Welcome to the New Year! If you’re like many attorneys I’ve talked to lately, you are glad last year is over. Hopefully, we have turned off the nightmare street called “Recession” and are back on the “Road to Recovery!” Even still, there are many sectors in the economy that are still stagnant, like estate planning or even contracting—think real estate. Many attorneys have found they are working twice as hard to capture the same amount of clients. Law firms that “never had to market before” are having to make the choice of either getting serious about legal marketing (instead of just paying lip service to it) or losing their prospects, clients, and referral sources to more sophisticated and dedicated law firms who are not afraid to aggressively promote their services both online and offline.
Here at The Rainmaker Institute, we specialize in helping small law firms and solo practitioners generate more leads, convert more prospects into paying clients, and significantly increase their referrals and repeat business. One of the many reasons why over 8,000 attorneys have made the right decision to trust us with their marketing efforts is because we stay on the cutting edge of how to market a small law firm in a professional manner. We analyze economic, business, and consumer-related trends and how they apply to the legal industry. Over the next 12 to 18 months, we believe there will be some significant changes in the legal marketplace. Specifically, we see four types of law firms emerging:
Firms Who Fail—Attorneys who either stick their collective heads in the sand, refuse to acknowledge that the marketplace has forever changed, or simply fail to take decisive action in response to the prolonged recession climate may see themselves go under. While each law firm must carefully evaluate the options, choices may include, but are certainly not limited to: changing their practice area (from bankruptcy to tax or from insurance defense to commercial litigation), refocusing their limited marketing budget (from yellow pages to blogs and internet marketing), or even removing Partners who are not performing.
Firms Who Merge—Although this has been a trend among mid and large firms for some years now, we see this trend affecting smaller firms who will merge for one of three reasons: (a) to provide additional services to their existing clients, (b) to prepare for the eventual retirement of an older partner, or (c) perceived or real cost benefit savings by sharing expenses or combining offices.
Firms Who Barely Survive—As we, hopefully, end this difficult economic cycle, we are seeing a growing number of attorneys who waited too long to respond and now have nothing left. In times past, these attorneys would go in-house or would “merge” with a larger firm who wanted access to their clients, but with firms continuing to lay off attorneys and larger companies looking for ways to reduce their in-house legal staff, these types of people may be searching for months before they are forced to take a less than fulfilling position.
Firms Who Thrive—A few, select attorneys and law firms will use our country’s current economic downturn to reposition themselves, to aggressively increase their market share, and attract top talent who were let go by other firms. In every crisis lies opportunity. Some of today’s most successful companies were started in a recession, including Apple® and Microsoft®. I recently met with the Managing Partner of a 40-person law firm on the east coast who is rapidly expanding their territory by buying up other law firms. His stated goal is to go from 40 attorneys to over 100 by 2013. His next buyout of a 22- attorney firm is set to take place in Q1 of this year, so he is well on his way.
By now, the question you should be asking is, “How do I ensure my law firm is the one that thrives?” In Part 1 of this series, we will cover several specific steps you can take to recession-proof your law practice and turn these troubled times into an opportunity for your law firm.
1. Focus on profits—not just growth.
Growth is a good thing and so are revenues; however, profits are better. Do not make the mistake of only focusing on your top-line revenues. Analyze your profit margins on all the legal services you provide. In tough economic times, you generally cannot afford to have “loss leaders”—services where you “lose a dollar on every sale, but promise to make it up on volume.” The only exception to this is if you have a higher back-end service with a much higher profit margin and you can demonstrate that at least 50% or more of your clients eventually upgrade to the higher-end service.
I was recently working with a small law firm generating almost $1.5M in revenues, but the profits were less than $400,000 annually. Barring the unusual, top-performing law firms should generate at least 30 to 40% Net Operating Income (NOI). We analyzed the law firm’s profit and loss (P&L) statements and found their accounts receivables were extremely high, an especially dangerous situation to be in given the state of the economy.
