As gloomy financial forecasts emanate from corporate America and Wall Street, some law firms continue to embrace the same belief–that they are insulated from the dramatic financial ups and downs experienced by their business counterparts. With the notion that “business is always good for lawyers,” most firms have not felt the need to look at the productivity of their practice groups. However, a growing number of firms and legal analysts are beginning to recognize that this long-held school of thought may be nothing more than a complete myth, or at a minimum, legal “wishful thinking.”

A survey, published in the July 2002 issue of The American Lawyer provides statistics that corroborate the notion that the legal industry is not protected from the vacillations of the national economy. Although the results portray a 13% increase in gross revenue, most of this increase can be explained by the residual head count growth experienced by the larger firms. In fact, the results showed the largest head count increase seen since the inception of the survey in 1995. Revenue per lawyer, which had grown by an average of 6.4% in the previous five years, grew by a miserable 0.5% last year, with profits per partner revenue rising only 2%. In the face of these statistics, how can law firm partners and managers, short of employing the “magic 8 ball” method of analysis, adequately prepare and forecast to maximize their firm’s profits and resources? This article will discuss some of the tools and methods firms can employ to begin the process of transitioning from the “practice of law” to that of the “business of law.”

Tools of the Trade–Budgeting: In firms like Denver-based Holland and Hart, practice groups are utilizing budgeting software to anticipate costs and personnel scheduling to more efficiently manage resources. Scott S. Havlick, practice group manager for Holland and Hart’s Intellectual Property Group, has found that using a budgeting tool is not only valuable in forecasting income and resources, but also in better preparing clients for total costs of litigation and the distribution of those costs. The firm uses a software program adapted from the construction industry that even provides visual graphing to assist clients in understanding how and when monies are to be expended. Havlick has found that the use of budgeting tools early in the matter assists the legal team in using good judgment in litigation, by identifying and labeling important phases in the life of the matter.

Another innovative tool being used by law firms is “decision tree” methodology. Based on the triage model utilized in the medical profession, this type of software assists teams in identifying prospects and percentages for success in a legal matter. Particularly helpful when either finance or workforce constrained, usage of decision tree methodologies enables teams to analyze the percentage of success and “next steps” in an action, based on factors that occurred prior to and during the matter.

Tools of the Trade–Forecasting: Historically in most law firms, the core technology utilized for forecasting future growth and profitability has been the firm’s billing management and collection software. This software typically enables firms to review and monitor billable hours, accounts receivable, unbilled work, practice profitability, and perhaps even client profitability. Basically, reviewing the large amounts of data collected for billing and accounting purposes allows for this type of review/monitoring. However, firms are now also analyzing this data in order to make sound business decisions about practice groups, hourly rates and personnel.

Anne Castle, chair of Holland and Hart’s Management Committee finds such information crucial in determining the firm’s plan for the upcoming year. Taking a close look at each practice area’s profitability for the previous year and current market trends enables the firm to boost staff in thriving areas, while instituting cost efficient strategies, such as the use of paralegals or technology tools, in practice groups with stagnant or declining revenues. “A firm the size of Holland and Hart (250+ lawyers) can gather enough data to give us good projections for the upcoming year. Through the uses of technology, we have met or exceeded our profitability forecasts.”  Castle finds, however, that the process of forecasting necessary budgeting and personnel is a continuing evolution, and that success can be attributed to having a team dedicated to watching the changing signs, and “paying attention to the law firm as a business.” 

New Tools for the Toolbox: Using custom systems, adapted systems and internal methods of compiling/reviewing time and billing data have historically been the only options available to firms seeking greater insight into managing profitability. However, a new genre of financial analysis tools has recently become available. This technology, offered by only a select group of legal vendors and consultants, allows firms to quickly extrapolate and graph crucial information from the current data being collected. One recent addition to the industry are intuitive practice management solutions that provide not only comprehensive matter management, but also instant billing and time analysis, budgeting, forecasting, and financial planning through one easy, intuitive interface. These applications, designed with the firm CFO and managing partner in mind, allow users to assign specific practice groups, clients or budgets to billing matters, and then provide an instant evaluation of resource utilization, projected revenue numbers and future resource needs. This information is critical for firms to better evaluate and forecast profitability.

Choosing the Right Tools–What to Expect from Financial Management Tools: New technologies will continue to aid those law firms that choose to be proactive in budgeting and forecasting for themselves and their clients. By thinking beyond the “practice” of law to the “business” of law, firms can more effectively shield themselves from business upturns and downturns, and can retire the “magic 8 ball” approach to predicting their future.

In general when evaluating the right financial management tools, law firms should expect them to:

• Be easy to use and understand by your Senior Managing Attorneys
• Be easy to access remotely and securely           
• Be available to selected persons even outside your other systems
• Allow users to save and send queries and reports
• Allow instant “real-time” reporting in multiple formats
• Provide forecasting based on present data and “what if?” scenarios
• Operate without any additional actions from your staff beyond their matter management and time keeping activity
• Work seamlessly with your front-line matter management software

About our author . . .

William Feid is President and CEO of RealLegal, LLC, a provider of practical software applications and services for improving the business of law.