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Ten Ways Law Firms Lose a Lot of Money

By Janice Mucalov, LL.B.

Losing moneyYou already know that you and your firm lose money when you write down your time or when clients don’t pay their bills on time (or at all). But there are several other hidden costs that claw back on firm profits that you may be unaware of. Here are ten common ways law firms lose a lot of money and solutions you can adopt to avoid them:

  1. Putting Up with Computer Crashes
  2. Not Recording all Billable Time
  3. Not Moving to a Paperless Office
  4. Limiting Use of Support Staff
  5. Underutilizing Word Processors/Suites and Practice Management Software
  6. Accepting Bad Clients
  7. Keeping Mediocre Clients
  8. Not Recouping Printing Costs
  9. Surrendering Control of Your Time
  10. Cutting Corners with IT Consultants

1.  Putting Up with Computer Crashes

Computer lock-ups and crashes are surprisingly expensive for a law firm, says David Moon, the 2005 TechnoLawyer winner of “Legal Technology Consultant of the Year” and president of Lan-Tech Inc., a Georgia-based information technology and system integration consulting company for law firms (www.lan-tech.com).

“You waste at least ten minutes if your computer freezes and you have to reboot, get all your programs up and running again, and get back into the task you’re working on,” Moon says.

If you have three computers in the office and average two 10-minute lock-ups per day per computer, then at a conservative employee rate of $25 an hour (and based on 240 working days per year), this costs your law office $6,000 per year. If each crash wastes 15 minutes per crash, the cost per year is $9,000. If it’s the lawyer’s computer that freezes, the wasted cost is even steeper.

Contrary to public opinion, crashes are not normal, says Moon. “With today’s operating systems and software, everything should be very stable.” Yet many law firms continue to suffer computer downtime. Why? “Ninety per cent of the time, systems crash due to viruses and spyware,” he says. Other causes include conflicts between programs (ignoring error messages is dangerous, especially if the same error message pops up time and again).

Potential for Loss

1 lost hour/day (based on 3 computers 
each with 2 lockups per day @ 10 to 15 minutes per lockup)
x
240 working days
x
$25/hour  =


$6,000 to $9,000+ per year

Solution

Install good anti-virus and anti-spyware programs
Trend Micro and Norton Symentec are two recommended anti-virus programs, reports Moon. For an anti-spyware program, Moon likes Ad Aware manufactured by Lava Soft. Anti-virus programs are usually installed at the server side (the law firm’s electronic gateway), but some programs, like Ad Aware, are best installed on individual computers.

Make sure the programs are updated too. You need to get new updated DAT files from the program manufacturer (your computer can be set to get these automatically) plus updates from the operating system (e.g., Microsoft). Some people, for whatever reason, turn off the automatic updates.

Apply common sense
“Don’t open any attachment that you’re not expecting, even if it’s coming from a client or your mother,” advises Moon. Viruses typically come from someone you know. Downloading free programs from the Internet is also not a good idea, as that’s typically how spyware is installed.

Use newer software
In his consulting practice, Moon has seen law firms that still use Windows 98. You’re likely to have more problems with this operating system (which is almost ten years old) than with Windows XP, which Moon recommends.

Buy/replace new hardware all at the same time
When it’s time to upgrade, replace all your office computers at one time, advises Moon. A system can be cloned and replicated onto other systems if the equipment is the same. Even if you buy another computer only a month later, it might have a slightly different video driver, for example, making it more difficult for the overall system to be configured.

Invest in good technology
Get rid of any problematic computers. Buy good, brand name, desktop products like Dell or HP. You want a three-year minimum onsite warranty, so if you have a hardware problem, it can be fixed or replaced at your office, typically the next business day. For your server, Moon suggests a same-day warranty, otherwise your whole office will be down until the problem is fixed. For laptops, Dell offers a “complete care” warranty (basically insurance for accidental damage), so if you drop and shatter your laptop, Dell will still replace it.

Expect to pay about $5,000 per lawyer for computer technology, which should be budgeted every three years, says Moon.

2.  Not Recording All Billable Time

It’s estimated that lawyers lose between 10 to 30 per cent of billable time by not recording their hours. There are several reasons why billable hours go unrecorded, says Dustin Cole, a law firm practice development coach and principal of the Florida-based Attorneys Master Class (www.attorneysmasterclass.com):

You simply forget
You run out of your office while in the midst of a task, see a stack of phone messages on your secretary’s desk, run back into your office to return the calls, and simply forget to record what you were just doing.

Good client discount
You consciously don’t record certain phone calls because they’re from a good client.

Inefficiency recording
You say to yourself that you can’t record four hours for a particular task because you were only efficient for three hours.

Recording more than 24 hours later
If you record time more than 24 hours later based on your memory, then you’re “recording fiction” and will inevitably miss things, says Cole.