Meet with your partners and business manager to analyze your profit margins. Specifically, look at the following factors:
Top 10 accounts—How can we serve them better? Are they obtaining legal services from other law firms that our firm can provide? What do we need to do to convince them to send more business to our law firm? How can we serve them better by “micromanaging the client experience”? How do we find more clients like them? How can we encourage them to refer our firm to other people or companies that have similar characteristics or profiles to them?
Bottom 10 accounts—How much time do we and our staff spend on managing our bottom ten accounts? Do these accounts have the potential to become at least “B” clients or should we terminate them so we can better focus on our top ten accounts? We have often seen the bottom 10 (or 10%) of a law firm’s clients take up 30 to 50% of the attorney’s or staff’s time and attention. Unless there is a compelling reason, most firms are better off if they look to replace those bottom 10% with better accounts and then politely ask the bottom 10% to find another firm (perhaps refer them to your competitor?).
Services that you have used as “loss leaders”—Should we start charging a consultation fee, even a small one, to reduce the number of “tire kickers”? Can we delegate most of the work for managing this service to either a staff member or an associate? What percent of people who use the loss leader service actually convert into a higher-end/paying client? Consider significantly changing the service or eliminating it entirely unless you have at least 50% of people or companies converting from the loss leader into a higher-end service or you have a service that is perceived as having high value, but does not cost you much to provide. One of our law firm clients works with small businesses uses incorporations as a loss leader. He gives them away for free! Here’s the catch: if you retain him to create your operating agreement and buy-sell agreement, he will incorporate your new company for no additional fee, other than fees paid directly to the state for registration. Over the years, he has recognized that he forms a much stronger bond with partners who have him create their operating or buy-sell agreements, especially as compared to people who have him set up an LLC for them. Several of his largest clients have directly come from the relationship he built with them during the process of creating their operating agreements or helping them set up a buy-sell agreement.
Major services that most of your clients use—This area has the potential to generate significant revenues for your law firm. If you have a handful of services that most of your clients use, how can you make those services more efficient or more valuable? For example, how can you refine the process or system you use to make those services more streamlined and efficient, thereby increasing the net profits? Can you delegate a lot of the process to a staff member to increase the profit margins without damaging the client relationship? What could you add to the basic service to give a percentage of your clients the opportunity to upgrade to the “concierge level?”
Accounts receivables—See below.
2. Focus on cash flow.
As Bill Martin, one of my mentors, repeatedly states, “Cash flow solves a lot of problems!” I have encountered several law firms lately that have made major mistakes in marketing their practice because they did not have a handle on their cash flow. Pay yourself first, your staff second, and your vendors third.
Sit down with your accountant and go over your cash flow situation and seek their expert advice on ways you can improve it. Ask for longer payment terms from your vendors. Forgo buying that new computer or expensive phone system when your current one is ok. Don’t upgrade to the latest version of your software program just because they added a few more bells and whistles. Cash in the points you have accumulated with your VISA rewards card for office supplies, airline miles,s or other commonly used items.
Emphasize to your staff that invoices must be sent out on a regular basis. By delaying sending out invoices, you’re encouraging clients to delay paying you! This is especially true of litigation firms. There is one piece of advice I give to all my litigation clients: bill more frequently—at least monthly. If it’s a 5-figure invoice then send out smaller invoices byweekly. I am not kidding! No business owner likes to get a 5-figure bill. For a smaller business this can have a major impact on cash flow or making payroll that week, so they end up delaying payment. It’s must easier to pay two smaller bills every month (most companies do payroll twice each month). When you delay sending out invoices for 15 or even 30 days and your client questions or disputes the bill, it ends up negatively affecting your cash flow even more. Far too many law firms let these types of situations quickly spiral out of control.
3. Require every single employee to either make you money or save you money.
You cannot afford to have employees who are 100% overhead. Every single person you employ should be able to identify at least two ways they can either save you money or make you money.
