By George Egford, Solutions Manager at Legal Futures Associate BigHand
Our latest market research at BigHand found that 51% of law firms are planning to train lawyers to be more commercially aware in response to rising costs and decreased profitability in the legal sector.
Cultivating a commercial mindset can only happen if lawyers are educated in and have access to financial insights. I’ve seen this firsthand during my time working within law firms.
To build profitability acumen and commercial awareness, lawyers need to have a comprehensive understanding of the factors that influence the financial health and business outcomes of the firm.
Profit leaks and better client relationships
At the end of 2023, many law firms were pleasantly surprised to see that revenue was better than expected. When looking at the full picture, however, profitability was still down despite the increase in revenue. The reality is that costs have continued to rise while profit leakage has worsened over time.
Write-offs and discounting are areas of profit leakage that heavily influence profitability. They eat away at revenue and are often a result of poor scoping and lack of transparency. Over the past year, 59% of firms confirm write-offs have increased with 60% believing they will increase again over the next year. These figures are concerning on their own but become even more worrying when you add in the fact that demand for legal services continues to decline. The current economic climate is difficult. It’s easy to use write-offs and discounts to retain clients when they are met with unexpected costs. Doing this blindly is creating a problem for profitability.
Client expectations for transparency have increased over the years and to be able to provide them with the information they seek, firms need to have visibility and actionable data. With the right information, firms can identify the right lawyers and resources to work on a matter and be more open with clients regarding the scope and cost of work.
When lawyers are equipped with the knowledge of how a matter is progressing financially, they can communicate with clients more regularly on the work they are completing and what it will cost them. This leads to fewer write-offs, less discounting, and higher client satisfaction due to less surprise bills. Client engagement and retention are metrics that can often be overlooked by billable hours when wanting to build profitability acumen with lawyers. However, client engagement and retention are true metrics of business performance that provide more understanding of how write-offs and discounting occur.
40% of firms are planning to shift their focus towards client retention and 38% are planning to focus on client engagement when asked about other lawyer KPIs (Key Performance Indicator) to track to improve performance and profitability. Building better client relationships boils down to better communication and more financial transparency. Neither of these things can happen without a business intelligence tool that can provide real-time financial insights on the profitability of your clients and matters.
A culture of long-term success
The legal industry has been talking about commercialization and the need for a new corporate culture for years now. The time for talking about change is over. Law firms need to invest in the people, processes, and technology that will cultivate true commercialization.
The first step to creating a culture of long-term success is to shift the mindset that lawyers aren’t businesspeople. At the end of the day, they are. The business of law cannot operate without them selling their services. Many firms still do not hold their partners accountable for the profitability of their work. If lawyers are to become more commercially aware and take ownership over their matter profitability and client engagement, they need access to real-time insights.
This kind of data cannot just sit with a firm’s financial team and be sent out in quarterly reports. With business intelligence solutions, this kind of data can be always accessible firm wide. Firms can have customizable dashboards with role-based views so lawyers and partners can have access to the right data that is relevant to their work.
With a tool like this, profitability reporting and analysis becomes part of the daily routine. Lawyers are empowered with the insights they need to ensure transparency with clients and keep them satisfied. Profit leakage is less likely to occur and law firms can focus on KPIs related to profitability outside of revenue and billable hours.
Learn more about the different strategies law firms are taking in 2024 to improve profitability and accelerate commercialization by reading BigHand’s latest market research, The Annual Law Firm Finance Report.
