There are multiple metrics a firm can monitor to ensure financial success. Having good billing protocols is a good place to start. Once those procedures are functioning well, you can accurately identify which areas of practice are most beneficial to your firm. Knowing where you should be focusing your assets (time) allows you to strategically make decisions on what cases to accept and what cases should be declined or referred out.
Begin this process by identifying the practice areas in which your firm most often practices, and ensure they are entered into your billing system. Using a billing system that allows you to identify practice areas and run reports quickly and efficiently is an important piece of this process. The identification of practice area should be a part of your client intake protocol to ensure that cases are properly identified at the outset.
Depending on firm size, there are different ways to go about the identification of departments. If your firm typically has specific attorneys and staff working in each practice area, it is intuitive to define your departments by practice area. You may have a real estate department, a civil litigation department, a criminal litigation department, and a corporate department, for example.
If most of your attorneys are working across multiple areas of practice, you may want to define your departments by supervising attorney rather than by practice area. This will allow you to determine whether profitability is impacted by practice area or by managing attorney, for example.
Once you have identified the practice areas you want to track and how you would like to divide your billable timekeepers (attorneys and paralegals) into departments, you can start monitoring the revenue you are seeing from each practice area and department. By putting your clients into buckets of practice areas, you can:
The cost to acquire a client may be different depending on the practice area. Your physical injury cases may come to you through television advertising, which is going to have a different cost than your probate clients, who may come to you through word of mouth. By identifying your client acquisition costs by practice area, you can get a more accurate evaluation of the true profitability of each case type.
Likewise, the lifetime value of a matter is going to be different by practice area. As is the case with acquisition costs, by identifying your average lifetime value by practice area, you can drill down even further on profitability by case type.
Once you have calculated the average acquisition cost and lifetime value for your cases by practice area, you can determine an overall average net revenue for each area. This does not take into account the costs of your timekeepers or firm overhead – this is strictly net revenue after taking into account the cost to acquire the matter. For example:
Once you have calculated the net revenue by practice area, you can break things down even further to determine your revenue by department. In this calculation, you add in the direct costs of your timekeepers in each department.
To begin, you need to have calculated the hourly cost for each of your timekeepers. By knowing what it costs for each of your timekeepers to work one hour, you can calculate their costs in each practice area by running a report showing total hours billed by practice area or department. In the example below, the firm’s departments are identified by practice area:
Now that you know what it costs your firm to conduct business by practice area and department, how can you use this information?
By identifying these important metrics for your law firm, your firm can become more profitable, and your attorneys will be more fulfilled and effective with an improved clarity of focus.