Top Ten Strategies for Profits and Law Firm Marketing
In this bad economy, some law firms are still taking their eye off the ball by focusing on gross revenue as opposed to profits, or by pursuing shotgun marketing to their entire client base as opposed to doing rifle-shot marketing to clients with the highest profit margins.
Here are the top ten strategies to increase your firm's profits as articulated by Darryl Cross, Vice President of Performance Development at LexisNexis, speaking in a Lex Mundi webinar "Mining (and Minding) Your Client Base."
- 90% of percent of your profits come from 20% of your clients. Client analysis begins with ranking clients by profitability, not gross revenue, according to Cross. Once you have the list, winnow it down to the minority of clients who account for most of your revenue. A big firm may have thousands of clients, but a handful will generate 90% of profits. "Law firms should invite some of those clients into practice group meetings and get a briefing about what's going on at their company," he advised.
- Big clients stick around long term. Small clients don't. The reason is that big clients use many services of a firm. This makes a business an institutional client.
- Find clones of your most profitable clients. "If you need to find 10 new clients next year, take your existing client list and we which companies have been most profitable, identify which industries they are in, and look for similar companies in that sector," Cross said.
- Siloed clients are 7X more likely to leave within. If a client is using only one area of law (i.e., they're stuck in a silo), the odds are 40% that they're going to leave. But when a client uses three areas of law, they'll stay because it's too difficult to leave and because the transition costs are too high. So if a partner has all the relationships with a client but the lawyer handles only one area of law, the client is very likely to leave, Cross advised. It's time to talk about cross selling to that partner.
- New clients are fickle. "The first year or two is when you lose all your new big clients," Cross said. "Right after handling a merger or after litigation when things settle down, firms don't maintain contact with the client, and they tend to leave." When the legal work is over they are more likely to leave. Partners should make sure to spend time to solidify the relationship and introduce the client around the firm.
- A high number of partners involved equals high loyalty to the firm. To keep the clients it makes sense to have numerous points of contact within the firm and at the client. The more bonds between a firm and client, the easier it is to "zipper" the two together.
- Bargain shoppers will never pay standard rates. Clients who press you at the beginning for discounts will never come up to standard rates. "The rate at which clients come in is where they'll be in three years," Cross said.
- Big clients started big and small clients remain small. 20% of your clients will cause 90% of your problems. "I've heard from partners that someone they've met has the potential to turn into the next big client. And if we give them a discount they'll be big. We've found that this rarely happens. All your clients that are in your top 10% started there," Cross said. Rather than focus on "acorns" hoping they'll turn into oak trees, firms should instead focus on the largest 10% of clients. "That's how you'll build your future," he said.
- Your top clients are not the most profitable. "Many top clients are paying fees based on special deals or the realization rate isn't high, they pay slowly, they challenge the firm at the end of the year for a deal, or you have to write off a lot of time," Cross said. Firms want to keep big clients happy, but it's a mistake to base a growth strategy on discounts.
- The key to success is to focus on profit. Two clients may produce the same amount of revenue, but one could have a 22% profit margin and the other could be causing a 22% loss. Firms must start with the standard rate and compare it to the billed amount, the collected amount, and the ultimate margin. There are many steps in a process that lead to a low margin.
Thanks Larry/Darryl for the post. You are right to focus on the basics. It is amazing how some firms still forget the "turnover is vanity; profit is sanity" mantra. One other point that I think should be considered: the lifetime client. You many be talking about corporate clients but it is worth bearing in mind the lifetime value of a client to a firm. Too many lawyers work on the basis of a file opning and closing mentality. Once the file is closed the client is forgotten about. It is super important to stay in contact with the client and not to be perceived in a reactive way all the time.
Julian
Ten great points to improving financial results in law firms. I particularly like No.4. I've always struggled to get law firm clients to take cross-selling seriously. They guy with the relationship rarely has an interest in getting other partners to work with "his" clients. But demonstrating that his client security is improved by embedding the client with other parts of the firm may provide sufficient motivation to cross-sell.