3 Common Causes of Leakage of Law Firm Profits

“If you even think of a transaction, you should charge this time” – rainmaker partner at the London law firm.

As I sit down to write this blog, the above quote from my time consulting on BI legal solutions comes to mind. The individual in question expanded on this to say that the company’s BI solution allowed him to not only see what was happening financially but also, and just as importantly, what was not happening.

In our latest Legal Cash Flow Report we dive into legal cash flow trends, including profit leaks.

What is Profit Leakage?

The term itself has negative connotations, unless you’re a plumber or a newspaper editor, a leak of any kind is very rarely a good thing. In the context of a law firm, profit leakage is any unnoticed or unintended loss of revenue from your business. In legal transactions, these leaks can occur at different stages of a case’s lifecycle and all share the common theme of leaving money on the table.

98% of companies surveyed in our report confirm that they can identify leak areas that impact business profitability. Three of the most common culprits are:

Missing time capture, overdue registration or billing

The amount you lose if you don’t keep time together is shocking. According to studies, if you don’t get your time at the end of the day, you could lose 10% of your billable hours. If you don’t get it the next day, you will lose 25%. If you don’t get it by the end of the week, you will lose 50%.

Realistically, that means guessing what to put on your timesheet. Your customers will likely sense that something is wrong, which will increase the chances of you not getting paid or having your invoice disputed. And then you have to spend time explaining the bill to them – if you remember. You work hard for your clients and you deserve to be paid for your work. It’s frustrating to give up hard-earned fees just because you forget to record the time.

While it’s important to track time and achieve the optimal billing completion rate, what matters most is how much you collect. Delaying your billing has the biggest impact on this – it’s like giving away free money. Late billing is equivalent to offering 0% financing and performing your services at a discount. Overdue invoices are often disputed, with less cash flow resulting in lost opportunities to invest in efforts to drive business growth.

Underpricing and poorly defined works

Law firms need to understand how to effectively frame and price work to reduce the amount of money written off, maximize law firm profitability, and improve client relationships.

By providing the estimate based on a “finger up” judgement, mixed with vague information on previous similar type questions, we often see little flexibility to deal with the inevitable scope creep and, more surprisingly, the Margin level data is not used to make pricing decisions for fear of making the numbers less palatable to the customer.

Failure to effectively manage the project by tracking work in progress against the fee estimate, while regularly updating the client, will lead to a fractured relationship as budget predictability and the idea of ​​value become blurred .

Delivery

The discount can take several forms. The initial exception rate can be discounted from your standard rates, the next time write-off to get the bill out, or the discount to get your bill paid – this three-ingredient discount cocktail can often leave you with an afterthought. bitter taste and therefore it is important to approach them in their own right and look at the levers for each.

One of my clients at the law firm, by providing his client with visibility on this three-dip cut, resulted in a rate increase that exceeded the standard rate. This of course would not have been possible without access to profitability data as well as visual representation of the radiation chasm.

In summary, profit leakage is not a new concept and the aforementioned 98% of companies surveyed who can identify at least one area of ​​profit leakage clearly indicate that companies know they have challenges in this area. domain.

Our report also confirmed that 70% of companies plan to implement an advanced legal business intelligence solution within the next two years. This figure rises to 83% of CEOs, reinforcing the strategic importance of having the right tools in place if companies are to truly achieve the lasting cultural change needed to increase profitability and deliver new customer value.

To read the full cash flow report, visit https://www2.bighand.com/CFR-LX

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