The Sources of Revenue and Profit For Attorneys and Legal Firms

An attorney, a member of the executive committee of a midsized law firm, wondered about the profitability of his firm. Firm clients represented a broad range of interests. Each client received the same amount of attention with regard to public relations, that is, a holiday card mailed each December and occasional gifts as tokens of appreciation. The attorney thought that more attention should be paid to clients generating the most income, but no one seemed to know who they were with any confidence.

The attorney decided to conduct a revenue analysis, categorizing clients by the amount of work generated in contradistinction to the amount of income received.

The attorney discovered that relatively few clients (and related matters) accounted for most of the firm's revenue. The rest of the clients were either hit and miss with their needs and lacked consistency in revenue for the firm or required a lot of partner work with little leveraging opportunity and negotiated bill write-downs so that profitability was not good. The attorney concluded that the firm needed to pay more attention to the few real consistent revenue producers. The loss of some of these clients could have a severe impact on the organization's fiscal health.

Many attorneys react too much to the "squeaky wheel" and not enough to those clients that are truly important to the practice. Key clients require special attention because of their immediate economic impact, their value as referral sources for similar potential clients, and the damage to reputation and revenue that would result from the loss of such a client. The process starts with the identification of which clients are key. If attorneys asked each person in their office, from the receptionist to the paralegal to the partners, who the key clients were, they would probably find that each person would provide a different answer. Each person views clients in a very personal way.

The receptionist might think that the client who calls the office frequently is the most important client. The paralegal might assume that the client generating the most labor-intensive work is the greatest revenue generator for the firm. The partners, most likely, would be able to name the top revenue generators, but they might not be able to name the most profitable clients. Few practices, whether solo or a firm, have an accurate listing of revenue and/or profit by client. Attorneys can establish a clear picture of which clients should be considered crucial to the success of their practice by analyzing
 

• Client work required.
• Billable hours generated.
• Billable hours actually billed (no time write-downs).
• Income received.
• Any other mitigating factors.
• leveraging opportunities.

The attorney's bookkeeper, accountant, or even the attorney (if interested in conducting such an analysis) should be able to assemble a breakdown of all these factors and piece together "the big picture" in terms of revenue and profitability for the firm. For most practices it will be a matter of devoting the labor to compiling the data, since it is the simplest data required.

USING GRAPHICS TO TELL THE STORY

The single most effective device in the analysis of quantifiable data, in this case client revenue, is the use of graphics. Not only is graphic display valuable for attorneys, it has other value. When shared with staff, they can become more involved and committed. Graphic display does not require the exposure of detailed financial data which should be kept confidential; it only requires an honest evaluation of a practice's financial status.

The receptionist who thought the client calling the office frequently was the most valuable client may learn that person generated very little revenue for the practice. By providing a clear indication of the attorney's key clients, the receptionist is able to treat them in the manner they probably expect and most definitely deserve, without making the other clients feel they are missing anything.

One way to illustrate client revenue graphically is the use of a bar Graph. Another way to illustrate client revenue graphically is the use of a pie graph. Both methods clearly demonstrate key revenue-generating clients. By looking at revenue and profitability of clients, an attorney can do a more efficient and rewarding job of assigning energy and resources to take care of clients. Further, by identifying strengths and opportunities, an attorney can make well-informed decisions about business development resource allocations. Attorneys should make such a graph available to partners, associates, and staff on a regular basis, as often as is necessary to ensure that it is current and relevant.

PLOTTING CLIENT REVENUE TRENDS

A simple line graph depicting client revenue trends can help the attorney ascertain which clients may be slipping in loyalty and perhaps receiving legal services elsewhere. An attorney who discovers that the work and revenues from one or more clients is steadily decreasing should take immediate remedial actions to increase communications with those clients. The attorney should also investigate and seek replacement work. Seeing a negative trend as it just begins to take shape helps the attorney to alter its course before impact, which is more hopeful than making reactionary plans in its wake. The point of this analysis is twofold: first, by understanding your clients' changing needs, you can better adapt and change for their and your benefit, and second and perhaps even more basic, by better understanding your revenue sources by clients, it will be easier to identify other potential clients with the same needs and profiles.