Law firm profitability is often viewed in simplistic terms: the more billable hours attorneys log, the more profitable the firm becomes. But the reality of assessing profitability is far more nuanced. Profitability can be sliced and diced in several ways — by practice area, client, lawyer, and matter profitability, and more — and your firm has to determine what’s appropriate to analyze.
That can get complicated, but my goal with this article is to help make profitability analysis feel doable by looking at just one example — practice area profitability. We’ll look at how you can use practice area information to make strategic decisions about resource allocation, maximizing your profit margins, and maintaining a healthy work environment for your attorneys and staff.
Understand Attorney Cost Rates to Set a Profitability Foundation
Before we can begin analyzing profitability by practice area, we must understand what it costs your firm to provide its services by determining each attorney’s cost rate.
This is essentially the hourly cost of employing them, including salary, benefits, and overhead expenses such as office space and technology. This rate forms the foundation for assessing whether your firm is pricing its services appropriately and whether each attorney is contributing to overall profitability.
Base salary and benefits: The most straightforward cost is the attorney's salary, along with additional benefits like health insurance and retirement contributions.
Overhead allocation: Overhead includes office space, administrative support, technology costs, and other general expenses. Allocating these expenses to each attorney is essential for a true understanding of their cost.
Practice group specifics: Different practice groups may require varying levels of support or incur different costs. For example, a litigation group may need additional paralegal support compared to a transactional group, affecting the cost rate of attorneys in that practice area.
Calculate the cost rate for each attorney by adding their salary and benefits to their share of overhead expenses. This will give you a baseline cost per hour for each attorney, which can then be compared to their billing rate to determine their contribution to profitability.
Practice Area Profitability: Analyzing Where the Firm Thrives
Now that you’ve established attorney cost rates, you're ready to analyze profitability by practice area. This is often a relevant category to assess within a firm because it can reveal valuable insights that might not be apparent from a high-level overview of your firm's financials.
For example, a firm may appear profitable overall but harbor unprofitable practice areas that are being subsidized by more successful ones. This situation can lead to resentment among partners and potentially affect staff retention.
Not all practice areas are created equal — some may generate substantial revenue but come with high costs, while others may be highly efficient profit centers.
You can understand practice area profitability at both a high level and a granular level. By breaking down profitability by practice area, firms can identify which areas are driving the most profit and which may be underperforming. Here are some guidelines to approach this analysis:
Revenue vs. costs: Start by calculating the total revenue generated by each practice area. Then, subtract the costs associated with that practice area, including attorney cost rates, paralegal support, and other direct expenses. This will give you a clearer picture of each practice area’s profitability.
Attorney utilization: Consider the utilization rates of attorneys within each practice area. Are higher-cost attorneys working on lower-value matters? If so, reassigning that work to lower-cost associates could improve profitability.
Market rates and adjustments: The cost rate analysis also helps determine if the billing rates for specific practice areas are appropriate. If a practice area isn’t profitable, you can explore adjusting the rates or targeting different types of clients.
You want to regularly assess the profitability of each practice area by tracking revenue, costs, and utilization rates. Adjust resource allocation to ensure the right attorneys are working on the right matters to maximize profitability.
Leverage and the Concept of 'Highest and Best Use'
Another crucial factor that impacts profitability is how work is allocated across the firm. The concept of “highest and best use” can help ensure that the right person is doing the right work at the right time. This is particularly important for maximizing profitability in practice areas with mixed levels of complexity.
Partner vs. associate work: Partners typically have higher billing rates but also higher cost rates. Ensuring that partners focus on strategic, high-value tasks while associates handle routine work can help improve profit margins. The key is to avoid having high-cost attorneys working on tasks that can be done just as effectively by lower-cost attorneys.
Utilizing technology and support staff: Law firms should also leverage technology and support staff to handle tasks that don’t require an attorney’s expertise. Choose law practice management software for time tracking, document management, and other administrative functions to reduce the amount of time attorneys spend on non-billable activities to further enhance profitability.
Conduct regular reviews of workload distribution to ensure that partners, associates, and support staff are all working at their highest and best use. This will help optimize profitability while maintaining a balanced workload across the firm.
Benchmarking and Profitability Tracking
Benchmarking plays an important role in understanding whether your firm is performing as well as it should be. You can benchmark against both internal and external standards to identify areas for improvement and set realistic goals for growth.
Internal benchmarking: Compare the profitability of different practice areas, clients, and attorneys within your firm. Identify which areas are excelling and which need improvement. Then, use these insights to guide strategic decisions.
External benchmarking: Look at industry benchmarks for profitability, revenue per attorney, and other key performance indicators. This will help you understand where your firm stands compared to your peers and identify opportunities to enhance profitability.
Use benchmarking data to set performance targets for practice areas and individual attorneys. This will help create accountability and ensure that everyone in the firm is aligned with profitability goals.
Turn Insights into Action
Maximizing profitability requires moving beyond increasing billable hours to taking a holistic approach. This should include understanding attorney cost rates first, and then analyzing a category that makes sense for your firm, such as practice area performance. With this combined cost rate at practice area data, you can begin allocating resources strategically — all to identify hidden opportunities for growth, make data-driven decisions, and ensure long-term profitability for the firm.
Why Profitability Matters for Law Firms
Profitability is one of the most critical measures of success for any law firm. But while it’s easy to fall into the mindset of “more billable hours equal more profit,” the reality is more complex. Simply focusing on the standard math equation of revenue minus expenses equals profitability doesn’t always tell the full story of a firm’s financial health.
In a recent webinar, “The Next Generation of Law Firm Profitability,” Debbie Foster, CEO of Affinity Consulting, and Paige Roncke, Chief Revenue Officer at Centerbase, explored the essential components of law firm profitability, moving beyond the basic math to consider how different practice areas, lawyer cost and billing rates, client profitability, revenue generation, and cost management play a crucial role.
How Do Law Firms Calculate Profitability?
At a foundational level, profitability is calculated as revenue minus expenses. It's a straightforward equation, but there are multiple factors influencing law firms’ revenue and expenses.
“While the simple math for profitability is accurate,” Debbie says, “in law firms, we need to look beyond what the profitability number is to what the profitability number could be in order to maximize what is left.”
To do this, you can define your firm’s profitability inputs by considering:
What do we want the end profit to be?
