Jim Ray Contributes Articles for the Small Firm and Solo Practitioners Division

Don’t Risk Going Out of Business “Profitably” is the title of my first monthly article, which I recently contributed for the National Bar Association, located in Washington D.C.  I’m working with the Chairman of its Small Firm and Solo Practitioners Division to develop an ongoing series of articles, webinars and other membership presentations.

According to its website, the National Bar Association was founded in 1925 and is the nation’s oldest and largest national network of predominantly African-American attorneys and judges. It represents the interests of approximately 60,000 lawyers, judges, law professors and law students.The NBA is organized around 23 substantive law sections, 9 divisions, 12 regions and 80 affiliate chapters throughout the United States and around the world.

The below content is the full version of my recent article:

Don’t Risk Going Out of Business “Profitably”  –  The National Bar Association, Small Firm & Solo Practitioners Division, November 2014

For many small firm and solo attorneys, there’s a chasm between helping your clients to cope with significant legal issues and effectively managing the business of your practices.  Most of you have invested years of study and training in the effort to develop successful, legal practices.  Many, however haven’t had the time to seriously study the fundamentals of accounting, marketing, and the other disciplines associated with actually running a business.  As a practitioner (and business owner) you’re confronted with challenges on both ends of this spectrum.  At times, the business of your practice may present greater challenges than your opposing counsel.  Sound familiar?

I’ve consulted with law firms for over a decade.  I’m also the former director of a medical malpractice firm in Kentucky.  I present CLEs, publish articles for various organizations, and consult with firms on a regional basis.  Most often, firms engage me to help them deal with practice management, business development and marketing issues. My goal is to provide an on-going series of articles for you about ways to operate your practice more profitably.

I’d like to start with a simple observation, and then a definition.  Observation:  Clients will eventually move on.  The key to any successful practice is managing the intake of new clients.  However, it’s critical that you understand practices can go out of business, profitably.

Businesses of all types are subject to financial constraints.  While the desire to help people with legal issues is a driving force, doing so profitably is paramount.  You have a finite capacity to work on your cases.  There are only 24-hours in a day and we must assume that family and sleep will demand at least a small portion of those hours.

Your ability to think and effectively manage your caseload is highly dependent upon your personal stress and energy levels.  Over the years, I’ve seen numerous professionals burn out because they thought they simply needed to work harder.  However, when you do this for an extended period of time, you run the risk of making poor decisions which might not only impact you, but your practice and possibly your marriage.

That point brings me to a definition. “Profit” is what is left over after you subtract your business expenses (including taxes and wages/salaries) from the billable or contingency-based revenue you generated.  As a pure business fundamental, you need to focus on your net profit, much more than on your overall revenue for the practice.  This is where many practitioners struggle.  You may have significant income from client referrals, law school friends and other firms who pass along cases to you.  However, if you’re not actively managing the types new clients you’re taking, you may be in for a crash.  More on that point in a minute.

For now, let’s consider two ways to manage your profit.  The first is to limit or cut your expenses.  While that can be effective in the short run, there’s only so much that you can cut.  For most, there is a necessary level of expense, which must be incurred to run your practice.  Your ability to “cut costs” by its very nature, therefore, is limited.

However, you can also manage (and increase) your profit by increasing your overall revenue.  But beware; this also requires a healthy balance between taking on new clients, and accepting the right clients.

When you consider the changes in the legal landscape, it’s fairly certain that your market is going to become increasingly more competitive.  Many of you have already seen this.  As the focus on law firm marketing and advertising grows, practitioners are going to be faced with an ever-increasing pool of potential clients, but whose ability to pay (or at least pay what you actually deserve) will be reduced.  Factor in the risk of poor case selection for contingency-based firms.  This is going to put immense pressure on you to ensure that you’re being properly compensated for the services you provide.

Let’s come back to my earlier point about actively managing your types of new clients.  In most businesses, there are a core group of services that yield the best results for the business.  For you, this might be family law, commercial litigation, personal injury, etc.  You can quickly subdivide those practice areas to identify specific types of clients within those subcategories.  Whatever it is, this is your best possible type of case.  However, some practitioners struggle to maintain an active influx of these “ideal clients.”

Overtime, the practitioner may take on other types of cases simply to pay the bills.  They run the risk of deviating too far from their core case load, which typically requires either more time, yields less income, or both.  While the cash seems to be coming in, the actual profit margin is less and less.  Eventually, your days are spent dealing with the wrong types of clients for your particular practice.  This is what I meant when I said practices can go out of business profitably.

Reaching the point at which zero income is generated isn’t at all typical.  Like a puddle on a hot day, the evaporation of your profits may occur rather slowly.  Add to that the on-going pressures of daily life, family and work and you can see the implosion coming.  You may have a colleague who has already experienced something similar.

I’ve spoken with a number of attorneys who struggled when the economy tightened.  Their referrals dried up because firms chose to keep different types of cases in-house.  Even divorce attorneys began handling car wreck cases.  Several of those referral-dependent attorneys didn’t last on their own because they couldn’t cash flow themselves through the economic valley.  They burned countless hours on marginal cases and then had to split the fees with the firm who originally handed off those “slam dunk” cases.  They spiraled downward because they had less time to attract and manage the right kinds of cases.  The highly capitalized firms were simply practicing “legal Darwinism.”

By putting into place strategies and tools to assist you in broadening your exposure to a larger pool of potential clients, you’ll eventually have a larger group of cases from which to choose.  This will help you, as the practitioner/business owner, to effectively select enough of the right kinds of clients to allow you to take on other non-core cases – all while growing the overall profitability of your practice.

Remember, the attorney who usually experiences the greatest success over time is the one who knows which cases not to take.

In the next several articles, I’ll detail various ways you can do this.  I’ll provide you with tips and suggestions intended to help you develop your practice to the point at which you might begin working less, but actually earning more.  Sound interesting?  You’ll have to look for my next article to find out.  Until then, feel free to check out my blog at https://jimrayconsultingservices.com.

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