Table of Contents
Table of Contents
Respublica has a singular focus to provide first class advisory services to law firms and show law firm owners how to increase profits, operate efficiently, and master cash flow. In this post we show how we provide value, from our technology investments, to our technology stack, and an industry leading customer service agreement written into each engagement.
The 3 key differentiators that separate us from the competition are 1) our investments in data infrastructure, 2) our ability to turn raw data into profit saving insights, and 3) no nonsense customer service.
Data infrastructure refers to how data is entered, captured, stored, and analyzed. For most law firms their most important operational data is in their legal management system that houses their all important timekeeping data. That operational data tells the full story of each law firm’s performance, efficiency, and future outlook. Hidden within this data are the early warnings, such as a matter going over budget or associate utilization trending below historical norms, answers to tough pricing questions like “how much should I charge as a fixed fee for this engagement,” and lastly, questions of improving efficiency like, “where is non-billable time being spent and what amount of utilization and invoicing write offs are controllable”? These kernels of business intelligence can inform swift corrective action, proper pricing and hiring decisions, and improved profits, but only if insights, gleaned from the data, are communicated timely to decision makers.
Data that is a day old is pristine, data that is a week old is aging and data that is 60+ days old has little value. Why is it difficult to capture your law firm’s performance in real time? The answer is, without expert guidance, law firms are relying exclusively on whatever data points and reporting their legal management software provides out of the box and possibly supplementing this with manual, inefficient, and unscalable data analysis in spreadsheets. Effectively, software companies are not experts in law firm data analysis and reporting and because of this they are good at capturing standard data points, but incapable of customizing reporting and creating the proverbial cockpit for your law firm. Some of the largest legal management providers can’t even provide utilization reports.
This is a serious strategic problem for law firm owners that Respublica solves with investments in an innovative data pipeline that takes thousands of data points from its source, not only from legal management software, but any data source accessible via API, and stores it in a data warehouse that updates every 5 minutes and is connected to a fully customizable business intelligence KPI dashboard. The result maintains a realtime pulse on the performance of your law firm. You can track your most important KPIs like utilization, realization, and collections as well as customize views by client, matter, or employee, filtered over any time period. Further, we can take your raw data and perform calculations in the data warehouse and create calculated data points. For example, multi partner law firms need to see firmwide P&L split by partner. Historically, this has been a manual and arduous process for traditional accounting firms to provide and it could only be done monthly or quarterly. With our data model and the flexibility to create calculated data fields we can combine revenue by originating partner via your law firm legal management software, payroll and benefits costs from your payroll system, and overhead costs from Quickbooks Online and automate this all important by partner P&L report. With the power of our data model, Partners know exactly where they stand on a P&L basis at any given time during the year. Better yet we can integrate not only accounting and timekeeping data, but marketing data such as website traffic and ad spend, and track cost per lead and cost per conversion.
Now that we’ve laid out the intricacies of how we set up a modern data infrastructure capable of capturing the totality of relevant law firm data, we can detail our 2nd key differentiator, which is turning that raw data into a material increase in profits.
The average small to mid size law firm has utilization, realization, and collection rates of 37%, 86%, and 89%, respectively, and a 22% profit margin. What this means is for every 100 hours of firm time, 37 hours are billable, but of that 37 hours, 5 hours are written off before being invoiced, and 4 hours are deemed uncollectable and written off after invoicing. On average, what starts as 37 billable hours yields only about 28 hours of revenue.
Respublica aims to raise our clients’ utilization to over 40%, realization to over 90%, and collections to at least 95%. For a law firm with $2,000,000 in annual revenue, employing 10 associates, and performing on average with their peers, raising the 3 key metrics to our goal figures, increases profits from $440,000 to over $800,000. If utilization and collections stayed on par with industry averages, but realization increased from 86% to 90% that alone is nearly a $100,000 increase in profits. If utilization and realization remained unchanged with industry averages, and collections increased from 89% to 95% that would increase profits by over $135,000. The impact of even small changes in a law firm’s utilization, realization, and collection rates has a significant impact on profits. In this case, the investment required to hire Respublica for CFO services would be between $5,000-$6,500/month. As seen in this example, modestly improving key client metrics with Respublica’s CFO services can yield significant returns. If you’d like to estimate your law firm’s approximate ROI on our CFO services feel free to check out our ROI calculator.
Let’s dive deeper into how we can increase your law firm’s utilization. First, everyone from the Managing Partner to paralegals needs to complete daily time submissions detailing billable and unbillable time. If the timekeeping data isn’t created we can’t track it or improve it. Second, billable time needs to be broken out by client, matter, practice area, originating partner, and the type of work completed (chosen from predefined categories). Third, non-billable time needs to be broken out into predefined categories. By tracking unbillable work in predefined categories we have the data so our clients can make hiring decisions like adding an admin or paralegal to take non-billable work from Associates and Partners, freeing them up to perform billable work and generate more business. Lastly, each associate needs an attainable utilization goal they will be held accountable to and one in which they can view on demand to see how they’re tracking. These 4 actions allow us to measure utilization, understand what drives unbillable work and billable write-offs, and get a nuanced understanding over which associates are over and under performing expectations.