I recall one of the last conversations I had with one of my former employees a few years ago when she politely explained to me, “Stephen, I don’t make you any money; I’m pure overhead.” That attitude is fine if you’re in a Fortune 500 company (her previous employer), but not in a small business. Within 30 days she was replaced.
Here are a few ways your employees can either save you money or make you more money:
Fix your follow-up! Follow up with every single prospect who has called, emailed, or contacted your office for any reason in the last six months. I don’t care if your staff doesn’t want to do it! I hate to say it, but most law firms are very lazy when it comes to follow up and it’s one of the biggest mistakes they make in marketing. You have no idea if that potential client ended up hiring someone else or if they decided not to hire anyone and file pro se or if they are still satisfied with the legal counsel they received or if they are looking for a different attorney because their current one never returns their phone calls. Fix your follow up!
Make sure your invoices go out on time! If an invoice is over a certain amount then start billing them more frequently.
Set a limit to suspend or stop services. If a client is over a certain amount and your staff has tried to contact them several times to collect the overdue amount, then you, as the business owner, need to call and email the client to inform them that, unfortunately, unless this overdue amount is taken care of by a certain date, you will be forced to suspend services and even drop out of the case. I always take the position that I would rather not do the work and not get paid, then to do the work and not get paid.
Collect an overdue payment from a former client. Many attorneys have had great success in giving their business manager a “bonus” for each overdue payment collected. It does not have to be a large amount, perhaps $50 or so. Be sure to give them a de minimus flat fee, not a percentage of the amount collected as this may be perceived as “fee splitting with a non-attorney.”
Analyze every bill you receive to check for errors; then look for ways to reduce recurring fees. Assign a staff person to look over your monthly cell phone bill, Yellow Pages, and advertising bills to ensure no “feature benefits” have been added without your authority.
Assign a staff person to track bills that do not come on a monthly basis as they are much harder to track and leave you susceptible to fraud or charges for previously cancelled services.
Have a staff member or office manager use your VISA reward points to purchase gift cards to an office supply store. One of my staff members did this and saved us over $600.
Book your travel on Southwest Airlines instead of a higher-priced one. In my experience, they still have the best frequent flyer awards program in the industry and no extra charges for baggage.
Create a monthly online newsletter or e-zine to keep in touch with current and former clients, prospects, and referral sources. We recommend ConstantContact.com or, if you need help, we can provide a “Done For You” newsletter.
Call your bank to get them to reverse minimum balance charges and other miscellaneous fees on your checking account. With the recent changes in the banking laws restricting fees that banks can collect, a number of more “creative” fees have been cropping up on statements.
Chase down the promised referral fee from an attorney. Better yet, have your staff create a written system for tracking when referrals are sent out, when cases are taken, and when the fees come in.
Have your associates turn their billable hours in every week so invoices can be sent out faster.
Have your staff contact and set up a breakfast, lunch, or coffee with a potential referral partner at least two to three times every month. Not all of them will work out, but some will.
I’ve never seen a law firm that could not improve their efficiency at least 20-30%. Hold a brainstorming session with your staff on how the firm can save money or reduce expenses and then either ask for volunteers or assign responsibility for who will take action on specific items. Meet on a monthly basis to hold your team accountable and report the progress they have made to date.
It’s in times like these that every single team member needs to be working as hard as possible to help the firm survive. Stay tuned for the next issue where we will discuss more strategies to help you save money, increase your referrals, and recession- proof your law practice. Welcome to the New Year and the New Realities of Doing Business!
About the Author: Stephen Fairley is CEO of The Rainmaker Institute, the nation’s largest law firm marketing company that specializes in helping small and solo law firms generate more referrals and build lifestyle law firms. Over 6,000 attorneys have benefitted from applying their proven Rainmaker Marketing System. For more information visit: www.TheRainmakerInstitute.com or call 888-588-5891.