Pre-bill write-down
You think the bill is going to be a little high, so you cut it down as you go along.

Potential for Loss

1,400 billable hours/year
x
10 to 30% unbilled
x
$200/hour  =


$28,000 to $84,000 per year per lawyer


Solution

“Stop recording billable hours and start recording time,” urges Cole. Don’t make any subjective decisions when you record your time. Instead, ask yourself at the end of each month, or when the file is completed, if you were worth that time and how much of that time you should bill.

Remember also that clients really pay you for value and results, not hours. How do you bill for the “ah ha” moment? Only 0.1 hour of time? As Cole notes, you need a period of wandering around in the woods to get to the “ah ha” moment. And twenty years of legal experience might be behind that moment. So record all your time and then, at the end, bill what you’re worth.

3. Not Moving to a Paperless Office

“I’m convinced that after having a virtually paperless office for five years now, the cost … is substantially lower than if using paper,” says David Masters, who describes himself as a “paperless small firm general practitioner” in the small town of Montrose, Colorado (www.masterslawfirm.com).

Consider a standard size filing cabinet. It costs about $900. It also takes up some 7½ square feet of space (the typical cabinet is 24 inches deep and requires 18 inches to open a drawer and another 18 inches to stand in front of the open drawer). So now you have the cost of buying or leasing office space to house that filing cabinet, plus you have to pay for heat, taxes, cleaning and other maintenance costs for the building space, notes Masters. In addition, if you use paper, you also have photocopying expenses plus toner and paper costs.

Now consider a paperless system. A hard disk drive with 100 gigabytes of memory costs less than $50 – more than enough for your whole office. (Only two gigabytes are needed to hold information from a four-drawer filing cabinet.)

Masters, who writes frequently on the use of information technology in the practice of law and is the author of “The Lawyer’s Guide to Adobe Acrobat,” runs his practice out of 1,700 square feet of office space; there are two lawyers, one paralegal and one administrative assistant. “We have one two-drawer filing cabinet,” he says. “The top drawer is empty. In the bottom drawer, we use cheap manila folders for current clients in case we need to pop in paper documents before they’re scanned. Everything goes through the scanner and then is put in an electronic file folder (where nothing ever falls out).”

Since getting rid of the office photocopier, the firm has been saving $220 a month previously spent on the copier lease. There are also no offsite storage costs for closed files.

“We’re able to operate virtually paperless with the courts and other lawyers,” says Masters. About half of their clients communicate by email, and the firm sends them digital copies of documents (rather than print copies).

Backing up files

But what if your computer crashes? “What if your office burns to the ground?” replies Masters. “There’s no back-up there. But once you switch to a paperless realm, it’s easy to have several redundant back-up systems.”

He works exclusively on a laptop. Files are shared on the office computer and on everyone’s laptop. Every day at 5:00 p.m., all files are synchronized with a complete back-up of the office computer onto his laptop. Every week, Masters backs up his laptop to his home computer. Three times a week, he backs up the office computer to a tape – he has four tapes at any one time. Once a year, he creates CD backups of all open files. “This is way safer than storing records by paper.”

Potential for Loss

$3,600 for four four-drawer filing cabinets
+
$1,500 per year in rented office space (based on 30 sq. ft. of office space x $50/ sq. ft. per year)
+
$2,640 per year per photocopier (based on $220 month lease) =


$7,740+ per year


Solution

Go paperless. Here’s what you’ll need:

Computer monitors
“Fear of technology basically prevents lawyers from moving to a paperless office,” says Masters. “You have to get over the mental hump of looking at documents on a screen.” He has two monitors for his computer – one monitor for the document he’s working on and the other with Adobe Acrobat so he can simultaneously look at other documents.

Scanner
A scanner is key – a $2,000 scanner should suffice for a small- to mid-size firm.

Adobe Acrobat
And make sure you have the full version of Adobe Acrobat (not just Reader) at every desktop in your firm, says Masters.

4.  Limiting Use of Support Staff

More on CBA PracticeLink

Hiring and Working with Support Staff: A Guide for Solo and Small Firm Lawyers

Welcome to Reality – Chapter 4: Working With Your Assistant

Unwisely cutting back on support staff is associated with huge costs – and a mistake made by many law firms. Cole notes that a “disturbing and financially limiting trend in law firms over the past few years has been limiting the amount of staff support… ostensibly for the purpose of reducing overhead.” But instead of achieving the desired effect, the result has been the reverse – reduced lawyer revenues – as lawyers are forced to spend time doing what a paralegal or secretary should be doing.

The problem is that firms are not using staff efficiently, explains Cole. An example is the lawyer with revenues of $1 million whose senior secretary spends most of her time typing and faxing, when she should be doing much higher level drafting work, organizing the lawyer’s practice, and so on.

