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TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Get a Handle on Your Firm’s Revenue Capacity . . . . . . . . . . . . . . . . . . . . . . . . . 2
Identifying the Gaps in Your Law Firm’s Revenue . . . . . . . . . . . . . . . . . . . . . . . 4
Measuring and Making Decisions Around Your Firm’s Revenue Capacity . . . . 6
How Small Law Firms Can Predict Their Revenue Stream . . . . . . . . . . . . . . . . 8
What to do If You Are Not Getting Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
16 Not So Obvious Ways to Increase Law Firm Revenue . . . . . . . . . . . . . . . . . 13
About Rocket Matter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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INTRODUCTION
Law firms are facing more challenges than ever. Increased
competition, industry pressures, falling realization rates, and a more
demanding client base combine to make managing and growing a
firm more challenging than ever. How can firms adapt amid
unprecedented change in the legal profession in order to increase
revenue and profits?
In this guide, we’ll discuss how to get a handle on your top-line
revenue figures, how to identify those hard-to-spot gaps in revenue
that impact your bottom line everyday, how to use data to make
informed decisions, hidden ways to increase your firm’s revenue,
and what to do when you’re facing slow or no-pay situations. Firms that manage their clients and their finances better through
the entire lifecycle are most likely to succeed in today’s business
climate. To see how law firms are using Rocket Matter to help get a
better handle on their overall practice management, check out our
Case Studies E-Book.
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GET A HANDLE ON YOUR FIRM’S REVENUE
CAPACITY
Like any business, your firm has a maximum realistic capacity
for earnings in a given period. Similar to your car’s
tachometer, there is a corresponding redline where you max
out your earnings for that period. That’s your revenue capacity:
the amount of money your law firm generates by its billing
practitioners including lawyers, paralegals, librarians – anyone
who bills, all working at top capacity. This is your high-level
benchmark.
In order to measure your overall success, it’s important to
gauge what percentage of your revenue capacity you are
actually operating under. Once you establish a baseline you
can work backwards to identify gaps and improve that rate.
Calculating your revenue capacity is deceptively simple, depending on the size of the
firm, the individual billing rates, and any alternative fee arrangements that are in place.
Let’s start with an uncomplicated example, featuring a solo firm with one person
billing. The firm is a family law practice that bills on an hourly basis.
The revenue capacity would be calculated at 40 hours per week at $200 per hour. In
theory, the revenue capacity for the firm is $8000 per week. Operating under sustained,
ideal circumstances, with no time off factored in, this translates to $416,000 in annual
revenue capacity.
For a more complicated example, let’s look at a firm with 3 attorneys and 3
paralegals, billing at two different rates. Let’s say the attorneys bill at $250 per hour
with a maximum of 50 hours per week. The paralegals bill at $100 per hour and bill no
more than 40 hours per week. The revenue capacity for this firm would be (3 x $250 x
3
50) + (3 x $100 x 40) or $49,500 per week. This translates into an annual revenue
capacity of $2,574,000 per year.
Now comes the fun part: measuring what percentage of revenue capacity you are
currently operating under. Sticking to the first example, let’s say our solo attorney spent
4 hours last week on various administrative tasks for his home office. That firm then
went on to bill 36 hours, correspondingly. The firm billed 36 x $200 or $7200 for the
week, or 90% of their revenue capacity of $8000. In this example, it’s easy to see why
the firm finished the week at 90% of capacity, but for larger firms with several or many
employees, the paper trail can become more complex.
Getting a handle on what your employees have billed over a certain period of time can
be made much simpler by utilizing the right practice management tools like Rocket
Matter, as in this example report below.
Using specialized reports like these can help you identify who is billing at or near
capacity on a regular basis and who is billing substantially below. You can then work
backwards to try and identify the reasons and work on incremental improvements.
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IDENTIFYING THE GAPS IN LAW FIRM
REVENUE
It happens month after month. You set a goal to reach your firm’s revenue capacity and
you get the same results. You’re underperforming.
Changes need to be made and there are obstacles you must overcome. But how do you
identify what’s keeping the firm from reaching its revenue capacity? And how do you
make improvements to meet, or even exceed those goals?