The second core metric paramount to every law firm is realization, which measures what percentage of billable time is actually invoiced. This metric principally measures the efficiency of work performed for clients. In this context efficiency refers to delivering quality counsel at a price consistent with client expectations. In order to establish reasonable client expectations and manage those expectations as the engagement progresses, law firms need to firstly communicate upfront how much the engagement will cost and how long it will take to conclude. That upfront communication should be accompanied by the usual caveats (i.e. “based on the current ask, fact pattern, and absent variables outside our control”). Without an expectation set upfront law firm’s are left wondering how their clients will react to invoices and may prematurely write off billable time to avoid perceived client issues. In order to be in a position to communicate matter level pricing up front, law firm’s need to have historical data available for similar matters. Respublica can create real time custom KPIs that track average revenue and cost to complete by matter type. That can be further broken down by client type, size, industry, etc.
Another way Respublica can help law firms increase realization is implementing matter based budgeting. Budgeting upfront at the matter level allows law firms to understand at any given time if a matter is tracking on budget or trending over budget. The main components needed are hours by Partner, Associate, and paralegal/admins, as well as when those hours will be spent by day or week. When timekeeping entries are submitted the matter and client will be indicated, among other things, and actual hours will be compared vs budgeted hours. Respublica can monitor actual vs budget results, by matter, and send alerts when actuals are trending over budget and corrective action can be taken. This allows law firms to catch when their time is exceeding expectations and either speak with the client to explain why costs are trending higher or discuss the efficiency gap with Associates and course correct so final time comes back in line with the initial budget. Industry averages dictate that law firm’s lose nearly 15% of billable time to realization write-offs, which is a material loss in profits. By establishing upfront cost expectations with clients and an internal by matter budget, law firms can capture those lost profits and maintain strong client relationships.
The third metric that is crucial to law firm profitability is the collection rate. This metric measures total amounts paid as a percentage of total amounts invoiced to clients. The typical small and medium size law firm loses more than 10% of billable time to clients not paying the full invoice amount. What does that mean in dollars and cents? For a law firm with $2 million in revenue and operating at industry average efficiency, including an 89% collection rate, they are losing over $250,000 of profits to not being able to collect the full invoiced amount. We are confident we can help law firms perform in excess of industry averages and materially increase their collection rates. Here’s how.
First, law firms must offer online payments to clients. This very simple convenience reduces average days for invoices to be paid by over 30%. On average, law firms that don’t offer online payments wait 70 days to collect 80% of invoices vs 49 days for law firms that do offer online payments. This greatly improves cash flow and helps avoid dated receivables.
Second, anytime there’s an invoiced amount that’s written off, there’s a story behind that write off. We want to understand and learn from each write-off by bucketing each into either a controllable or uncontrollable category. Anything that is deemed controllable means the cause of the write-off was the law firm’s mismanagement of either expectations, invoicing cadence, internal resources, or flawed upfront pricing.
We want to hone in on these types of write offs because they give us a road map to avoid repeating the same mistakes in the future. Ideally, we want controllable write offs to be zero, indicating flawless execution for everything within our control. Write-offs caused by a client’s genuine inability to pay as a result of abrupt and unpredictable events related to war, public emergencies, legislation, or lawsuits fall into the uncontrollable category and can be partially mitigated by two straightforward measures. Firstly, law firm’s can require retainers and that client’s replenish retainers at predetermined points. This is a common practice, but brings IOLTA compliance requirements and clients may push back against providing upfront funds before services are rendered. For clients who don’t want to pay retainers, law firms can offer payment via credit card, which is the most preferred method for payment for law firm clients.
Law firms can also suggest the client sign an ACH authorization form allowing a law firm to auto debit the client’s bank account for amounts invoiced after the client has either approved the invoice or a reasonable time has passed and the client hasn’t contested the invoice. As a last resort, we recommend law firms offer a pay over time option, but only after all avenues for payment are exhausted and a built in interest rate is included.
In summary, law firms lose a significant amount of potential profits to collectability issues. On average over 10% of amounts invoiced to clients go unpaid and are written off. Respublica can put a system in place to increase the collection rate by implementing best practices, understanding the why behind each write off and helping law firm owners learn from and avoid controllable write offs in the future.
The third value differentiator is how we treat clients. No matter the service level chosen, we guarantee we’ll respond to communications on business days (via text or email) within 24 hours. If we don’t live up to that promise we give our clients a credit for that month’s fee. This is consistent with our core value of accountability and showing clients we mean what we say. We also guarantee the price we quote will be fixed for 12 months as long as the scope and volume of transactions doesn’t change by more than 20%. Additionally, our standard pricing is for a month to month contract with 60 days notice, but we do offer discounts for clients who sign annual contracts. Overall, we’re in the service business and understand doing the little things really well, day in and day out, is what makes clients feel valued and happy to have us by their side.
Chiefly, there are 3 value differentiators that set Respublica apart from the competition. Firstly, we invest in a modern data infrastructure that is capable of capturing your law firm’s most important data points. Our competition is relying on spreadsheets and manual data analysis, while we invest in connecting APIs so data flow is constant, complete, and accurate. Second, we transform this wealth of data into profit saving insights by creating real time custom KPI dashboards. Our competition doesn’t offer real time business intelligence. Lastly, we mean what we say and we back it up. We guarantee transparent and fixed pricing and we’ll respond to text and emails within 24 hours or else provide a monthly credit. No other firm offers such a guarantee backed up with a refund if they don’t fulfill customer service expectations. All in all, we can help your law firm solve the most pressing challenges related to efficiency, profitability, and cash flow. Schedule a call to learn how we can help your law firm grow and increase profitability.
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