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.