According to a report by Georgetown University’s Law Center and Peer Monitor, “2014
Report on the State of the Legal Market,” law firms are only reaching 84 percent of
their maximum revenue.
How can you reverse this trend? Here are two important elements you should examine:
EFFICIENCY OF LAW FIRM STAFF
Remember, the revenue capacity of a law firm represents the
amount of money that a firm should bring in based on the
billable hours worked by attorneys and staff working at their
highest and most efficient level.
Let’s use the Doe Law Firm as an example. John, a solo
attorney, works 220 hours a month with a hourly rate of
$200 while his paralegal, Jane, works 160 hours a month with
a hourly rate of $80. Combined they bring the firm’s monthly
revenue capacity to $56,800.
Based on the Georgetown University Law Center and Peer
Monitor report, the Doe Law Firm is likely to bring in
$47,712. That’s almost $10,000 less than the firm should be
earning every month.
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This means that both John and Jane need to be more productive during their hours in
the office. In many firms, increasing productivity can add billable hours without having
to add more hours in a workday.
Little improvements can be made by transferring an hour a
day per employee from non-billable time to billable time
and increasing those hours over time to boost your firm’s
revenue.
ACTIVITY FEE TYPE
In recent years, firms have gravitated toward setting custom expense rates for activities
such as filings and research. This practice reduces the amount firms get paid for work
that was done.
When entering research as expenses instead of timed entries, firms are not able to
properly reflect the exact time that was spent conducting the research. This is where
the revenue capacity bottleneck is created. Yes, it took two hours for Case A’s research
to be accomplished, but the time spent to research Case B may be double that of Case A.
In the example above, there’s two hours of unpaid work completed for Case B because
there was a custom expense rate put in place for research. Of course, no two cases are
the same, so in this case, a flat fee for both cases is negatively impacting the firm’s
revenue capacity.
You now have two options. Continue charging a custom expense rate or start tracking
time and bill by the hour. Your best option here is to bill hourly.
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MEASURING AND MAKING DECISIONS
AROUND YOUR FIRM’S REVENUE CAPACITY
After establishing your revenue capacity baseline, and in
order to make informed decisions, you'll need to measure
your current operating level, and reliably forecast the impact
of adding or reducing cost related to staffing, fee
arrangements, and other considerations.
ESTABLISH YOUR BASELINE
Let’s begin with another quick example of calculating your
baseline revenue capacity. Suppose you are a solo attorney
with one paralegal, each capable of billing 40 hours per
week. Let’s say your hourly rate is $300 and your paralegal’s
is $150. Your firm’s revenue capacity per week is ($300 x 40)+(($150 x 40) = $18,000.
That translates into (52 x $18,000) $936,000 per year in total revenue. That’s your
baseline and it’s not a bad one for a small firm with two people billing.
DETERMINE YOUR CURRENT SITUATION
In order to gain meaningful insight into your functional revenue capacity, you’ll need
to measure it frequently by recording your actual performance and comparing it to
your baseline. For example, let’s say for the past year, you’ve only been averaging 31
billable hours and your paralegal billed 35. Your actual revenue was ($300 x 31) +
($150×35) = $14,550 per week. This translates to $14,550/$18,000 = 81% of true capacity.
Operating at 81% of your revenue capacity may be OK for you. Or, it may be a wake up
call.
CALCULATE PROFITABILITY LEVEL
To truly calculate profitability at the firm level, you must
be aware of all of the various costs that are inherently built
into operating a law firm.
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For our purposes, we’ll stick with the basics, but there can be many more
miscellaneous costs that your accountant and others can help identify. Assume you’ll
be faced with a fixed overhead for office space, a salary for your paralegal, utilities and
vendor invoices for various services, marketing expenses, travel and court related costs,
etc. Assume that these total about $50,000 per month or $600,000 per year.
IT’S DECISION TIME
Now, looking at the same figures through a different lens, it’s easy to see that one
example shows annual profitability of $336,000 per year and the other nets $156,000.
The difference? 14 extra billable hours per week. Assuming you are not able, for various
reasons, to exceed the current threshold of 31 and 35 hours per week of billable
activity, respectively, you might either hire another associate or consider alternate fee
arrangements for some clients.