What comprises our law firm’s profitability? This could include: Practice area profitability, lawyer profitability, client profitability, and matter profitability.
How can we use technology to help us track our firm’s profitability?
“There are many ways to look at profitability, so you have to double down and figure out what combination of these inputs makes sense for your firm, and how will you track it,” Debbie suggests.
Let’s take a look at where to start.
The 5 Key Drivers of Law Firm Profitability
To move beyond the basic profitability equation, analyze the underlying factors that influence both revenue and expenses at your firm. By doing so, you can identify opportunities to maximize profits and make data-driven decisions. Here are five key areas to assess in your firm.
1. Lawyer Cost Structure and Billable Rates
Each lawyer in a firm has a different billing rate and cost structure. Partners might bill at a higher rate, but they come with higher compensation. Associates, on the other hand, may have lower billing rates but can be profit centers if their work is leveraged effectively.
Take the time to figure out each of your lawyer’s cost rate — what it costs them to provide their services — factoring in their salary, benefits, office space costs, and technology costs. By calculating this cost, you can determine the minimum amount each lawyer needs to bill to cover their expenses and contribute to the firm's profitability.
Example of a lawyer cost rate calculation
Start with the lawyer's annual salary — for easy math, we’ll use $120,000.
Calculate the monthly salary: $120,000 / 12 = $10,000
Factor in billable hours. Divide the monthly salary by the lawyer’s expected monthly billable hours to get an hourly rate: $10,000 / 100 billable hours = $100 per hour
Add benefits and overhead. Factor in the cost of benefits per hour (e.g., $30/hour) and overhead per hour (e.g., $70/hour) to get the lawyer’s hourly cost rate: $100 per hour + $30 hourly benefits + $70 hourly overhead = $200 hourly cost rate
Actionable insight: Now that you know how much it costs for this lawyer to provide their services, you can better determine a billable rate that will enable profitability. Follow this method to calculate the hourly cost rate for each lawyer and compare it to their hourly billing rate. If a lawyer’s cost rate is higher than their billing rate, this could indicate a profitability problem. Ensure that work is assigned based on each lawyer's cost-effectiveness, balancing their rates with the profitability of the cases they handle.
2. Practice Area Profitability
Not all practice areas are equally profitable. Some might generate higher revenue but come with greater expenses, while others may be less lucrative but require fewer resources. For example, family law cases might involve more administrative work, while corporate law could bring in larger retainers but demand more expensive expertise.
Actionable Insight: Start by analyzing each practice area’s cost rate to determine its profitability. Track the hours billed, expenses incurred, and the average rate charged. By understanding which areas are most profitable, you can make strategic decisions about where to focus your resources and who to leverage in your firm for different types of work.
“Understanding cost structure gives insight into appropriate billing rates for attorneys within a practice group,” Paige says. “With this information, you can balance the practice area’s work, having attorneys with a lower cost rate handle work that doesn’t require a senior partner’s expertise, which starts to help you adjust your profitability for that practice area.”
3. Client Profitability
Not all clients are created equal in terms of profitability. Some may require more time, resources, and attention, while others are more straightforward and generate higher profit margins. By understanding which clients contribute most to the firm's profitability, you can make more informed decisions about where to invest your time and effort.
Actionable Insight: Regularly review client profitability by tracking the time spent on each client’s matters and the revenue they generate. This will help identify high-maintenance clients who consume resources without delivering commensurate revenue, enabling the firm to renegotiate terms or focus on more profitable clients.
4. Revenue Generation
Maximizing revenue might seem like a straightforward goal, but the practical aspects of capturing all billable time, diligently following up on leads, minimizing write-offs, and optimizing accounts receivable collections often fall by the wayside. It's common to underestimate the significance of these seemingly mundane yet critical tasks that can make or break your firm's profitability.
Actionable Insight: Maximizing these revenue-generating tasks comes down to having the processes and tools in place to set your firm up for success. Paige sums up four actionable areas to optimize your firm’s revenue.
Following up with leads. Implement a process for following up with leads efficiently to turn them into clients. “Following up with leads is your first chance to generate revenue for the firm,” Paige notes.
Time tracking. Implement time-tracking technology to ensure all billable hours are captured. “Whether it's texts, phone calls, emails, meetings — you want to capture every moment of time worked for a client,” Paige says. “Even small increments of missed time can add up significantly over the year, impacting overall profitability.”
Pre-bill review process. How much time gets written off at the pre-bill stage because of your perception of the client's willingness to pay? Establish clear billing policies to minimize these pre-bill write-offs.
Accounts receivable process. Enforce a structured accounts receivable process for efficient collection. Paige notes, “When you send an invoice, it doesn't stop there. There's negotiation that happens, and it changes per client. You want a policy in place, so you don't get stuck in the 90-day mark writing off outstanding bills.”
5.Cost Management
Law firms have three main expense categories — personnel, office space, and technology — and managing these costs is another important factor in a firm’s profitability. However, it’s not necessarily about minimizing expenses, but rather optimizing what you spend.
“It’s important to not waste money,” Debbie says, “and you do that by making sure you’re leveraging what you buy. You need to think about people planning, space planning, and technology planning to utilize them all effectively.”
Actionable insight: Using technology as an example, if you invest in cloud-based software but don’t review the updates and learn about new features regularly, then you’re not leveraging the software — or your money — to its full capacity. Similarly, when you hire new staff members but provide little training on the firm’s processes, technology, and culture, you’re not optimizing personnel or technology, and you’re risking additional expenses through attrition if staff members become disengaged to the point of resigning.
Law Firm Profitability is About More Than Just the Bottom Line
Understanding profitability isn’t just about looking at the revenue minus expenses equation. It’s about going beyond basic math and exploring how you can optimize each component of your business. By focusing on core drivers of profitability — cost and billing structure, practice area profitability, client profitability, revenue generation, and cost management — your firm can uncover opportunities for long-term growth and profitability.
Stay tuned for our next article, which will focus on the impact of technology and how to leverage it for law firm profitability.
Basic reporting functionality isn’t enough to help law firms unlock the full potential of their data. Today’s law firms need robust reporting tools that help law firm leaders extract actionable insights, optimize resource allocation, and enhance overall performance. And they need tools that align with their strategic priorities and operational requirements.
Six reporting capabilities can optimize your firm’s efficiency, profitability, and strategic decision-making.
