If you are anything like Chicago resident Jay Panandiker, then you have seen your fair share of lawyer billboards advertising their latest big cases. When interviewed by WBEZ Chicago, Panandiker said: “When I’m driving on the highway, I always see many billboards for lawyers and law firms, and it seems like a disproportionate number of billboards compared to other businesses.”
Indeed, this is a common experience for many motorists, no matter where they live. However, while those billboards are ideal for trying to attract new clients, landing the next big client isn’t necessarily where the real money is for many law firms. As it turns out, accurately reviewing and documenting the time spent on existing clients often proves far more beneficial to the bottom line at many law offices.
Why Profitability Analysis Matters for Law Firms
Let’s start with a fundamental truth: Without accurate time tracking, no law firm can know who their truly profitable clients are. First, you must understand that more revenue from an individual client does not always translate to more profit. If a high revenue client is draining a significant amount of an attorney’s time, then they can quickly turn into a resource drain that does not ultimately serve the law firm well at all.
A few other potential profitability traps for attorneys include:
- Scope Creep – This is the concept of allowing client work to extend beyond what was initially agreed to or what can be billed for. A client might ask for a favor that seems small and relatively simple to handle at first. However, even those small tasks can rapidly add up and take away from one’s ability to collect revenue from the client.
- Slow-Paying Clients – Some clients might drag their feet when it comes to paying their legal bills. Pushing the issue with them becomes a lot more difficult when you don’t have accurate billing records to prove the extent of the work that you performed.
- Lack of Profitability Analysis – A lack of clarity on the profitability of various clients can lead to serious financial issues for the firm. Everything from inaccurate billing to inefficient business practices can ultimately lead to a drag on the profitability of the firm itself.
These are just some of the things that can hinder the performance of a law firm, and they are all reasons why performing routine profitability analysis audits matters.
Key Data Points
You might be wondering what types of data should I specifically measure? This is an excellent question and represents precisely the mindset that you need to have if you want to operate a profitable law firm. Several key data points are worth keeping tabs on at all times, including:
- Hours Logged Per Client – The specific quantity of hours that one puts in per each client or each matter that they are handling is a piece of data that should always be handy. You need to know how long you are spending on each task so that you don’t burn an excessive amount of time on less profitable matters.
- Realization Rates (Hours Worked vs. Hours Billed) – Not every hour worked is a billable hour for all attorneys, but that time still adds up. Taking on tasks such as preparing client invoices, holding staff meetings, and working on pro bono work cannot be billed to the client. However, it is still helpful to track the total number of hours spent versus those that are billable to understand the actual value of your labor.
- Collection Rates (Hours Billed vs. Hours Collected) – We have already mentioned that some clients are incredibly slow when it comes to paying for the attorney services that they have ordered. Some of these clients will also try to dispute certain charges on their billable hours, which may cause the firm to find itself unable to collect on some of the hours that it has billed. The collection rate is a helpful metric for determining the percentage of billable hours that are truly collected.
- Administrative Overhead Time (E-Mails, Calls, Client Hand-Holding) – Don’t forget about the additional costs that come with running a law firm. The staff, supplies, and other expenses contribute to the profitability of a given client. In particular, the time spent on e-mails, calls, and other time spent with clients getting them through the process. That is data that should also be carefully monitored.
There are several key data points that any profitable law firm should always keep a close eye on. It is merely about ensuring that you are handling business properly and not spending too much time on causes that don’t generate real profitability.
How to Use Time Tracking Data to Identify Profitable Clients
One of the most exciting things about accurately tracking the data is that it can be leveraged to identify profitable clients. Here is how that works:
- Generate Reports by Client – Create individualized reports on each client that you serve to see all the key statistics and data points mentioned above in individualized detail.
- Calculate Effective Hourly Rates – Sit down with those reports and determine your actual hourly rate for each client based on the full scope of the data that is available to you.
- Spot Patterns in the Data – Take a deep dive into all the data that you have compiled and look for any patterns that emerge that you can capitalize on. This might even mean spotting patterns of clients who are too slow to pay that you might need to avoid in the future.
- Identify Highly Profitable Clients – The best clients are those who you can provide service to at a high hourly rate. You put in a significant amount of work for those individuals, and you deserve to be rewarded for that. Identify your most profitable group of clients and spend more time and effort on those individuals.
Turning Insights into Strategy
You now have some insights based on the data that you have collected about your clients. With that in mind, you should start to shape those insights into a complete strategy. This means compiling an “A-list” of clients who are your most profitable. You will be putting forth the most effort with them going forward. It also means reviewing those clients who are low margin or not as profitable and working to renegotiate with them or perhaps even cutting them loose. It can be a challenging process, but it is what you need to do for the survival of your practice.
The Role of Legal Time & Billing Software
There is certainly a role in this process for legal time tracking and billing software such as LawBillity. Some of the things that it can be incredibly helpful with include:
- Custom Dashboards and Profitability Insights – You must run a lot of numbers to get down to the bare bone’s facts about each client, and it can be intimidating to try to keep up with it all. Fortunately, LawBillity creates custom dashboards that are specific to your needs and that generate profitability insights for each client. You can take it all in at a glance and better understand how each client contributes to the success of your firm.
- No Guesswork – All your time is accurately tracked down to the second, so there is no more guesswork involved. You will know precisely how much time you have put into each matter and can use those insights to assign a real value to that matter.
- Real-Time Data – Tap into real-time data and insights from the LawBillity platform so that you know that you are looking at the latest and most helpful information for your firm.
You deserve to know who your high profitability clients are and where you should spend more of your time. Your profitability isn’t just about billing more, but about billing smarter. LawBillity can help you reach those goals with the data-driven insights that you need. Get started on a road to higher profitability with a 14-day free trial of LawBillity.