The bottom line is profitability fuels growth, and law firm growth is fueled by efficient
operations. Keeping a sharp eye on revenue capacity and consistently measuring
current performance against the optimal situation will let you know how well you’re
doing against your ideal baseline.
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HOW SMALL LAW FIRMS CAN PREDICT
THEIR REVENUE STREAM
Managing cash flow is, without question, one of the
major stress points of a small practice. Wondering how
much money will be coming in next week, worrying
about whether you’ll have enough to cover your bills
three months from now, questioning where your practice
will be financially next year at this time, can be daunting.
The uncertainty about when cash is coming in can lead
to a lot of unwelcome additional pressure. However, it’s more manageable and
predictable than you might think.
While several elements of an overall cash flow analysis are intangible and unpredictable
– it’s equally true that many parts of your practice’s cash flow are both: (a) reasonably
predictable; and (b) largely under your direct control - and that means an accurate
revenue forecast isn’t far off.
Lawyers often resist the process of forecasting their revenue, thinking: “How can I
accurately predict how many new clients I’ll get next quarter?” or “How can I know
which of my clients will be sued next month, or who will need M&A services next?”
True, there is some merit to each of those questions (although perhaps not as much as
one might initially think), but to focus primarily on those external factors alone, is to
miss an opportunity to operate as your own revenue-forecasting CFO.
For example, we all have (or ought have) a detailed list of current tasks, deadlines, and
upcoming events. Frequently, we’ve already allocated specific time (read: “budgeted”) in
our calendars to complete those “to-dos.” Deadlines may be client-driven, or set by our
area of practice; that is, litigators may have court-ordered scheduling orders to follow,
corporate practitioners may have SEC filings, Board meetings, tax filing dates, and so
forth.
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Here’s where you channel your “inner CFO” and take the next step – translate your
budgeted workflow into budgeted revenue:
• Take your scheduling information and add the information you already know
about your engagement terms (whether you’re billing by the hour, by the
completed task, etc.).
• Factor in your own billing practices (i.e. when you anticipate billing for the
task).
• Add your own knowledge of your client’s pay schedule (do they typically pay on
time? In 30 days? 60 days?).
• Aggregate this data over your client base.
Voilà! You have the start of a logical – and likely pretty darn accurate – revenue
prediction. Match that up against your anticipated client acquisition activity and your
expenses (which ought be highly predictable), and you’ve got the makings of a
comprehensive financial forecast for your entire practice.
Business savvy in-house counsel at companies of all sizes, have utilized this technique
for a long time, albeit from the flip side (the cost side), and particularly with respect to
litigated matters.
Setting out a litigation plan and budget, containing the
timing of planned actions, expenses, logical case settlement
points, and probability analysis, is a basic step in budgeting
legal department resources needs.
There’s absolutely no reason why the same technique can’t apply equally well to
formulate the basis for a litigator’s own revenue forecast.
Forecasting revenue in this fashion also serves as an additional reminder to send your
bills out on time. Collectability may not always be completely assured (though it can
often be managed by a combination of client screening, effective and ethical use of
retainers, and basic good client communication), one thing is virtually certain: if the
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client isn’t billed, the client probably isn’t going to pay.
So – consider rolling up your schedule into a revenue forecast, and take a big step
toward having more of a comfortable, predictable revenue stream.
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WHAT TO DO IF YOU’RE NOT GETTING PAID
Special thanks for Fred Abramson, a New York based attorney specializing in business law and
litigation, for sharing his experience and advice about how to get paid.
Nothing is worse than performing work and not getting
paid. It’s frustrating and stressful.
I’m sure that you want to avoid litigation that can be a
lengthy process with legal fees usually starting around
$3,500 and skyrocketing depending on the work.
Litigation is also emotionally draining, causing sleepless
nights.
With that in mind, here are some suggestions to avoid
hassles with collecting for your work:
1. Get paid in advance. Unless my office is retained on a contingency fee basis, I require
payment up front. Moreover, I only handle contingency cases when there is a deep
pocket, such as an insurance company. You should demand payment up front too. If
you collect up front, there is nothing to collect later.