1. Target new opportunities for profit
Typically, law firm reporting software allows users to generate reports to track billable hours, expenses, and invoices. Standard reports may include details such as client billing summaries, unbilled time and expenses, and aging invoice analysis. But these basic reports aren’t enough to help law firms stay competitive in a crowded market.
Law firms need deeper insights. Only a handful of legal software solutions offer profitability reporting, and it’s a game-changer for firms. By analyzing profitability metrics at the timekeeper, practice area, location, and matter levels, law firms can pinpoint areas of strength and weakness, allocate resources effectively, and optimize performance. Prioritizing profitability reporting enables firms to focus on revenue-generating activities and enhance their overall financial health.
2. Visualize data to match the way you work
Law firm reporting software usually includes basic elements such as charts, graphs, and tables that present data in a visual format. These tools give users a snapshot of metrics and trends, helping them make more informed decisions.
But leading reporting platforms allow users to visualize information in multiple ways, with customizable dashboards that allow users to transform raw data into actionable insights. Interactive dashboards offer dynamic visualizations of key performance indicators. Top platforms empower users to create personalized dashboards so they can monitor real-time data, track trends, and gain actionable insights at a glance. The interactive nature of top platforms’ dashboards allows users to drill down into the data for deeper analysis and exploration.
3. Drill down into data with out-of-the-box templates
Not all legal practice management software is created equal. Most tools provide standard reports to understand law firms’ financial metrics, but the top reporting platforms offer robust pre-built report templates out of the box. This advanced reporting functionality allows law firms to drill down into their data immediately and get faster insights compared to standard reports. They can be more cost effective, too, by avoiding paying for customized reports to be created.
Some advanced platforms also include cutting-edge data analytics and predictive modeling capabilities to help law firms identify trends, anticipate future outcomes, and make data-driven decisions.
4. Configure reports to fit your practice's needs
Leading practice management systems include advanced reporting capabilities and unlimited custom data fields, so firms can tailor reports to their specific practice areas, clients, and operational requirements.
With these advanced legal reporting tools, users can create custom data fields, filters, and calculations to generate highly specialized reports that reflect the firm’s specific practice areas, workflows, and metrics. By configuring reporting tools to fit their unique needs, firms can enhance data accuracy, streamline processes, and derive actionable insights.
5. Strengthen internal security with robust reporting permissions
Top legal software also provides granular, role-based permissions so administrators can control access to sensitive data and reports. These platforms allow administrators to define user roles and permissions, ensuring that only authorized individuals have access to specific reports and data sets. This feature enhances data security and compliance with privacy regulations and ethical responsibilities.
6. Share reports easily with quick exporting and importing
Law firms often need to share reports with clients, stakeholders, and regulatory bodies, necessitating seamless export capabilities. However, in some legal software, it can be cumbersome to collect and share the data in a format that others can read.
Leading practice management software allows users to schedule automated report generation and distribution at predefined intervals with just one click. This feature enables users to receive timely reports via email or other communication channels, ensuring that stakeholders can access up-to-date information without manual intervention.
How to level up your law firm’s reporting capabilities
Advanced reporting capabilities are essential for modern law firms seeking to maximize profitability, drive strategic decision-making, and thrive in today’s competitive legal landscape.
Centerbase goes above and beyond basic legal reporting features, offering a comprehensive reporting library plus advanced customization options, interactive dashboards, profitability reporting, role-based permissions, and much more. Its robust reporting features empower law firms to analyze data, drive attorney performance, and achieve their goals with confidence.
If you’d like to see how Centerbase’s reporting solutions can optimize your bottom line and drive strategic business decisions, see below to get a demo.
Agile, streamlined processes are what modern law firms need to effectively handle the full gamut of activities required to take a matter from client intake to paid in full. . Firms are under constant pressure to optimize their workflows, reduce manual errors, and maximize billable hours. Technology can address these challenges. But do you have the right technology to be effective — meeting client, staff and attorney expectations?
That depends. Have you embraced workflow automation yet? To get ahead of the curve, you’ll want to look into law practice management systems that offer more than out-of-the-box solutions — you need workflows personalized to your law firm’s needs.
Why should law firms avoid out-of-the-box workflows?
Some workflow automation is better than none, right? Well, it depends. Although the standard workflows that come with some legal practice management software can be convenient and save time, they fall short of custom workflows in several critical ways.
Out-of-the-box workflows follow a one-size-fits-all approach, assuming all law firms have similar processes. However, a generic workflow might not work for different practices because, for example, criminal defense workflows differ markedly from those of a real estate firm. Pre-built workflows might miss steps critical to your practice or include irrelevant steps that can lead to inefficiency and redundancy.
Generic solutions can also hurt adoption. Employees are more likely to engage with technology when it aligns closely with their daily tasks. Out-of-the-box workflows might not resonate with lawyers and staff, leading to low adoption rates. When users don’t fully embrace automated processes, your firm won’t realize the full value of your investment in technology.
What legal workflows will benefit most from customized automation?
Client intake: Managing client intake efficiently is crucial for any law firm. Workflow automation helps in handling website form submissions, sending personalized response emails, scheduling follow-up tasks, and updating client information promptly.
Conflict checking: Customized conflict check workflows help law firms identify potential conflicts of interest quickly and accurately by cross-referencing client data with existing cases and clients.
Case management: When law firms set up personalized case workflows, they can create task lists, deadlines, and notifications for each type of case; trigger alerts for critical milestones; and assign tasks to specific team members based on their expertise and availability.
Document assembly: Personalized document automation allows law firms to generate customized legal documents tailored to specific client needs. Automation tools can merge predefined templates with client data to create accurate and personalized contracts, agreements, and legal forms more efficiently.
Billing: Personalizing your billing workflows accounts for the way you bill clients, whether it’s hourly, flat fee, or contingency. Workflow tools can streamline the electronic approval process for pre-bills, automate reminders for overdue bills at specific intervals, and manage discounts and interest calculations effectively.
Time tracking: Automated tools track attorneys’ time as they work, whether that’s sending emails or texts or writing documents. Capturing billable hours automatically reduces the risk of time leakage.
Calendaring: Task management and calendar appointments are automated, ensuring that deadlines and meetings are never missed.
Client communication: With the right tools, you can program client interactions, including emails and follow ups, based on individual preferences and requirements to enhance client engagement and satisfaction.