Some sole practitioners are even tempted to work without any support staff (again, in a misguided attempt to save costs). Cole says that instead of billing their own $200 per hour, the average sole practitioner could be spending up to 50 per cent of their time working on paralegal, secretarial or administrative tasks that they should be paying someone $25 per hour to do.

Potential for Loss

(200 hours of support staff work
x
$200/hour per lawyer)
-
(200 hours of support staff work
x
$25/hour per employee that should be doing the work)  =

$35,000 per year per lawyer

Solution

Delegate
Take advantage of the principle of leverage, advises Cole. Move work down to the lowest level that can be performed competently. Identify what you should be doing as lawyer, and delegate everything else to support staff.

The more complex your practice, the greater your need is for more skilled support staff. A top real estate lawyer may have four paralegals and two secretaries. A sole practitioner should have, as a minimum, one experienced secretary/assistant. And you should be hiring an office manager when the firm is between seven to ten lawyers in size, says Cole.

Develop office systems
For more efficient use of staff, create standardized systems and procedures for the operation of the office. If your secretary is to take all your phone calls, how do you want the phone answered? If your secretary is to delegate dictation down to a typist, create a standard dictation form.

Appropriate Functions of Lawyers and Staff

Partner

  • Marketing
  • Management
  • Supervising files and cases
  • Giving legal advice and strategizing
  • Serving as lead counsel on trials

Associate

  • Writing briefs
  • Conducting interviews
  • Attending examinations for discovery
  • Appearing at hearings

Paralegal

  • Document assembly
  • Research
  • Drafting pleadings
  • Conflicts checks
  • Acquiring records

Legal Secretary

  • Organizing
  • Scheduling
  • Word processing

Clerk

  • Filing
  • Copying
  • Answering phones
  • Errands

* adapted from Division of Functions Worksheet, by Dustin Cole, Attorneys Master Class



5. Underutilizing Word Processors/Suites and Practice Management Software

“A word processing application coupled with practice management software is the most under-utilized technology,” says Moon. In many firms, staff still manually performs tasks that should be automated.

The time wasted is enormous. One of Moon’s clients told him that a particular document, which used to take from four to eight hours to prepare, now takes just 20 minutes with document automation. To recoup the cost of their investment, the firm now charges a flat fee per automated will or medical request.

Moon estimates that by maximizing your use of word processing/practice management software, you could see an extra 15 minutes of work a day from your support staff or increase your billings by 15 minutes a day. You should recoup your investment within three months (for a small firm) to 12 to 18 months (for a solo lawyer), including downtime to get trained, to customize the software, etc.

Potential for Loss

0.25 lost hours/day
x
240 working days
x
$200/hour  =

$12,000 per year per lawyer


Solution

“The greatest investment a firm can make is to get their word processing and practice management software working together for document automation,” says Moon.

The most common practice management programs for law firms are: Amicus, Time Matters, Abacus, Practice Master, and Pro Law. The three major ones for small firms are Amicus, Time Matters and Practice Master. Also keep an eye out for PC Law, a billing system, which is developing a practice management software program. The software is fairly inexpensive – about $150 per user to purchase. When you make your purchase, make sure your practice management software integrates with your billing system, so bills can be automatically generated.

6.  Accepting Bad Clients

More on CBA PracticeLink

Client Selection – The Single Most Important Way to Increase Profits, Reduce Stress and Better Serve Your Clients

Cole classifies clients into categories from “A” to “E.” “A” clients are dream clients who pay without fail and delay. Your “E” client is your worst nightmare. “D” and “E” clients are uncooperative, argue with you, and don’t value your expertise.
 
Unfortunately, all firms accept a few “D” and “E” clients. The main reason is fear that other clients may not show up, says Cole. And the lower the revenue of the lawyer, the greater number of “D” clients that the lawyer will take on.

“Every firm is aware that “D” clients are money-losers,” says Cole. But few are fully aware that the cost of such clients far exceeds uncollected billings. The additional costs include:

  • the potential for neglecting “A” and “B” clients
  • extreme stress and frustration – “These are the clients who will have you going home at night wishing you weren’t in this business,” says Cole.
  • the opportunity costs of turning down more valuable work
  • a tendency to avoid working on files from “D” and “E” clients, which can result in missed deadlines and malpractice claims

These clients can cost you up to 50 per cent of your revenues, says Cole.

Another scheme for rating the cost of poor clients considers whether clients are promoters or detractors of your firm. Based on research from MIT, clients can be classified according to their answer to this question – On a scale of one to 10, where one is “not at all likely” and 10 is “extremely likely,” how likely is it that you would recommend us [our law firm] to a friend or colleague?” If the client answers nine or 10, then they’re a promoter; seven or eight, they’re “average”; six or less, and the client is a detractor, says Robert Millard, a principal with the legal management consulting firm of Edge International (www.edge.ai).