2. Put everything in writing. Even though you may be able to enforce an oral
agreement in court, a written purchase order, or services agreement is much stronger
and will go a long way towards enforcing payment terms. Usually the terms need to be
crafted specifically and individually for each client.
3. Perform basic due diligence. If the matter is large enough, I would check online
courts in your state. In New York eCourts, you can simply plug in the company’s name
to see if there is any pending or outstanding litigation in New York. Even if you are
able to sue, you may not be able to collect because there are other judgments ahead of
yours.
4. Don’t wait to bill. Recently, a client called my office and wanted to sue on an invoice
that was 90 days past due. He only sent out a bill two weeks prior. His customer’s cash
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flow may have changed or other bills may seem more urgent. For this customer, your
invoice is only a couple of weeks past due. I advised him to wait 30 days.
Bill your customers immediately when the work is
complete or the goods are delivered. You will find that your
invoices get paid more quickly.
5. Accept payment plans. If you’ve tried sending past due invoices and are not getting a
response, consider calling your customer and offering to break their balance into two
to four monthly payments. Insist that they pay the first one right now, over the phone,
as a sign of good faith. Then invoice them for the remaining monthly installments.
6. Don’t Wait. Once an invoice has reached 30 days past due, send the customer a letter
asking for payment. Follow that up with a phone call a week or so later. Then send a
second, sterner letter at 60 days reminding them that you may refer the matter to
collections, and/or report their delinquency to a credit bureau if they fail to respond.
Follow that up with a phone call too. At 90 days, refer the matter to collections and
make sure that you or your collections agent reports the delinquency to a credit bureau
(if you do a significant amount of work on credit, it is worth joining a credit bureau
reporting service such as Equifax, Experian or TransUnion). If nothing happens within
30 days, discuss collections litigation with your lawyer. Be aware of statute of
limitations in your state.
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16 NOT SO OBVIOUS WAYS TO INCREASE
LAW FIRM REVENUE
Increasing billing rates and number of hours billed are typical ways to increase firm
revenue. Here are some not so obvious tactics.
1. Use law practice management software – Don’t leave money on the table with lost
billable time by relying on your memory when sitting down at the end of the day or
week to enter time. Track and easily capture time using practice management software.
For instance, Rocket Matter offers Bill As You Work™ technology with 9 different ways
to capture time. Let’s say you work 5 days a week for 49 weeks. The other three weeks
are spent disconnected, relaxing, and getting rejuvenated. Obviously. If you bill at $300
an hour and forgot just 15 minutes a day working on client matters, you’re missing out
on $18K for the year.
2. Go paperless – Moving to a less paper office
saves the firm money by cutting costs on
supplies, storage, labor, rental space, equipment,
and so on. Although these savings speak more to
profit, the improved efficiency and timed saved
can result in increased opportunities for
marketing and networking to land clients and
boost revenue.
3. Optimize billing realization rates – Realization rate is the percentage of recorded
billable time that gets billed to clients. The amount that is not billed to clients is often
written off by law firms for many reasons, including time spent on projects and less
than optimal practices that cannot be justified to the client. Firms should try to achieve
the historical realization rates of 90 and 95 percent.
4. Bill on Time – Tracking time and achieving an optimal billing realization rate is
important, but what matters most is how much you collect. And delaying billing is the
biggest culprit. It’s like giving away free money. By not sending your bills out on time
you are essentially offering interest-free financing and performing your services at a
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discount. Less cash flow results in lost opportunity to invest in efforts to help your
firm grow. Late bills are often challenged and chopped.
Want to read more on best billing practices
to help grow your firm?
Download our FREE E-BOOK
The Law Firm Growth Manual Vol. 2:
Better Billing Practices
The Law Firm
Growth Manual
Vol. 2: Better
Billing Practices
The Law Firm
Growth Manual
Vol. 2: Better
Billing Practices
5. Leverage Paralegals – Hire paralegals to perform billable work that you routinely do
and can offload. This frees up your time to work on matters with a higher billing rate
and to create opportunities for new clients. This is particularly significant as more
states allow paralegals to do work traditionally handled by attorneys. They are the legal
profession’s “nurse practitioners.”
