As I sit down to write this blog the above quote garnered from my time consulting on legal BI solutions, springs to the forefront of my mind. The individual in question expanded on this to say that the firms BI solution had allowed him to not only see what is going on financially but also, and equally as important, what isn't going on.
In our latest Legal Cash Flow Report we dive into legal cash flow trends including profit leakage.
What is profit leakage?
The term itself has negative connotations, unless you're a plumber or an editor of a newspaper, a leak of any kind is very rarely a good thing. In a law firm context, profit leakage is any unnoticed or unintended loss of revenue from your company. In legal transactions, these leaks can occur at various stages of a matter lifecycle and all share the common theme of leaving money on the table.
98% of firms surveyed in our report, confirm they can identify areas of leakage that influence the firms profitability. Three of the most common culprits are:
Missing time capture, recording or late billing
The amount you lose if you don’t keep time contemporaneously is shocking. According to studies, if you don’t get your time in by the end of the day, you’re likely to lose 10 percent of your billable hours. If you don’t get it in the next day, you’ll lose 25 percent. If you don’t get it in by the end of the week, you’ll lose a full 50 percent.
Realistically, that means you’ll be guessing at what to put on your timesheet. Your clients will likely sense something is wrong, making it more likely you won’t get paid or your bill will be contested. And then you have to spend time explaining the bill to them – if you can remember. You work hard for your clients, and you deserve to be paid for your work. It’s frustrating to walk away from hard-earned fees just because you forget to record the time.
While tracking time and achieving the optimal billing realization rate is important, what matters most is how much you collect. Delaying your billing has the biggest impact on this - it's like giving away free money. Late billing is tantamount to offering 0% financing and performing your services at a discount. Late bills are often challenged, with less cash flow resulting in lost opportunities to invest in efforts to boost firm growth.
Under-pricing and poorly scoped work
Firms must understand how to scope and price work efficiently to reduce the amount of money written off, maximize law firm profitability and improve the client relationship.
In providing the estimate based on ‘finger in the air’ judgment, mixed with vague information of previous similar type matters, we often see little flexibility to handle inevitable scope creep and more surprisingly, margin level data not being used to drive pricing decisions for fear of making the figures less palatable for the client.
Failure to manage the project effectively by keeping track of work-in-progress against the fee estimate, while also regularly updating the client, will lead to a fractured relationship as budgetary predictability and the idea of value become unclear.
Discounting
Discounting can take many forms. The initial exception rate can be discounted from your standard rates, the following time write-off to get the invoice out the door, or the discount to get your bill paid - this three-ingredient discount cocktail can often leave you with a bitter aftertaste and it's therefore important to address them in their own right and look at the levers for each.
One of my law firm clients, in bringing visibility to this triple-dip reduction to their client, led to an uplift in rates that surpassed the standard rate. This of course would not have been possible without access to the profitability data as well as the visual representation of the write-off chasm.
In summary, profit leakage is not a new concept and the aforementioned 98% of firms surveyed that can identify at least one area of profit leakage is a strong indication that firms know they have challenges in this space.
Our report also confirmed that 70% of firms have plans to implement an advanced legal business intelligence solution over the next two years. This rises to 83% of CEOs, reinforcing the strategic importance of getting the right tools in place if firms are to truly achieve the sustainable cultural shift required to increase profitability and deliver new client value.
