A curious source for improved law firm financial performance
Like most businesses, law firms are always looking for opportunities to improve financial performance. There’s certainly no shortage of financial metrics flying about in legal circles. The AmLaw100 annually ranks the largest firms by gross revenue, revenue per lawyer, profits per equity partner, profit margins, profits, and profits per non-equity partner, to name a few metrics. It’s almost dizzying. Chief financial officers worry about performance drivers like realization rates, write-offs, write-downs, and client payment delays.
Firms need to look in unfamiliar places to help with financial performance. One oft-overlooked operational area in this quest is business acceptance. It turns out that client evaluation and intake can help prime the realization rate, revenue, and profits pump.
An Altman Weil Survey found that managing intake to improve profits showed the highest improvement compared to all other tactics law firms tried in 2017.
Curious? Let’s explore three ways new business acceptance can impact law firm financial performance. Your firm may want to consider these new ideas.
1. Make outside counsel guidelines visible
For over a decade, clients have spelled out billing requirements, permissible expenses, staffing, and many other business terms in plump documents called outside counsel guidelines (OCGs). These OCG requirements are fast becoming a very sore thumb inside firms. You see, most firms have no way to assess OCGs during business acceptance nor make them visible to the matter teams after acceptance to ensure compliance. There are simply too many client OCGs, terms, and matters for firms to get their heads around.
Outside counsel guidelines have grown from a couple of pages to 25-page documents in some cases.
Some Lawyers Chafe as Clients Expand Outside Counsel Guidelines, The American Lawyer, May 2018
OCG noncompliance hits revenue and realization rates
With the complexity and volume of OCGs today, prohibited billable hours and expenses end up in client bills. Without visibility into each matter’s OCGs, it’s easy for lawyers to inadvertently enter time that violates them. As you can imagine, client bill rejection is almost instantaneous. The firm is left without a leg to stand on—the black and white requirements were very clear in the OCGs agreed to during business acceptance. Far too many times, this story ends in a write-off and diminished realization rates and revenue.
A 1% realization improvement could increase revenues by $1.1M in a 600-lawyer firm.
Intapp Research Group
A way forward
Firms can now use technology to classify, categorize, and expose matter teams to OCG terms. The improved OCG compliance results in fewer billing disputes, write-offs, and write-downs to improve gross revenue.
2. Analyze this: client financial risks
Most firms focus on one basic business acceptance question: Can we take this client on? Many times, firms fail to adequately analyze new clients’ financial states and payment scores during business acceptance. Newer approaches also ask another question: Should we take this client on? Missed red flags can lead to downstream payment problems or delays. With traditional business acceptance analysis stopping at matter opening, changes in client Paydex scores during the engagement can go unnoticed until payment delays pile up. Your firm can get left holding the bag for hours already billed, and experience revenue decreases that impact profitability.
Does your firm have the ability to continuously monitor client financial and corporate activities? If not, you’ll want to learn about business acceptance technology that alerts you to a client’s Dunn & Bradstreet Paydex scores upfront and during the engagement. Consider how staying on top of client financial risks during and after business acceptance can help you avoid payment problems or delays.
Firm revenue decreases by 4% for every 30 days of payment delays.
Intapp Research Group
3. Sacred cow cultural changes
Firms intent on improving financial performance are changing long-held cultural norms around accepting every client at intake, tolerating client payment issues, and not pushing back when clients dispute bills. Rejecting clients upfront goes against every cultural fiber in most law firms. Yet saying “no” to a client or restructuring fee arrangements to account for financial concerns are becoming necessary measures to reduce write-offs and improve realization rates.
Curiosity is the wick in the candle of learning.
William Arthur Ward
Intake impacts profits
A startling fact: In the last few years, 41% of large law firms have improved profitability by better managing client intake and in some cases firing clients. New-business acceptance models are helping firms change culture by surfacing client financial concerns early on as well as throughout service delivery. Firms also use aggregated, centralized, well-classified OCG data to push back during negotiations on difficult-to-implement OCG terms that would assuredly result in bill rejections for noncompliance.
If you’ve never explored how advances in business acceptance can help your firm’s bottom line, I hope you are curious now. For a more in-depth look at changes in business acceptance, read our ebook, 5 Big Trends Changing Law Firm Business Acceptance.
Carolyn Casey, JD, is a lawyer and author who writes on trends in legal technology and operations, information governance, global regulations, data protection, and artificial intelligence.