This is the next article in my discussion addressing the common question of “how to bring in clients” at a law firm. My previous blog article gave a
diatribe as to how law firms are managed overview of why I’m discussing this topic. A main point I stressed is that simply “bringing in clients,” without going about it the right way, will actually result in your firm making less money per case as opposed to more. In other words, while a firm may actually have more cases, the managing attorney will watch his or her profit margins drop just like this:
Going about things the right way, however, can help your margins to go in this direction:
I’m assuming that you’d rather have your margins look like the latter. In this article I’m going to look at why it’s important to understand the concept of your profit margins. I’m also going to look at why it’s a mistake to try to grow your practice without first working on your margins, and how to go about fixing your practice so you can then go ahead and start bringing in clients. Let’s get to it.
I’ll start by taking a quick look at the “profit margin problem” that most law firms experience. Suppose Joe Attorney is a one man operation and maybe has a legal assistant or paralegal while renting a small office. Joe does $250,000 per year in revenue and earns a profit of $150,000. In other words, Joe’s profits is sixty percent of his revenue. Joe decides to “get more cases” without first making his firm operate more efficiently. His revenue jumps to $400,000 and his profits jump to $200,000. Notice anything? Joe had to bring in an extra $150,000 in revenue just to make an extra $50k. This is common in law firms; the harder the attorney works and the more they grow their practice, the smaller their share of that revenue becomes. This is different from successful businesses, which see profit margins go up, or at least stay somewhat steady, as they grow. In other words, for most lawyers, the harder one works then the smaller the rewards tend to get. This is why I say that trying to grow your revenue, without first making sure you’re keeping as much of it as possible, is frickin’ insane.
Attorneys must focus on increasing profit margins before they consider bringing in more business
In my article on why law firms should focus on conversions, I told the epic tale of Joe Attorney and Jill Attorney. The point of that article was how, by improving the intake process, Jill could grow her practice exponentially while spending no more on marketing than ol’ Joe. Let’s expand this concept out a bit. For our purposes, Joe and Jill are both criminal defense lawyers. They each handle a low level misdemeanor for a $2,500 flat fee. Their net income at the end of the day, however, is quite different. Let’s look at why.
Joe’s approach to growing his income begins with “get more cases.” He spends $100 more on marketing this month and that outlay yields ten extra phone calls. This is a cost of $10 per call. Joe converts twenty percent of his calls into clients. So his $100 yields two new clients at $2,500 each. So Joe’s new inflow is $4,900 ($5,000 of revenue minus the $100 marketing spend). Joe devotes an average of twenty hours (in both administrative and substantive time) to each of these new matters. That’s a total of forty hours. Joe earned $122.50 per hour ($4,900/40 hours). Joe is happy about this and wants to grow his practice. He then devotes an additional $100 to new marketing. Now the trouble begins.
Joe is a busy chap. His second $100 marketing spend increases his workload, and he has to give his assistant/paralegal more hours to help him cover everything. Let’s say Joe incurs an extra $200 in labor costs. So that second $100 in marketing really only yielded $4,700 ($5k in revenue minus $100 for marketing and minus $200 in labor). Joe also has to devote forty hours to each of the cases brought in by the second $100. So he only earns $117.50 per hour on these cases ($4,700/40 hours). Joe again decides to grow his practice. He again spends more on marketing. His profit margins just continue to spiral downwards as a result.
Jill doesn’t like the example that Joe sets. She decides take an approach of saying “before I bring in more cases, let’s make sure I make as much off each case as possible). She decides to make her day to day operations much more efficient as a result (more on how she does this below). Jill is now able to resolve a $2,500 misdemeanor, with the same result as Joe, in fifteen total hours as opposed to Joe’s twenty. Now that Jill is making as much off each case as possible, she wants “more cases. ” Before worrying about “getting more calls,” however, she’s going to make sure that she is converting as many of the calls she receives as possible into consultations. She works on her conversion process and, as a result, turns thirty percent of her calls into clients as opposed to Joe’s twenty. Now she’ll focus on how she gets those calls. She focuses on making sure she’s using the most cost effective marketing approaches. Her $100 in marketing spend yields 12 phone calls as opposed to Joe’s ten. This is a total cost of $8.33 per call.
Do you see what Jill did? As opposed to solely focusing on getting more calls. Jill fixed her practice from the inside out – meaning she started with the cases she already had and worked her way outward. Let’s see the net result of this after each spends an additional $200 on marketing. Here is the cash flow which resulted from that extra $200:
Notice that $200 of new marketing brought Joe $9,600 of net income. That looks pretty good until you realize that it brought Jill $17,300. Why is that? First, Jill worked on how efficiently she handled cases before anything else. As a result, she didn’t have to increase payroll when she brought in new business; she was able to get more done with her own time. Second, she focused on improving her conversion process before she focused on “getting more calls.” When she did decide to get more calls, she focused on more cost effective methods. The net result of this is that she received twenty four calls and converted thirty percent of them (for a total of seven new cases). She then didn’t have extra overhead associated with handling those cases.
The moral of this story is to grow your firm from the inside out. This means that you must focus on handling the cases you currently have more efficiently before you worry about anything else. Second, have your conversion process squared away before you even consider trying to get more calls. Third, get those new calls in the most cost effective way possible. Following this inside out approach, before asking yourself “how can I bring in clients” is key.
Lawyers should focus on three areas when growing their firm from the inside out
You get the point, after reading the foregoing, that you need to grow your firm from the inside out. Of course, the bulk of attorneys will tell you that they operate efficiently and do a good job with conversions. Trust me when I say that if you think you’re good at operating efficiently and converting then you’re probably not. That’s because there is always room for improvement and if you’re not always trying to move forward then you’ll quickly get stuck. So, when trying to improve your operations, like Jill did above, focus on three areas: handling a case in as few hours as possible (without sacrificing results or customer service), converting more of the calls you already receive, and getting new calls through the most cost-effective means possible.
As much as I like to listen to myself talk (mainly because I find what I have to say so interesting), I realize that this article is getting long. As such, here are some articles which will help in each of these three areas:
Tips for handling cases in fewer hours
Tips for law firms to convert more phone calls into clients
Tips for law firms to bring in clients through more effective methods
Why do you feel so many attorney solely focus on getting calls as opposed to improving efficiency from the inside out? Please chime in through the form below.