What does profitability mean to your firm and how is it measured? More importantly, how can it be boosted? For law firm CFOs, profitability is always front of mind, especially as downward pressure on fees persists and amid broader economic turbulence. But as you consider how to make sure your firm ends the year with a decent level of profit in the bank, the answer to the last question is closely connected to the response to the first.
While profitability most obviously refers to the fundamental calculation of revenue minus costs, there’s clearly a whole range of variables that can be taken into account, from analyzing profit by client, matter or department, to whether revenue is defined by fees billed or by payments collected, and the extent to which costs are set in stone.
What’s more is that there are many ways to enhance profitability, from creating efficiency gains to reassessing the value of your service to clients. Your firm’s practice and financial management systems are a treasure trove of information that could be harvested for deeper insights into the realities of your firm’s profit position, and they should comprise tools that you can use to evaluate and drive profitability.
Here are three key things you can do now with 3E as your practice and financial management solution to help ensure a profitable year-end:
1. Leverage your data
The data your firm holds is not just a matter of record about who has done what, for whom and when. It is a powerful resource that can and should be harnessed to provide deeper insights on where your firm is most profitable. Data analytics can reveal the hidden detail of what your firm is doing well and what could be improved to maximize profitability.
Metrics that can be leveraged to measure profitability:
- How much time is spent on billable versus non-billable tasks?
- In which areas of work are discounts or write-downs most prevalent?
- How well are budgets being managed and how good are our forecasts?
- How accurately are we pricing for work on fixed-fee matters?
- Are there areas where our hourly rates should be adjusted?
- Where can the work-to-payment cycle be improved so we get paid faster?
- How much visibility do we have over cashflow and therefore over our projected bottom line?
The list of questions that can be answered via data-driven insights is extensive. That intelligence into law firm financial and profitability metrics is invaluable to decision-making. Only with this knowledge can CFOs help design sensible strategies on key issues like managing costs, setting pricing structures, and staying competitive yet profitable. And support changes in behaviors where necessary to eradicate unprofitable practices or replicate margin-boosting ways of working.
As Amy Fuchs, Project Manager at Spector Gadon & Rosen P.C. explains,
“Any data we could possibly need, we can pull up with the touch of our fingers in 3E. Being able to quickly run reports—and with a reduced margin of error—has had a major impact on our productivity. This has given us and our clients added confidence in our business.”
2. Continuously seek operational improvements
It’s not enough to rely on people to make changes of their own accord to make the way they do things more efficient or just because it has been mandated from the top, even if the need to do so is evidence-based. What really ramps up profitability is identifying more productive, cost-effective practices and then embedding them across the firm so that processes become more standardized and streamlined wherever possible.
So, that might mean facilitating time entry by making it easier for attorneys to input all their time correctly under the right categories as soon as they’ve done it, with no room for ambiguity about how it should be logged. Or, it could involve automating more of the billing cycle, or implementing more robust frameworks within the firm’s systems around how budgets are created to remove inconsistencies across matters or teams and minimize the risk of getting pricing wildly wrong. It could involve reducing friction in workflows so less time is spent on non-billable tasks or in basic processes more generally such as team collaboration or client communications.
3. Optimize the client experience
Client satisfaction and the sense that they are getting real value for their legal spend are often overlooked factors that can drive law firm profitability. After all, happy clients will be more inclined to send more work your firm’s way and recommend you to others and perhaps even pay more. Often, it’s not only the outcomes that matter to clients, but the experience they get along the way.
3E can be used to increase operational efficiency and offer a more seamless service to clients, so that clients get more ‘bang for their buck’ and law firms can strengthen their margins (even when fees are competitive) and demonstrate the value delivered (even when fees are relatively high).
It’s also possible for law firms to track referrals and measure conversion rates, return rates, and billing and collection rates, for instance, in order to gauge client satisfaction by how quick they are to pay, whether any queries or issues were raised about bills, and how many matters clients are instructing the firm on.
Harness the power of 3E for a profitable year end
Profitability is reliant on getting more revenue in through the door, pricing work correctly, and keeping a lid on costs, while enhancing customer satisfaction and providing value for money to generate high-margin new and repeat business. Law firm profitability metrics provided via 3E are a valuable tool to keep tabs on the balance of all these factors in the equation and make sure that they all add up to profitability at the end of the day, month, and financial year.
By having the right financial management infrastructure in place, opportunities and threats can be spotted sooner — and you’ll start to see the positive effect on your profitability just as quickly. Learn more about how to be profitable with 3E.