The practice of law is rapidly changing from a “professional calling” — something akin to a noble intellectual pursuit — to a highly competitive service business. While it was once common for law firms to operate as distinguished gentlemen’s clubs, today firms are subjected to the same harsh market dynamics as the corporations they count as clients.
Pressure on Profitability
Several trends are squeezing the bottom lines of law firms. Their corporate clients, who were forced to improve their productivity and eliminate costs during the recent economic downturn, are finding it difficult to accept law firms’ continual fee increases. Clients are reducing the number of outside firms they use and are aggressively pushing alternative fee arrangements, such as discounts and fixed fees, on the surviving firms. Additionally, they are relying on eBilling and other auditing tools to scrutinize what their outside firms do — and what they charge.
In recent years, these cost reduction initiatives have saved clients tens of millions of dollars in legal fees — all but guaranteeing they will be continued.
Another trend impacting law firm profitability is their very organization and structure. Many firms have developed or acquired multiple specialized practice areas. Others have opened offices overseas. While such diverse and
complex practice offerings have improved the competitive stance of law firms, they has also burdened firms with record debt and spiraling overhead.
Unfortunately, clients are increasingly resisting the annual fee increases which have historically offset rising expenses. The result is a growing problem with law firm profitability that must be addressed.
Increasing Firm Profitability
with Business Intelligence
New technologies, such as Business Intelligence, are helping law firms to better manage their operations and improve their profitability. Business Intelligence (BI) is a broad category of applications and supporting technologies for gathering, storing, analyzing, and providing access to data that helps users make faster, more informed business decisions.
BI helps firms make the transition from being a reactive organization to a proactive — and profitable — business. A proactive firm constantly monitors its performance and empowers its staff to make continual adjustments to ensure their profitability goals are reached. BI has become a requirement for any law firm that wishes to maintain — or increase — their profitability.
Budgeting and Forecasting
Historically, many firms have managed their profitability — and ensured their partners were paid — through budgetary control of departmental expenses. Today, however, firms must manage their expenses in greater detail, such as by office, practice group, partners, and timekeepers. Traditional spreadsheet-based budgeting — a time-consuming and largely manual process — can no longer meet these new business requirements.
Proactive firms need new BI solutions to automate and improve their business planning processes. The solutions must provide finance departments with centralized control over budgeting workflows and business logic, but enable departmental managers to take direct ownership of expense and headcount information. The solutions should easily integrate with multiple data sources to improve accuracy and provide powerful reporting and analysis capabilities.
BI business planning solutions help law firms transform budgeting and forecasting from a static, once-a-year event to a continual process. As the business environment changes, BI solutions help firms adjust their plans to reflect the new reality.
Analyzing Profitability
Many firms find it difficult to determine which activities contribute to — and which detract from — their profitability. This is because they typically track productivity and profitability by timekeeper, client, or matter but they track expenses by practice area or department.
Firms need BI solutions to help them analyze their profitability in detail — by office, practice group, client, and matter as well as by partners and timekeepers. Profitability analysis is a valuable tool for helping firm management make informed business planning and investment decisions, such as allocating marketing resources, admitting new partners, or determining optimal staffing levels. Additionally, BI profitability solutions allow firms to examine their business in new ways, such as identifying and culling clients who are unprofitable or do not fit their overall business strategy.
New Business/Matter Pricing
Once a law firm has developed a budget and analyzed their profitability, they must also optimize the pricing of new business and matters. The logic for this is simple: firms need to ensure any new business they take on is priced in such a way that will meet their overall profitability goal.
Firms are finding increasingly difficult to profitably price new business as more clients are pushing alternative fee arrangements. Firm decision-makers need BI solutions that help them quickly and accurately model different pricing scenarios — such as staffing levels and rates — to ensure the price they quote will keep their firm on the path to profitability.
Reporting, Analytics, and Key Performance Indicators
Finally, law firms should invest in BI solutions for reporting and analytics. These tools help firms extract data from their various business systems and transform it into actionable information. This empowers executives and department heads to analyze data related to their responsibilities, understand key business drivers, identify and track trends, and maximize profit.
Another important BI requirement is measuring and communicating Key Performance Indicators (KPIs). KPIs are an essential tool for predictive firms as they provide employees with up-to-date, role-based information about their objectives and performance. KPIs deliver actionable information that helps individual employees meet their goals and ensures the firm reaches its profitability targets.
Managing Your Firm Intelligently
In the face of growing competition, more demanding customers, and rising costs, law firms should investigate how new Business Intelligence solutions can help them grow their bottom line.
Aderant provides a comprehensive, fully integrated business intelligence and analytics suite, Aderant Executive Office that is designed specifically for the needs of law firms. Used by more than 75 leading law firms around the world, Executive Office helps firms improve their profitability and manage their businesses more effectively.
Learn how you can improve the profitability of your firm with Business Intelligence. Visit www. aderant.com to download a FREE copy of our Business Intelligence white paper “Driving Profitability: Transforming the Business of Law.”
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