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The following is a short excerpt from Arthur Greene's new book, The Lawyer's Guide to Increasing Revenue: Unlocking the Profit Potential in Your Firm. Reprinted with permission.

Lawyers can take satisfaction from the tremendous value they provide to clients through the knowledge, wisdom, and skill they apply to the matter at hand in the form of counseling, negotiating, or litigating. But it is not unusual to hear lawyers lament the fact that while earning a relatively modest hourly rate they have been an important factor in making many of their clients wealthy. Unfortunately for lawyers, profit margins are tightening and the legal marketplace has experienced changes that are making it increasingly difficult to realize fair and adequate financial rewards for the services they render.

This problem is complicated by the fact that most lawyers do not welcome any change in the way they practice law. In response to what is happening around them, lawyers often react by trying to pedal faster and faster to keep up. Blinded by the work at hand, they are not receptive to spending the time necessary to think about what steps to take to improve their profits in the years ahead. To break this pattern and achieve improved profits, the first step is to develop a revenue mind-set.

How to Make a Big Difference

Here is the important concept:

Increasing revenue, while maintaining the same expense structure, is the most powerful approach to improving the firm’s bottom line.

Simple math demonstrates that those extra revenue dollars go straight to the bottom line and make a profound impact on partner profits. For example, assume the firm generates $1.5 million annually and that there is a 50-percent profit margin, meaning $750 thousand goes to overhead and the other $750 thousand goes to the partners as compensation or profits.

Now, if the firm is able to increase its revenue by 10 percent while maintaining the same cost structure, 100 percent of the additional revenue dollars will go to the partners. Therefore, partner profits would be $900,000.

Take a moment to think about what this means. A modest 10-percent increase in revenue produces a 20-percent increase in partner profits. A 15-percent increase in revenue produces a 30-percent increase in partner profits. The payback is good. Those extra dollars can make a big difference to the lifestyle and the satisfaction of the partners.

While there is something to be said for the concept that one has to spend money to make money, caution needs to be exercised before declaring that spending is the solution to a firm’s need for increased profits. There are certainly circumstances in which a firm can benefit from spending money on a new initiative; the firm needs to recognize, however, that a plan that increases both revenue and expenses does not necessarily improve profits. In fact, it can have the opposite effect.

Lawyers work long and hard to meet the firm’s revenue budget without appreciating how many of those extra dollars slide into their own pockets if there is additional revenue once the overhead has been covered. The lawyers who do appreciate the significance of the extra revenue may be reluctant to push in that direction because they believe that extra revenue requires working longer hours. But nothing is further from the truth. The extra revenue can result from a variety of sources, including better management of the revenue side of the budget, value-based billing methods, improved client satisfaction, and so on. There are almost always significant dollars that are left on the table . . . that is, left there for the taking.

Why Cost Approaches Fail

Yes, extravagant and unnecessary spending must be eliminated. However, once those items are removed, the repeated effort to slash costs as a means of meeting financial challenges is an ill-conceived approach to financial management. The vast majority of law firm expenses are either fixed or production- related. The percentage of costs that might be classified as discretionary is low, perhaps in the 20 to 30-percent range. Assuming that some of the discretionary expenses are desirable, the number of dollars available there for savings is small. The available dollars disappear after a year or two of cost cutting, leaving firm management wrestling with the effect of further cuts on the firm’s production capability.

Does it make sense to eliminate staff positions if the result is to put more administrative functions on the lawyers and paralegals? Of course not; such an approach would reduce the amount of billable work product. Does it make sense to cut back on the lawyers’ continuing legal education? Probably not; improving one’s level of expertise is important to increasing revenue production. Does it make sense to cut the marketing budget? Probably not, if there is a revenue problem and the goal is to develop more high-end business. What are the lawyers thinking? It can be so painful to watch a firm struggling with a revenue problem, debating what further costs to cut in order to improve profits!

There are law firms that have actually put themselves out of business by trying to forge their way to success through cost cutting year after year. These firms get to the point where the production capacity provided to the lawyers becomes so low that revenues decrease to the point of no return. It is not a happy sight.

It does not take a rocket scientist or a three-year plan to look at the expense side of a budget and remove unnecessary costs. Once the firm takes a look and makes appropriate adjustments, an attempt to continue to push too hard on the cost side undercuts the possibility of turning the firm around and making it a financially successful organization.

Most firms addressed unnecessary and extravagant costs in the 1990s and have removed them from the firm budget. Lawyers have to move beyond the cost-cutting phase quickly, and recognize the need to focus on revenue in their efforts to create a more successful firm.

Places to Look for Revenue

Now for the good news: there are several places to look for additional revenue potential within an existing law practice.

• Increase Billing Realization Rate: Billing Realization is the percentage of the recorded billable hours that is actually billed to the client. Bills get written down for any number of reasons. Is the firm’s billing realization rate 75 percent or 95 percent, or some other number? Whatever the number, there is a good chance it can be improved by 5 percent or more. This can be achieved by determining the causes of the billing write-offs and eliminating them.
• Increase Collection Realization Rate: Collection write-offs are bills that are submitted to clients and never paid. At some point, when collection seems unlikely, the firm takes a bill out of its receivables column and it becomes a collection write-off. Is the firm’s collection realization rate 85 percent or 95 percent, or some other number? This is another area where a reduction in write-offs adds profits to the bottom line.
• Increase Efficiency of Production: Most lawyers can improve the efficiency of their law practice. The more efficient and productive the lawyer, the more hours during the day are captured as billable hours One additional hour of productive time a day can make a huge difference in revenue.
  
  230 working days @ 5.5 billable hours x $200 = $253,000
  230 working days @ 6.5 billable hours x $200 = $299,000
  
  The goal is not to have lawyers spend more time in the office, but rather to make better use of the time they are there. Lawyers tend to lose from 20 percent to 40 percent of their potential billable time through poor time-management skills or inadequate support.
• Increase the Profit Margin: Firms that have clung to hourly billing have seen their profit margins tightened, meaning they have to bill more hours to stay even. Using other value-based billing methods allows a firm to better leverage its expertise and its investment in technology to achieve an improved profit margin on each project.

By improving results in any of these areas, a firm increases revenue production not only in the current year, but also in each succeeding year as long as the improved methods of operation continue. In other words, these are not one-time gains, but continue to provide financial rewards year after year.

But the analysis does not stop there. There are some additional areas for improved revenue that provide one-time gains. For example:

• Billing Turnover Rate: The billing turnover rate is the average time it takes from the time the work is performed until it is billed. It is usually stated in terms of months, such as 2.1 months. If the firm can improve the time by a half a month, in this case to 1.6 months, then the firm benefits from additional revenue equal to one half of a month’s receipts.  Collection Turnover Rate: The collection turnover rate is the average time it takes from the time work is billed until it is collected. It is usually stated in terms of months, such as 2.7 months. If the firm can improve the time by a half a month, in this case to 2.2 months, then the firm will benefit from a surge of revenue equal to about one half of a month’s revenue.

Unlike the realization rates, the extra revenue flow from an improvement in turnover rates does not continue from year to year. It represents a one-time surge of revenue. On the flip side, it is important to realize that if either of the turnover rates slips in succeeding years, there will be a cash flow shortage. Therefore, it does not make sense to push the turnover rate to a level that cannot be maintained long term.