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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
We get it-you're sick of the games. The guessing game of law firm financial reports, that is. It’s hard to know what reports your firm should be running and even harder to interpret the data from those reports and connect the dots into a useful strategy. And most bookkeeping or accounting software, like QuickBooks, is just too hard to understand and too complex for your needs.
But it doesn’t have to be that difficult.
Your firm might be brand new to data analytics, or maybe it’s dipped a toe into the waters and has the basics down. Either way, keeping close, regular tabs on certain metrics and understanding financial reports will increase the effectiveness and efficiency of your firm and lawyers and, in turn, your law firm’s profitability. Technology can streamline this process and make collecting and interpreting your firm’s data easy.
This guide will provide a basic overview of legal reporting and analytics and tell you why they’re important and how they can help you intelligently run your firm. Then we’ll go in-depth into the different kinds of financial reports your firm should be running to help you understand your bottom line.
Legal analytics is the process of collecting, organizing, and applying data to the practice of law. If that sounds overwhelming, think of it as paying close attention to the heartbeat of your law firm’s finances and making adjustments as needed.
The goal of legal analytics is to use the collected data and subsequent reports to make informed choices for your firm. Is one practice area soaring? It might be time to hire another associate. Is your cash flow tighter in January right after the holiday season? You can prepare for that by increasing your savings in December.
With the right tools in place, your firm can review its information and create reports on all aspects of its business model. You can then use those reports to inform actionable steps that will best serve the health of your firm.
Let’s get a bit more specific.
It’s simple: law firm analytics and reporting go beyond simple financial forecasting, giving your firm a competitive edge. With legal analytics and reporting, your firm can dive deep into its functioning and gain valuable insights into its daily, weekly, monthly, and yearly net income and operations. Then you can use that information to implement workable solutions targeting both short-term and long-term goals.
Legal analytics can help you forecast with facts. You’ll be able to view data represented in charts and graphs to make sense fast of things like billable hours by attorney, money spent last week (last month, last year), and invoices. Analytics tools translate raw data into knowledge, and knowledge translates into power.
Legal reporting software offers your firm real-time reports that can be pulled daily, hourly, or even faster. This means you can quickly get your hands around potential problems before they become threats to your law firm. Basic data points for legal reporting include law firm accounting, billing, compensation, and productivity—all vital aspects of your firm’s day-to-day operations.
Below is a shortlist of the types of reports your firm should consider when building out its reporting structure. We highly recommend using practice management software with a built-in reporting tool — it’s simply the best practice. We’ve also got you covered with more detailed information regarding what these reports include and how regularly to run them with our legal analytics and reporting guide.
Productivity - Billable hours matter, and tracking them is important both for individual bonus payments and overall firm vitality. Analytics and reporting can help your firm track straight billable hours, nonbillable time, billable processes, profitability per attorney, and matter origination credit.
Practice area performance - If your law firm has multiple practice groups, keeping track of performance is important for both staffing and resource allocation. You should review the performance of your firm’s practice areas at least annually (and ideally quarterly).
Marketing and business development - Reporting and analytics can take your law firm’s marketing and business development to another level. Don’t spend money on marketing and campaigns without analyzing the effectiveness of those efforts. The following market performance indicators should be part of your law firm’s regular reporting processes: source of clients, client retention and referrals, website conversion and hits, return on investment, and production and origination.
With certain reporting and analytics tools, your firm can identify which clients always pay on time (and those that don’t), which attorneys are developing a specialty based on time billed to certain matters, which months are busiest, and which are slowest. Raw data points can be turned into complex spreadsheets and pivot tables that are easily viewable, accessible, and actionable.
What this means for you and your firm is that you can determine appropriate billable rates, monitor, and adjust financial performance targets, hire when you need, and generally make informed business decisions to improve your firm’s financial position. And you don’t have to wait till year-end to get all of the data. No matter whether you’re a small law firm or a megafirm, this data is available at the touch of a button all year long, without having to call your CPA.
A balance sheet is like a doctor’s report — a financial statement of your firm’s health. The classic balance sheet report provides your firm with simple insights into its current assets, and liabilities including accounts payable, and capital. It helps your law firm plan for both the short-term and long-term.
This income statement is a backward-looking report that your firm can use to look forward intelligently. It details the past 12 months of earned revenue and expenses paid (e.g., operating expenses like office space, tech, marketing, malpractice insurance, and legal database subscriptions). A profit and loss statement will help your law firm evaluate its most recent annualized figures, reducing the impact of seasonality and helping you visualize your firm’s health on a rolling yearly basis.
