charge $75 an hour. If you bill at $300 per hour (or more), you’re saving money just by hiring me. This is something you can outsource.

  • Brenda Matanga

    Very informative piece of work.One other thing iv learnt is that lawyers were taught the law,and thats what they know best….They should actually concentrate on that bit..Marketing,Financial planning,IT,Human resources…call the experts and consult!!If one wants to manage a practice,then the management skills and expertise is what becomes critical…and this is what one should seek training and skill in!Otherwise the law degree per se..is inadequate to reach optimum profitablity!!