Task assignment: Custom workflows assign tasks and responsibilities based on team members’ skills, expertise, and workload.
It’s time to get personal — about your law firm workflows
Workflow automation, especially when personalized, helps law firms work the way they want, and do it faster and more efficiently. By automating tasks like client intake and billing, law firms can reduce errors, accelerate results, and enhance client satisfaction. And, beyond saving time and boosting profitability, customized workflows help firms work the way they’re used to, encouraging adoption and sustaining the usefulness of the software for the firm.
Get a demo today to discover how Centerbase can customize workflows to meet the needs of your law firm.
Written by Carol Patterson
Law firms that solely rely on tracking billable hours might assume that each legal matter they handle is equally profitable. This assumption is based on applying an attorney’s individual hourly billing rates to the client hours they devote to each matter. But this isn’t the most accurate way to determine matter profitability.
Some types of client engagements are likely to incur significantly higher costs than others, while some matters generate greater profit margins. The only way to tell which matters the firm should invest its time in is to look at profitability at the matter level.
So, what is matter profitability, and how can you maximize it at your firm? In this article, we’ll explore the concept of matter profitability and provide practical strategies to help optimize your law firm’s financial performance.
What is matter profitability?
Matter profitability refers to a law firm’s ability to generate optimal revenue and profits from each legal case or matter they handle. It’s a critical metric that directly impacts a law firm’s financial health and long-term sustainability. It goes beyond just billable hours. It involves considering various factors, such as the complexity of a matter, the expertise required to handle the matter, the resources allocated to complete the work, other expenses associated with the work, and the efficiency of the legal team.
To calculate matter profitability, law firms must deduct all the direct and indirect costs associated with handling a particular matter from the revenue that the case generates. Direct costs include attorney fees, court filing fees, expert witness fees, and other case-specific expenses. Indirect costs include overhead expenses, such as office rent, administrative staff salaries, and general administrative costs.
Fortunately, law firms can employ several strategies to improve matter profitability without compromising the quality of legal services provided. It all starts with the data you collect on your firm’s profit margins. Let’s take a look at some common scenarios for law firms and how firms can improve their matter profitability.
Sometimes the matters we take on lead to disappointing financial results. Sometimes we come close to breaking even or losing money on a matter. How can we figure out which matters to take at the client intake stage?
Matter profitability starts with selecting the right cases from the outset. Most client intake processes gather basic information about a client and their matter, but you need to do more than run a basic conflicts check and assess the facts to determine whether you should take a matter.
To identify matters that have the highest profit potential, you need to understand the types of cases that generally have lower expenses and generate the most successful outcomes. Profitability reporting data can show you historically what types of matters have been the costliest in terms of outlay, led to fewer collections, required higher write-offs, and more.
Law firms should regularly evaluate matter performance to identify areas of improvement and what cases to find to keep profitability high. Conduct post-matter reviews to assess the financial performance of each case, analyze the effectiveness of the legal strategies employed, and identify any cost overruns or inefficiencies. This feedback loop allows the firm to make data-driven decisions that will enhance future matter profitability.
Our attorneys are billing a lot to a certain matter, and a lot of senior partners are working on this project. It seems like our matter profitability should be higher than it is. Are we looking at the wrong figures?
The key is to remember that improving law firm profitability at the matter level requires firms to take a deeper dive than just billable hours and billing rate. Firms should run profitability reports to get greater insights into their expenses by matter and their client pay timelines so they can answer several questions:
What expenses are out of control?
What can we do to trim or better control our expenses?
How fast are clients paying our bills every month?
If our clients take time to pay us, what can we do to entice clients to pay our bills faster?
Profitability reporting can highlight areas where there may be problems in workflows in your law firm that are inhibiting profitability, such as an attorney’s failure to enter all time worked or write off too many tasks. To understand the true cost of a case, attorneys need to understand all the time they spend on a matter, regardless of whether it is billable, and any time reductions.
As for expenses, law firms need to track both hard and soft costs. Hard costs are any costs paid on a client’s behalf. Soft costs are overhead costs, such as office leases, copying, mailing, deliveries, and the like.
Depending on what the profitability reports show, it may make sense to change how your firm bills for certain matters. In some cases, a flat fee model may not work well, and you may need to switch to an hourly rate or to a percentage of the recovery on a case. Or, if clients are not paying their bills on time, you may need to set up a payment schedule or plan. If nonbillable hours or written-down hours seem high, you should talk to the attorney responsible for the matter about why and figure out a strategy that reduces those costs in the future.
Focus on the matters that will grow your bottom line with Centerbase’s Profitability Reporting
If you aren’t hitting the 50 percent profitability target at your law firm, you may be wondering which matters are really contributing to your bottom line. To get the answers you need, look to our latest tool: Profitability Reporting. With Centerbase Profitability Reporting, you can go beyond your gut and get clear, actionable insights into which matters are the most profitable and which matters to avoid, so you can seize the right opportunities for law firm growth.
Are you ready to take your matter profitability to the next level? Contact us to sign up for a demo of the Centerbase platform and our Profitability Reporting tool today.
Written by Carol Patterson
All law firms collect and study data about their bottom line. If they’re in the red, they know they need to figure out what’s holding them back. But if they’re in the black, they may not dig deeper to understand what’s working and what’s not. After all, a profitable firm is a healthy firm, right?
That’s not always the case. If your law firm has multiple offices or is practicing in several different areas of law, it might be that one location or practice is propping up another. Or it might be that a potentially profitable practice is located in an area with too few high-paying clients or with a high tax rate.
Aren’t these details you’d want to know as a law firm leader? Absolutely! And you can by using Profitability Reporting tools. Let’s take a look at some scenarios where profitability data can help you make smart, strategic decisions that will move your law firm’s profitability forward.
Our [fill in the blank] practice group or law firm location is busy, but it’s not turning a consistent profit. How can we figure out why their profitability is so low?
One reason is that you might have situated a practice in the wrong location. Let’s say you’ve got a divorce and custody practice located in a big city, where there’s lots of competition and a high tax rate to boot. You’re going to have to keep your prices lower to compete for business, and then the government is going to cut into those fees even more.
