November 09, 2021

law firm consulting value budget profitability

For law firms, like any business, profitability and competitiveness are critical. Yet, an inherent tension exists between these two goals. Increasing a firm’s competitiveness typically requires added expenses – salaries of laterals, new technology, etc. – that hit the firm’s bottom line. What are some practical steps a firm can take to increase profitability while enhancing its competitiveness?

Answering that question was the focus of last month’s Elevate webinar, “Managing Value: How to Remain Profitable and Competitive.” Moderated by yours truly, the panellists were Dr. Christian Mammen, Partner at Womble Bond Dickinson; Paul Nicandri, Chief Service Delivery Officer at DLA Piper; Cassie Vertovec, Global Managing Director for Practice Management and Innovation at Paul Hastings, and Rachel Dabydoyal, Head of Alternative Delivery Solutions at Hogan Lovells UK.

Dr. Mammen began the session by discussing six key considerations to limit profit erosion:

First, at the outset, firms must be realistic about matter costs before bidding on work. Clients often want upfront discounts – even to get on a panel, before winning the work – so a firm must understand its costs and budget accordingly. Aggregated billing data often yields consistent patterns that can improve budgeting.

Second, going into a matter, a firm must know the client’s outside counsel billing guidelines: what can (and cannot) be billed, how work must be billed, etc. This helps a firm budget appropriately.

Third, during a matter, be alert for work that is taking too long or wasn’t budgeted. Many clients are likely to press a firm to write off such work. It is critical that the entire team know at the outset what the budget is as well as the budgetary constraints.

Fourth, it is critical to be transparent with clients and get out in front of unanticipated costs. While those are difficult conversations, surprising a client with charges for unplanned work is worse.

Fifth, optimise the firm’s billing process to get bills out to clients quickly. Delays in billing mean delays in getting paid. Delays also risk uncollectable fees.

Finally, firms need to think critically about what circumstances make using technology more – or less – profitable. Clients are becoming increasingly sophisticated about and interested in technology and how it will impact the price of a matter.

Cassie Vertovec advised attendees to anticipate the risk of profit erosion from when a firm sets its price to when the client finally pays for the work. It is critical to set client expectations around developments that may necessitate additional work. Such work is a prime target for clients’ requests for write-offs. Things inevitably change; ongoing communication with clients is crucial so that they understand why there are overages.

Rachel Dabydoyal spoke about alternative delivery options. Adoption challenges remain, but upskilling junior team members means they can do more sophisticated work at a lower cost than senior team members. Also, team leaders should look beyond a single office or practice group when staffing a matter, as less costly options may be available elsewhere. The labour mix drives the budget.

Paul Nicandri emphasised that there may be cultural issues to address within a firm, whereby “blowing the budget” is not treated with the degree of concern that it warrants. Team leaders must understand the budgetary impact of staffing decisions and unplanned work. It pays to do a deep dive into why a matter became unprofitable or why a partner is significantly less profitable than others. Technology like dashboards often proves very useful.

Cassie added that the adoption of new technology is a critical issue. Change management plays a key role; constituencies must be persuaded, scepticism must be overcome. Always think through messaging and how to sell the benefits of a new tool, process, or system. If attorneys understand the pain points addressed by a new way of doing things, they are much more likely to adopt it.

A final point made by Rachel and Cassie as the webinar wound up was that while legal expertise may “get you in the door” on a matter, it’s the efficiency of your delivery that wins the work. Clients want to know upfront how you will staff a matter, how you will deliver the work, and how you will use technology.

Budgeting, communication, and efficiencies through technology – these are some crucial considerations to ensure firms increase profitability while enhancing competitiveness.