Once you get some legal experience under your belt, you may think about opening your own firm.
Setting up and running a law practice can be a daunting prospect, but taking certain steps will help to ensure that your firm grows and remains profitable.
Here are some guidelines to help accomplish the task successfully:
Develop a strategy
You really can’t proceed before you target a specific client base or market and decide how you plan to compete. This means knowing who the competitors are and creating a superior strategy so that you can provide more valuable services than your firm’s rivals. Strategy examples include:
- Attempting to “corner the market” by hiring experienced lawyers from big name firms and charging considerably less for their services.
- Specializing in a particular area of law or industry and marketing the firm’s partners and associates as more skilled in that area than the competition.
When assessing a strategy, take as much time as you need to honestly evaluate the capabilities you and your potential colleagues or partners have. Prospective clients will scrutinize your firm and expect a satisfactory answer to this all-important question: “Why should I hire your law firm instead of one of your competitors?”
Create a business plan
Business plans are typically associated with a start-up that has not yet opened its doors. However, even if your practice has been running for more than a year, it is not too late to document your plans for the future. A well-thought-out business plan can serve several important roles, including providing a road map to help guide decisions and secure financing for expansion. A law practice business plan is basically the same as a plan for any enterprise and should address:
- Five years of detailed financial projections;
- Detailed description of the type of services you plan to provide;
- How you plan to charge for the services. Your firm may choose from, or mix, any number of billing methods such as charging contingency fees based on a percentage of money recovered or saved for the client, billing by the hour or quarter hour, or blending rates based on the average charged by the lawyers working on a case; and
- A marketing plan that outlines how your firm will find and market to target clients.
Develop practice management metrics
As soon as your firm has accepted its first client, you must start tracking certain robust financial metrics. The metrics to track routinely include:
Utilization – From almost the first day practicing law, attorneys focus on utilization. Expressed as a percentage of total available hours to be billed throughout the year, this metric is the first step in determining performance. Most firms function on the basis that there are anywhere from 1,800 to 2,300 billable hours a year. If a lawyer bills 1,700 hours, the utilization rate would range from 94.4 percent to 73.9 percent.
Blended rate – Some engagements are won based on the blended rate. On others, the blended rate is calculated after the fact and used to assess the practice’s ability to leverage staff. For example, if your firm billed a client $75,000 in total fees for 600 billable hours, the blended rate would be $125 an hour (total fees billed divided by the hours billed). Sophisticated clients monitor this rate and often question why it is increasing. All things being equal, maintaining a low blended rate while delivering superior legal advice can generate competitive advantages.
Realization rate – Often the recorded billable hours and the actual amount charged to the client differ. Bills are written down for many reasons. Many law firms neglect to manage this rate as it is typically calculated well after the work has been completed. Whatever the realization percentage rate is, chances are good that it can be improved by five percent or more by determining the causes of the write-offs and eliminating at least some of them.
Margin – Expressed as a percentage, your firm’s margin (profits after expenses divided by fees collected) is an important measure of how billable your firm is and an indication of how well it is managing expenses. A margin of 35% to 40% is normally associated with a high performing law firm that can collect fees while maintaining a low cost structure.
These are not the only metrics your law firm should track. An accountant with experience assisting law firms can help you identify and report financial metrics using a balanced scorecard approach.
Listen closely
Becoming the “go to” firm for existing and prospective clients partly means taking the time to understand their wants and needs on a level deeper than the competition provides. Clients often want to be understood, to feel that the professionals they hire, whether a lawyer, accountant or publicist, understand their needs and have the skills and expertise to help them.
Your law firm can employ a number of tactics to discover and document what a client needs. Whatever method you choose, however, make it a firm-wide responsibility to set aside time to really listen to the clients. This can often uncover hidden client requirements that your firm is ideally positioned to meet.
Participate in practice-development activities
There is no shortage of experts in the field of law firm marketing. The vast majority of approaches center on building relationships with existing and prospective clients. This is not accomplished overnight. Relationship-building requires careful feeding and nurturing to be of value in the future.
The specifics of the plan should be tailored to an approach that you and your colleagues are comfortable implementing. Practice-development activities can include targeted seminars, articles in publications read by your target client, newsletters sent out to current and prospective clients as well as one-on-one networking.
The most important aspect of developing a practice is to come up with a plan and stick with it, even when business is booming. Infrequent or insincere efforts generally result in little benefit.
Please contact Judith Barnhard via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