You can use your profitability data to identify underperforming locations or practice groups and take appropriate action, such as closing or merging offices or practices, to optimize profitability. With this data in hand, you can model different scenarios, including adjusting your billable rates or flat fees to accommodate a higher tax rate and take on fewer clients. Or you may need to move a practice to a satellite office outside the city and use remote tools to work with clients in the city to improve your practice group profitability. Alternatively, you might find an opportunity to acquire another law firm in that area and then focus your resources on other, more profitable practice areas.
Some of my lawyers work in multiple offices. How can I see where they’re working most profitably?
If you have a profitable attorney splitting their time between a Connecticut office and a New York office, it can be hard to tell where they’re generating the greatest profits unless you look at their results by location. The key is to look at the location where the work is actually happening.
Profitability Reporting can help you isolate where your attorneys’ profit margins are the highest, so you can sift through the details about their billed, written-off, and collected fees and their costs to drill down to the details that matter.
Our attorneys want us to spend more dollars on advertising, but I’m not sure we’re getting our bang for the buck. How can I tell what marketing strategies are working?
If your partners are blowing through their marketing budget and their profitability numbers aren’t soaring, you need to figure out why. One way to sort out what’s working and what isn’t is to run a report on profitability by resource.
Let’s say a lawyer wants to invest in advertising on a particular radio show and claims that they’re bringing in new clients based on their ads. A law firm administrator can dig into the numbers to determine the impact of that spend on actual client revenue. If the clients are coming in but not bringing the dollars with them, it makes sense to invest those marketing dollars in other channels that will lead to more lucrative business.
Some of our practice areas have razor-thin profit margins. How can I improve the profitability of these practice areas?
To accurately assess profitability, law firms need to allocate both revenue and costs correctly. This involves allocating direct costs, such as salaries and expenses directly related to specific locations or practice areas, as well as indirect costs, such as overhead expenses and shared resources.
Some of these costs may include write-offs too. Take, for example, insurance defense practices. Often, the profit margins in these practices are razor thin, given competition and the rigorous scrutiny that insurance companies apply to their bills. If you bill for the wrong thing, their billing software algorithms will identify problematic entries and send the invoice back to you, further delaying payment and shaving your profit margin even thinner.
While it’s good to offer some services pro bono, you don’t want to pay businesses to be your clients. To ensure you’re focusing your attention on profitable clients, you can look for cost savings opportunities. You can also study how much each practice area is writing off or not collecting and use it to determine whether you need to adjust your rates, change how you bill for your work, or make different decisions about who your firm takes on as clients.
Find new avenues to law firm productivity with Centerbase’s Profitability Reporting
Partners and firm administrators have a new tool in their arsenal for measuring their law firm profits: Profitability Reporting. The latest addition to our software portfolio empowers leaders to make smarter decisions about resource allocation, marketing, and more using profitability at the practice group and office location level (as well as by timekeeper). Law firms can also focus their attention on markets and practices with the greatest potential for growth, client acquisition, and revenue generation.
Are you ready to take your location and practice area profitability to the next level? Sign up for a demo of the Centerbase platform and our Profitability Reporting tool today.
Written by Carol Patterson
If you’re running a small or midsize law firm, you’re probably juggling a lot of things, trying to maintain your law practice while also managing the business of your law firm. You may not always have your finger on the pulse of the metrics that matter, yet you probably do take a quick glance at your firm’s overall revenue and your timekeepers’ billable hours. So far, your firm isn’t in the red, and your partners seem to be churning out work. But these two statistics, in isolation, aren’t a meaningful gauge of your firm’s overall performance.
Say, for example, that you have an attorney who is bringing in a ton of revenue. However, when you take a closer look at the numbers, you discover that his expenses are incredibly high, and he isn’t billing enough to cover the costs of his practice.
You might also have brought in a lateral with a huge book of business — and a huge salary to boot. But while his billables are high, there are too many write-offs to cover his monthly paycheck.
Or perhaps your star rainmaker has landed a million-dollar client. But the expenses of working for this client are sucking your firm dry to the point that you’re actually paying this client to be on your roster. You’re running a law firm, not a charity.
How can you figure out that these problems exist if you don’t look at profitability by timekeeper? You can’t.
As you can see, it takes more than managing the bottom line to run a successful law firm. And a firm’s success depends on the success of every timekeeper. That’s why it’s so important to monitor profitability per attorney or timekeeper. That’s where Profitability Reporting comes in. Here are just some of the pressing profitability questions that a good tool can help you answer.
My lawyers are billing out the wazoo. Doesn’t that mean they’re profitable?
There’s a tremendous difference between being a top biller and being profitable. If an attorney is burning the midnight oil every night churning out briefs or contracts, they may not be as productive as they should be. Clients can’t be billed for inefficient work, so some of these timekeepers are having their hours written off.
Your law firm’s goal should be a 50% profit margin. That means you should set the same profitability goal — 50% — for each timekeeper too. Profitability Reporting can show you the complete picture of how write-offs are hurting your profits.
Some of my lawyers aren’t billing enough. How can I help them bill more hours?
Profitability Reporting can also help you assess the profit margins for each timekeeper by comparing their billed, written off, and collected fees to their associated costs, including overhead expenses and direct costs. If timekeepers aren’t billing enough to cover their keep — their overhead including their salary — something needs to change.
Profitability Reporting can give you the insights you need to have a coaching conversation with attorneys who aren’t logging enough hours so you can help them find ways, such as automation, to make their work more efficient; encourage them to spend less time on nonbillable matters; or balance the workload so everyone has a more equal load. You may also notice an opportunity to help lawyers struggling to meet their billable quota with tools that make it easier for them to capture every billable minute. If all else fails, you may need to adjust their billing rate, encourage them to manage their costs more effectively, or even change their salary to match their profit margin.
My lawyers are billing a lot and bringing in new clients, but they still can’t hit the 50% profitability threshold. What should I do?
It may be that your lawyers are doing lower-value work or work for clients where the profit margin is razor thin. Profitability Reporting helps you evaluate the value of different practice areas and types of work that your lawyers handle. The right tool pinpoints trends and shows which areas, matters, and tasks generate higher billable hours and profit margins. This analysis can help guide resource allocation and encourage your timekeepers to search for clients and focus on the work that delivers the biggest payoff for their effort.
Timekeeper data can also show you whether you have set the appropriate pricing and fee structures for the work. By analyzing the relationship between billing rates, fee structures, and realization rates, you can identify opportunities to adjust billing rates, introduce alternative fee arrangements, or negotiate better terms with clients to improve your overall profitability.