With this report, you can view a full year of financials at any time. (For example, if you run a profit and loss statement on May 20, 2022, you’ll use financials from May 1, 2021, to April 30, 2022). This allows for continuous planning for the future performance of your firm.
The monthly revenue report helps your firm better understand the flow of capital in and out. It takes into consideration time billed and the collection of funds for that billed time and can be narrowed in scope to reflect your firm’s revenue on a weekly basis as well.
This report gives your law firm tangible knowledge of how to best prepare for short-term fluctuations such as the pending conclusion of a matter or late payment by a client. In short, the monthly revenue report helps your law firm plan for the current moment while also considering trends to help it prepare for the long haul.
An accounts receivable report shows the money that clients or other parties owe your law firm. Tracking this amount is key to making sure your law firm is both getting paid for time billed and getting paid on time. These reports track receivables for each client account and matter, whether currently due or past due, and help you forecast your firm’s cash flow (and know when there is a big payday just around the corner). You can monitor accounts receivable on a firmwide basis, per-client basis, and practice group basis.
A statement of cash flows helps your firm track and manage cash on hand. It details your net income, adjustments in reconciled net income, cash from operating activities, and depreciation. The statement provides valuable insights that can help you predict when your firm might need more cash and when it can safely stow it away for a rainy day. You can customize the statement to your needs, which may fluctuate over a period of time.
This report provides your law firm with in-depth knowledge of its actual versus target revenue and allows your firm to track performance metrics like utilization, collection, and actualization rates. With this information, your firm can figure out where improvements can be made (and where it’s doing great). The leaders of your firm will get an overview of both the aggregate and individual performance of their various teams, giving them insights into employee performance.
Legal work in progress or pipeline reports are project management tools that show the financial health of a project relative to its progress by tracking the amount of time an attorney has worked, the value of such time and expenses executed but not yet invoiced. These reports look at more than expected billing and take into consideration the totality of relevant revenue and expenses.
Pipeline reports help law firms identify red flags early on and track real-time information about where capital is, where it’s coming from, and where it’s headed.
This report shows where your expectations did not sync with reality, whether good or bad. Its value is in showing where your firm might have been off for budgeting purposes. Perhaps your firm brought in additional revenue from a marketing campaign. Maybe a big client needs more time to pay a bill. These reports deliver the information that your firm needs to make useful adjustments.
Good legal practice management software can transform your firm’s reporting practices and increase its optimization and efficiency to boot. Legal practice management software makes tracking and obtaining data easier. And with better, more accessible data, your firm can compile more useful reports.
The best practice management software offers reporting tools for standard and custom reports that use a single source of data that doesn’t need to be copied from system to system, saving your firm time and money and reducing the possibility of human error.
When you think about the function of a law firm, your thoughts probably go straight to the provision of legal services. But law practice administrators must recognize that their firms are also revenue-earning businesses that need money to operate. For this reason, it is imperative to keep tabs on financial performance. They need to know whether the firm is bringing in enough revenue, as well as whether strategies and expenditures benefit or hurt the firm.
With regular reporting and analytics, firms can track metrics that provide valuable detailed financial analysis. This blog will take a closer look at some of those metrics, including what data they provide and how often firms should review them.
As the name suggests, these reports provide a detailed look at the law firm’s finances, including how much money is coming in, how much is on hand, and how much is being spent. To gain a complete view of a firm’s financial status, administrators can consider the following financial reports:
Law firms need to keep an eye on the productivity of the firm in order to promote efficiency, cost savings, and maximized profitability. While we tend to think of productivity as the pace of work being completed, there are a number of additional factors to consider within a law firm environment:
Many law firms pour extensive amounts of money into their marketing strategies with little understanding about the effectiveness of their efforts. The following marketing performance indicators need to be part of a law firm’s regular reporting process so that administrators can evaluate what approaches are working and what needs to be tweaked:
Law firms often build their practices around a single niche or a few specific practice areas. But societal changes can result in evolving needs among potential law firm clients. For example, the pandemic brought about a surge in such practice areas as bankruptcy, health law, and employment law.
Firms should take a look at the performance of their practice areas at least annually to determine whether they are still performing at a profitable level. This data can be collected externally from legal industry reports and studies, as well as internally from practice area comparisons of new matters and revenue generation. The information can then be used to make crucial decisions about the firm’s practice area direction.
These are only examples of the numerous types of reports that help law firm administrators evaluate the viability of the practice. It’s important that administrators identify metrics that specifically speak to the health of their firms and take steps to monitor them on a regular basis. With weekly and monthly reporting, administrators can promote what is working and make timely changes to address what is not.