Legal managers who are well-versed in the aspects of profitability can bring even more to the table.
Running any business requires that the leader know the value of the collective services offered.
Larger firms are doing very well: Law.com reports the average equity partner working at an AmLaw 200 firm brought in a record $1.8 million in profit-sharing compensation in 2017. But small and midsize law firms, where staff is often stretched thinner and hiring resources are leaner, still have their issues with profitability.
“The most difficult part of making a small or midsized firm profitable is the constant struggle between having to actually practice law while also needing to manage the business of law,” says Kristin Tyler, Co-Founder of Lawclerk, a platform that helps firms hire freelance lawyers.
Since small to midsize firms don’t have the luxury of large retainer clients, they need to be creative with how they make and keep their money — and that’s where a legal management professional well-versed in the aspects of profitability can bring even more to the table. The following are some basic places to start.
It starts with choosing a pricing model, or a few different ones, that the firm will use to charge their clients. According to Leslie H. Tayne of Tayne Law Group P.C., a debt attorney and author of Life & Debt, there are three models: cost-based pricing, competition-based pricing and value-based pricing.
With cost-based pricing, firms base their hourly pricing model around what they must make to at least break even on business expenses like salaries, rent and bills. With competition-based pricing, firms look at what their competitors in their geographic location and practice area are charging. And with value-based pricing, firms focus on what value they bring to the table that competitors cannot provide. In reality, firms should probably utilize a hybrid model.
“Your firm may rely on certain clients or a pipeline of clients in order to bring in money, and as a result, you may need to adjust as time goes on,” says Tayne. Ask your ALA peers for examples of their profitability, or reach out to other firms in your area if possible. “It’s important to meet with other firms in your area to discuss how they set their models up. For example, just because you have a firm on Long Island doesn’t mean it meets the same standards as a New York City firm and vice versa. Therefore, many factors need to be considered. You don’t want to just break even. You want to keep expenses low and profits up.”
Figuring out how to make more money is certainly important, but so is keeping to a budget. Legal managers should be reviewing expenses and renegotiating services, such as copiers and phones.
Firms may also want to consider flat-fee work. According to Tyler, many smaller firms are moving toward flat-fee work and alternative fees, like minimum fees with an hourly hybrid, once a certain threshold has been crossed. “Flat-fee work is a win for the client and also a win for the attorneys. When’s the last time you heard a busy lawyer say, ‘I love keeping track of every minute of my day to bill my clients’?”
Figuring out how to make more money is certainly important, but so is keeping to a budget, according to Tayne. Legal managers should be reviewing expenses and renegotiating services, such as copiers and phones.
Really zero in on spending details. For example, set a limit on office expenses. Legal managers should work with their managing partners to set a budget for spending and have a credit card to use for expenses. That way there’s a good system of checks and balances for the manager and the managing partner to help rein in the costs.
Hiring full-time employees can get pretty costly. Instead of bringing on new staff members, it might be more cost-effective to hire contract employees for one-off projects or particularly time-consuming cases.
Jason R. Savarese, Esq., of Savarese & Associates, PLLC, says he will interview a contractor through a service, give them a budget, and then pay the contract service provider when the project is completed. “That avoids having to provide benefits, pay matching Social Security contributions and dealing with human resources issues (coming in late, wasting time on Facebook, etc.) in-house.”
Another way to save money and time is to invest in technology that will automate and streamline business processes. But firms need to be very picky about their tech tools.
Another way to save money and time is to invest in technology that will automate and streamline business processes. But firms need to be very picky about their tech tools.
“Most tech tools for attorneys offer free trial runs so the attorney can figure out if the tool will actually benefit their practice or not before committing to a new expense,” says Tyler.
Running any business requires that leader know the value of its services. According to Savarese, it shouldn’t be a pricing race to the bottom; instead, start off with affordable pricing and then increase rates once firms gain experience.
“If you are new to a field of practice, charge lower rates as you hone your skills,” he says. “Consider associating an outside attorney for that one case to help you as you learn the ropes of that new area of practice.”
Savarese says to get a retainer upfront before jumping into business with a client — then carefully watch the billable hours. “If the retainer is $5,000, stop work on the case if the client will not replenish the retainer when you approach that dollar threshold. Otherwise, you are doing work under the risk of not being paid for it,” he says.
Having a budget and an effective pricing model can only go so far. Small and midsize law firms must, above all else, ensure their clients have a good experience.
“In small and midsized firms, management should be very tapped into what’s going on in the firm and can, therefore, make firmwide adjustments more easily than in a big firm,” says Tayne. “They will be able to ensure more easily that each client is having their needs met. As a result, the client experience piece should be strong in these small and midsized firms, which should help lead to profitability.”