Finally, the data in a Profitability Reporting tool can help you make tough choices. It may be that a lawyer on your team is just not able to generate the profit necessary to justify keeping them in the firm. If that is the case, it’s better to cut them loose so that your firm can focus on recruiting timekeepers capable of keeping your firm in the black.
We use flat fees. How can I figure out whether my timekeepers are profitable?
Typically, profitability is calculated using hours worked. But if your timekeepers aren’t counting their hours because you’re billing clients on a flat-fee basis, then you can’t make that calculation. That doesn’t mean all is lost.
New Profitability Reporting modules are being built n that will help you calculate profitability even when you’re using a flat rate for your services.
Start maximizing your timekeeper profitability with Centerbase’s Profitability Reporting
Our new Profitability Reporting tool makes it easy for law firm leaders to track revenue, expenses, and profits at the timekeeper level. With this data in hand, you can determine how each timekeeper in your practice can improve and give them targeted advice to strengthen their performance. And, when each timekeeper improves, you increase your firm’s overall profitability.
The Centerbase platform gives you all the tools you need to turn your law firm into a profit-generating machine. To learn more about our Profitability Reporting tool, reach out for a free demo today.
Written by Carol Patterson
For five quarters in a row, law firm profitability has fallen, according to the 2023 Report on the State of the Legal Market, a study conducted by the Thomson Reuters Institute and Georgetown. (Data are based on reported results from 170 US-based law firms, including 46 AmLaw 100 firms, 47 AmLaw 200 firms, and 77 midsize law firms.) Profits per equity partner are down for the first time since 2009. Client payments and realization rates are down too.
Demand has also dropped for everyone except midsize firms, where clients are flocking because they want quality legal services without the major firm price tag.
So, how can small and medium-sized law firms capitalize on this demand and optimize their profitability? That’s what we’ll cover in this article.
Why does profitability matter for law firms?
Law firms should focus on profitability for a number of reasons. First, being profitable ensures that the firm can sustain its operations and provide quality legal services to clients. Having a profit allows firms to comfortably cover their operating expenses, such as rent, salaries, technology, research materials, and marketing, and establish contingency funds and reserves for unexpected expenses or downturns in business, such as a global pandemic, potential lawsuit, or market uncertainties.
It’s also important for law firms to have sufficient funds to invest in resources and infrastructure to stay competitive and deliver efficient services. To stay ahead of the curve, firms should make investments in technology, legal research tools, document management systems, communication tools and client portals, matter management systems, and training. The more profitable a firm is, the better it can enhance its capabilities and client service through investments like these. And the more investments a firm makes, the better able it is to attract, engage, and retain attorneys and staff members — not to mention pay them competitively.
Finally, profitable law firms are positioned to pursue growth opportunities and expand their practice areas or geographic reach. They can invest in client and business development strategies that attract new clients and increase their market share.
Why do law firms miss their profitability goals?
The baseline profitability goal for a law firm is 50 percent. If your firm isn’t hitting that mark, it may be because your expenses are too high or you aren’t earning enough revenue. Or maybe you are too heavily staffed, which can drain your law firm’s financial resources. The key is to figure out what is causing the problem.
Many firms look at their profit and loss statements, but these statements don’t tell you the whole story. The typical law firm P&L report isn’t granular enough to help you determine the true source of revenue and expenses. You may have a timekeeper who brings in a lot of revenue but not enough to cover their incredibly high expenses, for example. Or you may have a million-dollar client, but what you shell out to keep that client and maintain their business is so high that you’re essentially paying the client to remain on your roster. But you likely can’t tell that from your current financials.
The problem stems from too many law firms not running their firms like a business. Law firms that lack accountants don’t fully understand the concepts of what makes firms profitable. If your firm’s office manager or paralegals are managing your accounting, they are certainly capable of handling billing, checks, and cash receipts, but they won’t be able to focus on your law firm’s bigger financial picture.
The bottom line is that if you’re focusing just on revenue and expenses, you’re missing important details. Many law firms overreact when expenses look high and look for ways to make cuts. But if you’re focused on reducing spending, you’re also contracting your business, and the revenue will follow, as will employee morale and output.
And if you aren’t yet using law firm accounting software, you’re just planning your law firm’s future based on guesswork. That wouldn’t pass muster for your clients, and it shouldn’t pass muster for your shareholders, either.
What is the best way to monitor law firm profitability?
The key is to study profitability by timekeeper. This way, you can discern which attorneys are in the clear and which need help. To get the full picture of expenses and profits for every timekeeper, you need to monitor direct expenses, indirect expenses, plus overhead. But most law firm billing platforms can’t deliver this information without running reports from hundreds of general ledger accounts.
Centerbase is here to fill the gap. Our new Profitability Reporting tool delivers the data that your partners need to drive smarter business decisions. Our tool goes beyond showing more than just data on what’s been billed and collected. Our platform helps you track revenue, expenses, and profit margins at the firm, practice group, and individual levels, so you can optimize your firm’s profitability and improve its financial performance. You can also analyze key metrics such as billable hours and realization rates so you can set profitable billing rates and pricing and create accurate budgets. With our platform, you can determine which timekeepers are most valuable to your firm, what practice areas to expand, and which matters are contributing to — and hurting — your bottom line.
Centerbase puts real-time accounting tools in the hands of everyone in your law firm. It’s like having your own personal accountant on call. Contact us for a free demo and learn how our profitability reporting can help you kick-start your law firm’s growth.
The practice of law — even in a firm environment — is typically individualistic. The siloed nature of the practice of law can lead to duplicative work and bottlenecks. One key to making legal work more efficient and profitable is working together as a united front, and the best way to create that front is through collaboration.
In this article, we’ll cover the basics of internal collaboration, including why it’s important for productivity and your firm’s bottom line, how you can use it to retain clients and legal talent, and where legal technology can lend a helping hand.
What is internal collaboration, and why is it important?
At its core, internal collaboration means working as a team. It acknowledges that together we can accomplish more than if we act alone.
Some lawyers think collaboration is antithetical to the practice of law, which they view as inherently competitive. But internal collaboration is an important part of working in any organization and is important if your law firm wants to find new ways to reach its productivity and profitability goals. Research shows that law firms that get collaboration right earn higher margins, attract more lucrative clients, and inspire greater client loyalty.