6. Use a variety of fee structures – Flat Fee or Hourly Billing? Retainers? What about
Contingency? No one billing method fits all situations and an imbalance can cause a
cash-flow dilemma. Be aware of the different types of fee agreements and understand
them thoroughly in order to effectively explore the options. Select one that best fits
each situation. Remember to be clear with the client about which fee structure you’re
using to avoid surprises, delays, and write-offs.
7. Fire clients – More clients do not always result in higher revenue. Working for a
nonpaying or particularly unreasonable client will take up too much of your time and
prevent you from landing or accepting a lucrative case. Firing a client is especially
difficult for new operations but it’s essential.
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8. Consider co-working spaces – Avoid high rents and zero flexibility by considering a
co-working space. Rents are much cheaper which increases your profit margin. And
you’ll have the added benefit of networking opportunities right outside your door, a
potential for new clients, and revenue.
9.Transparent client communications – Be up front and
clear about your service, process, and fees during client
intake and throughout your handling of the matter. This
creates realistic expectations and less haggling over
unanticipated bills.
10. Practice area pivot to current issues – Is your current practice area becoming
irrelevant or less lucrative? Maybe it’s time to add an area of specialty covering issues
that are hot, like cannabis law as more states legalize marijuana, or same-sex marriageand divorce, which is now the law of the nation.
11. Marketing – Marketing’s barrier to entry is lower than it’s ever been. Anyone with
access to a laptop can create Google ads, social media promotions, and YouTube videos.
But go beyond the usual, to the not so obvious: Host a webinar, write an E-Book, or get
exposure by recording a CLE session for a national provider.
12. Sales – Marketing, sure. But, sales? Many old-guard firms have long viewed
marketing with disdain. Imagine how they consider sales. But, Jordan Furlong notes
that the inevitable evolution of legal marketing is toward legal sales. “Sales consulting
already takes place now, although it operates under the pseudonym “business
development,” because lawyers can’t bear to use such a lowbrow and unsophisticated
word as ‘sales.'” Get over your aversion to sales.
13. Get CLE accredited – Wait, what? Yes, it works. I was involved with a CLE
accreditation initiative at a law firm and it proved very effective in attracting potential
clients and referrals. Put on a conference, webinar, or series of events around your
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niche practice and offer attendees CLE credit in your jurisdiction.
14. Use Freelance attorneys – One of the biggest expenses in law firms is payroll. Small
firms can avoid turning down work – and revenue – by employing freelance attorneys
on an as-needed basis.
15. Improve your intake process – Why does the number of cases a firm accept decline
even though business leads increase? It’s due to the lack of a sound client intake
process. Many firms experience a productivity bottleneck here. Improve the intake
process, take on more cases, and increase revenue.
16. Apply “Lean” and “Agile” concepts – Lean thinking, popularized by Eric Ries’s The
Lean Startup, has extended to the legal profession. It embraces the principles of cutting
waste, testing, and iterating. Together with Agile methodology, which includes Kanban
boards, law firms can increase transparency, accountability, and productivity. This
allows firms to identify bottlenecks and resolve them, and results in increased
efficiency with more time for landing new clients.
Sure, raising billing rates increases revenue, but it can also alienate some clients. Try
some of these alternatives to ramp up revenue at your firm and you’ll get the added
benefit of improved processes, productivity, and accountability.
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ABOUT ROCKET MATTER
Rocket Matter is the leading web-based practice management and time and billing
application for small to mid-sized law firms. Our aim is to make law firms more
efficient, productive, and ultimately more profitable.
Our software is trusted by thousands of law firms. The powerful, intuitive interface
allows lawyers to measure their firm’s performance, organize matters, communicate
with clients, quickly capture time, and makes billing and invoicing a breeze. Rocket
Matter integrates with popular applications that attorneys use like Evernote, Dropbox,
Outlook, Gmail, and more. Attorneys can manage their office on the go with a robust
iPad edition, and native iPhone and Android apps.
Please enjoy this guide and become part of our cutting-edge community on Facebook,
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