Does internal collaboration improve the client experience and profitability of my law firm?
A better-connected law firm means more access to the internal riches of the firm. Your firm is likely full of expertise — experts in litigation, real estate, accounting, and human resources, to name a few. But unless you have collaboration, a lot of that expertise may go untapped.
Lawyers often face complex issues that fall outside of their practice area expertise. If you’re a litigator dealing with a benefits issue, knowing how to access and work with your employment and benefits team is important to providing the best client service. If you practice in family law, when it comes to alimony across state lines, you might require some assistance from a colleague with tax expertise or before a different jurisdiction’s courts.
Better collaboration means better business, and better business means more business. Frictionless internal collaboration is good for your clients, and it’s good for your bottom line.
How does internal collaboration affect firm culture and its ability to attract and retain talent?
A recent McKinsey study looking at employee retention rates in connection with the COVID-19 pandemic asked employees why they quit their jobs. The top three factors cited were that the employees didn’t feel valued by their organizations (54 percent) or their managers (52 percent) and that they didn’t feel a sense of belonging at work (51 percent). The third response is particularly important to law firms.
Unpacking the term “belonging” goes beyond compensation and benefits and into something much more human. All employees, regardless of their level, want to feel that their contributions are noted and appreciated by both their leaders and the organization as a whole. Internal collaboration plays a critical role, allowing law firms to build camaraderie by recognizing that everyone has something to offer. People want to stay where they are seen and appreciated.
Organizational culture is a big part of this too. A law firm culture based on collaboration that prizes collective knowledge is preferable to one where lawyers gatekeep resources and compete with one another. Creating a great law firm culture starts with an open dialogue of free-flowing ideas and feedback, which areimportant components of internal collaboration.
Three steps to improving collaboration at your law firm
There’s no silver bullet that will improve collaboration today at your law firm. However, if you follow these three steps, you’ll develop an environment that encourages collaboration — one where team members work together to accomplish their goals.
1. Foster a culture of collaboration
Law firms can promote a culture that rewards collaboration by setting appropriate expectations and incentivizing teamwork. Firms should create opportunities for cross-department collaboration as often as possible.
One place to start is assigning team members to work on projects outside their usual practice area. Or you could create a cross-functional team to tackle a challenge a client is facing, to address lawyer recruitment, or to devise new business development ideas. Simple team-building activities, such as coffee breaks, lunches, and other social events, can also build bonds between people who wouldn’t otherwise interact.
Whichever avenue you choose, be sure to recognize and reward collaborative efforts. You may also want to incentivize collaboration by including it as a metric in your firm’s yearly evaluations.
2. Encourage open communication
Communication is the foundation for effective collaboration. Start encouraging open communication by creating an environment where team members feel comfortable sharing their ideas, concerns, and feedback. To build a more collaborative environment, schedule regular gatherings, including team meetings and brainstorming sessions.
If your lawyers and staff are willing, you can also bring in outside experts to help develop collaboration and teamwork skills, including communication and conflict resolution.
3. Use collaborative technology and tools
Technology is a powerful enabler of internal collaboration. Legal technology helps teams build a collective knowledge base that everyone can access. In turn, this improves work quality, avoids duplicative efforts, and accelerates results.
For instance, a fully integrated matter management system corrals data and documents in a single source of truth. It can keep everyone on a team or in a firm up to date on matter status and highlight roadblocks where someone may be able to offer their expertise. With a matter management system, teams can collaborate in real-time and track matter status, no matter where they are in the world. And lawyers can exchange messages seeking help from each other, such as whether anyone has experience dealing with a novel legal issue or has appeared before a particular judge.
Cloud-based document management systems also make it easy for multiple people to work simultaneously on documents, accelerating your results. You can also avoid the lag time of waiting for people to turn drafts around or trying to figure out which version is the most recent, both of which can discourage teamwork.
Take the next steps toward collaboration
Law firms can start improving their service delivery — and their bottom line — by taking steps now to remove the barriers to collaboration. To learn more about how technology can make it easier for your legal team to get work done, get in touch.
Breaking up is hard to do — we all know this. And while any divorce or separation can be painful, the stakes are higher when children are involved. Having a parenting plan in place can help with both logistics and healing and, most importantly, ensure that the best interests of your children are kept at the forefront. Stability is important, and a well-drafted parenting plan can help any family achieve it.
In this article, we’ll cover all aspects of parenting plans, from what you should include to how to avoid common pitfalls to specific state law requirements. A good parenting plan will help you and your co-parent navigate new waters and ensure that your children are cared for.
What is a parenting plan?
A parenting plan is just that — a plan for parenting children. Generally, a parenting plan is drafted and put into place in connection with divorce, separation, annulment, or child custody disputes. Parenting plans are sometimes referred to as parenting agreements, custody agreements, or co-parenting plans, and they may or may not be required by a court.
Essentially, a parenting plan is an agreement between parents that outlines the schedule, duties, and responsibilities of each parent. The agreement may contain specific information regarding guardianship, and if there are other parties involved, such as stepparents or grandparents, the parenting plan will likely also cover their rights and role in the child’s life. A parenting plan is drafted by the parents, the attorneys involved in the dispute, or the court itself, and the plan may be created even if not required by the state.
By having a parenting plan in place, you can reduce conflict and friction by setting clear guidelines and expectations of your former partner while also understanding what is expected of you. Parenting plans benefit both parents and children alike, and drafting a good one is important to creating a harmonious co-parenting situation.
What should a parenting plan include?
What is a good parenting plan for one family will be deficient for another, which is to say, it depends. The best parenting plan is one that is specific to your situation. However, there are general components that should be included in all parenting plans. The key is specificity.
Parent and child information
Your parenting plan must include the general information of the parties involved. This includes the names, contact information, and phone numbers of each parent and the names and birthdates of all children.
Legal and physical custody
Legal and physical child custody are perhaps the most important (and contentious) components of a parenting plan. However, it is important that the specifics regarding custody of the child be laid out clearly and agreed to within the arrangement. There are several custody options available:
Sole legal custody. Sole legal custody means that only one parent has the right to make legal decisions for the child. These major decisions include major choices like education, religion, and medical care.
Sole physical custody. Physical custody determines both where the child lives and outlines visitation rights for the other parent (oftentimes referred to as the non-custodial parent). A sole physical custody arrangement is where a child lives full-time at just one parent’s home (the custodial parent).
Joint legal custody. A joint legal custody arrangement provides that parents share decision-making responsibilities as well as the equal authority to make legal decisions for the child.
Joint physical custody. A joint physical child custody agreement provides that both parents have an equal or significant amount of time with the child and also share joint physical responsibilities.
Custody or visitation schedule
A custody or visitation schedule sets forth when each parent will have parenting time with the child. The specifics of this parenting time schedule will be based upon which legal and physical custody arrangement you and your former partner have settled on. When building this schedule, consider how visitation might work for the non-custodial parent. What will the details of your holiday schedule be? How will birthdays be spent? New Year’s Eve? What about school breaks? Shorter breaks, such as Labor Day or Memorial Day? While some of these things might seem minor, ironing them out in your parenting plan now might help you to avoid conflict later.
Duties and responsibilities
Along with determining your custody or visitation schedule comes establishing the duties and responsibilities of each parent. It’s important to outline each parent’s rights to see their children during day-to-day activities. Do both parents have the right to attend the child’s extracurricular activities? What about pick up from the children’s school, daycare, or childcare on transfer days? Your proposed parenting plan should also state clearly in which situations a parent is required to contact the other, such as in the case of a mental health crisis.
Child support and expenses
Your parenting plan should also detail how you’ll split expenses related to the child. Will one parent provide child support? Who will pay for health insurance or health care? What about private schools? Who will claim the child as a dependent on their taxes? Your parenting plan should lay all of this out clearly and carefully to avoid future contention and to ensure that your child is properly financially supported.
Other specifics
Because your family is unique, you’ll also need to include details specific to your family in your parenting plan. Consider any particular day-to-day decisions that might need to be made as well as anything in connection with special occasions. Maybe spending Mother’s Day, Father’s Day, Easter, or Diwali with your children is particularly important to you. If that’s the case, have it in the plan. Further, if you are separating from a partner because of domestic violence, that is something that should also be addressed in the parenting plan with specificity.
While all of this may seem overwhelming, particularly in the wake of a divorce or separation, the most important thing to keep in mind when writing your parenting plan is your child’s well-being. It’s a balancing act between specificity and flexibility.
What about writing a parenting plan for family court?
The parenting plan that you write specifically for a court should contain all of the core elements discussed above. In fact, in many states, courts prefer that parents submit their own detailed parenting plan (as opposed to having the court order a specific arrangement) because they understand best what their children need.
Typically, you and your former partner will come up with your parenting plan either outside of court or during formal court proceedings. If you are able to come to an agreement outside of court, generally you will present your parenting plan to the court for the judge’s approval. If approved by the court (pending any specific state law concerns (as discussed below)), your parenting plan will become enforceable by law. A parenting plan that is informal, not in writing, and not approved by a court may not be enforceable.
In the situation where parents are unable to agree on a parenting plan, the court may issue a plan for them. To the extent possible, it’s best to avoid a court-ordered parenting arrangement because, as discussed throughout this article, you, as a parent, are in the best position to determine what arrangement will work best for your family. Alternatively, a court may allow each parent to present their own plan. The judge will then listen to each plan and pick one (likely with adjustments). If only one parent presents a plan, it’s likely that the court will adopt that plan. So it’s important to develop your own parenting plan and to do so thoughtfully.
Though it will vary from state to state and judge by judge, when assessing a parenting plan, courts will typically consider the following factors:
The child’s age and maturity: If the child is old enough, the court may take the child’s preferences into consideration
Each parent’s capacity to care for the child, including financial ability as well as physical, mental, and emotional ability
Each parent’s proximity to important aspects of the child’s life, including schooling and other organizations, as well as proximity to extended family
Each parent’s custody preferences
You may want to consult a family law lawyer to help you draft your parenting plan, particularly if your divorce or separation has been contentious. There are specific state law concerns that you may want legal advice on, and a law firm will be able to help you. Alternatively, many parents find it helpful to use a parenting plan template or worksheet, many of which are available online. These resources allow you to customize your parenting plan to cover what is most important to you and your family.
The more harmonious and detailed your parenting plan, the smoother co-parenting will go for you and your former partner. Court wants to see how your parenting plan will create a stable and loving environment for your children.
What mistakes should be avoided when writing a parenting plan?
Your parenting plan is about your children. One of the biggest mistakes parents make when determining their plan is to put their own needs ahead of their children’s. As discussed throughout this article, the best parenting plan is one that is agreed to by both parents and focused on the best interests of the child.
Other common mistakes include creating a parenting plan that is too vague. This generally leads to disharmony between co-parents and the need for regular day-to-day negotiation, which isn’t fun for anyone. The terms of the parenting agreement should be laid out clearly and specifically. Specifics that are regularly left out include forgetting to specify what happens when one parent wants to relocate and failing to include specifics on tax deduction issues.
Additionally, there should be a provision about how to handle changes to the parenting plan. As time passes and your children grow older, it’s inevitable that revisions will need to be made. Make sure that you follow the proper legal process as set forth in your parenting agreement for these changes—doing so will only protect you.
Do parenting plans differ from state to state?
Though there are specific laws that differ state by state, the core elements of your parenting plan will remain the same regardless of the state in which it’s drafted or enforced. You will always want your parenting plan to be specific, clearly drafted, and legally enforceable. However, the way in which it is drafted and becomes legally enforceable will differ in each state.
Some states require that specific information be included in a parenting plan. For example, in Arizona, a joint legal custody agreement requires that a written parenting plan include a way to resolve conflicts about custody and parenting time; additionally, Arizona also requires that certain language stating that joint custody does not necessarily mean equal parenting time to be included in the parenting plan. Further, many states require that a parenting plan be signed before a witness or notary public to be enforceable, while others do not.
The key is knowing and following your specific state custody guideline when drafting your parenting plan. If you and the other parents live in different states, this gets a bit murkier, and it’s likely to your benefit to consult a family law lawyer. You can use this resource to start considering more specifics.
Protect your peace of mind
Divorce and separation are hard. By drafting and implementing a well-thought-out and complete parenting plan now, you’ll protect your peace of mind later. Remember what’s most important during the process, and be sure to take advantage of all resources available to you. This is an opportunity to start defining your new family.