There are no figures for what detractors cost law firms. But a 2003 study on Dell computers showed that the “average” customer was worth $210 to Dell, promoters were worth $328 each, and detractors were worth an astonishing -$57. Applying this analogy to law firms, unless clients feel very well-disposed to their legal advisors, they’re likely to result in a net loss, not a profit.

Potential for Loss

1,400 billable hours/year
x
$200/hour
x
estimated 50% of your time  =

Up to $140,000 per year per lawyer

Solution

Never take on a “D” or “E” client
Say “No” to any new clients or new files from existing “D” or “E” clients. Fire detractors as soon as humanly possible.

Develop an evaluation checklist for screening clients
“You need to create an evaluation sheet, a fairly objective screen to help you say no when things are slow and you’re tempted to take on a “D” client,” advises Cole. This should be used in every prospective client interview. The checklist should consist of a series of questions to help determine whether any warning flags are raised that point to a potential “D” relationship.

Get a partner to approve new clients
For all new matters above a certain estimated total fee, say, above $10,000, both the checklist and potential file should be reviewed by a second lawyer before the file is accepted.

Establish a strong business development plan
Use the 25 hours you would have spent on the “D” client (getting paid for ten) constructing a sound business development plan, improving your marketing and referral skills, and paying attention to your “A” clients.

How to Screen Out Bad Clients

“Bad” clients are costly. Pay attention to the following when evaluating whether or not to accept a potential new client:

Referral source:  Breathe easy if the new client has been referred by a good existing client. Be wary if they found you from the phone book.

Matter type:  Is the work you’re being asked to do within your area of expertise, and is it work you like to do?

Financial questions:  Note if the new client asks, “How much will this cost?” A red flag is raised if they don’t want to pay a retainer. “If the client says they can pay half the retainer now and the other half later, walk them to the door and say goodbye, as this is all the money they have to pay you,” says Cole. He also suggests that no lawyer should do a free consultation unless it’s a short free telephone conversation – charge at least $50, he says. “If you don’t charge, the client won’t respect you and is just shopping for free information.”

Cooperation:  How many other lawyers has the client retained on this matter? If they’ve fired other lawyers before you, say goodbye, says Cole, as you’re next. If they say this is an urgent matter and they want 100 per cent of your attention now, expect the client to be difficult to work with – they’ve had plenty of time to deal with the problem and likely lack responsibility. If they show up late for their first appointment, without the requested materials, show them the door.

Attitude:  Does the potential new client display a level of anger disproportionate to the matter? Do they like lawyers?

7.  Keeping Mediocre Clients

Then there are “C” clients, according to Cole’s classification. They pay reduced rates, and often don’t pay for 90 days. But as Cole notes, “C” level clients are often your “meat and potatoes” clients – they do send you work and contribute substantially to the overall revenues of the firm. Still, just as with “D” and “E” clients, there are hidden costs and dangers if your firm retains too high a proportion of “C” clients, including:

  • the opportunity costs of not having time to work on better billable work
  • loss of additional billable hours that the client, by agreement, doesn’t pay for, such as supervisory time
  • overwork and frustration, leading to a “good enough” attitude, and increased risk of errors and malpractice claims
  • loss of income – the firm becomes a bank, continually loaning the client substantial funds (receivables) on a short-term basis

Potential for Loss

1,400 billable hours/year
x
$200/hour
x
estimated 50% of your time  =

Up to $140,000 per year per lawyer

Solution

Institute a focused marketing program
To phase out “C” clients, institute a focused marketing program, advises Cole. Your aim is to gain new clients at higher rates, with the long-term goal of moving away from lower-rate work.

Raise your fees
Cole also advises that you implement across-the board modest fee hikes and get your clients to agree to greater use of (and billings by) paralegals and legal secretaries, with supervisory hours permitted for the lawyer.

8. Not Recouping Printing Costs

Firms used to charge back long-distance and fax costs to clients (before telephone rates became so inexpensive that it’s often no longer now worth doing). And it’s standard practice for firms to charge photocopies back to the client. Why not recoup the cost of your printing too?

You can gauge your printing costs by the number of boxes of paper you buy or go through a month. Moon estimates that most small law firms probably easily go through 50,000 pages every two months, or even every month.

Similiarly, as digital printing and scanning replace copying, many documents that your firm produces are likely going untracked and unbilled. One study pegs this cost at up to $5,000 per lawyer per year in otherwise reimbursable client expenses.

Also note that your total printing costs for an inkjet printer are likely to be more expensive than for a laserjet printer, says Moon, even though the initial cost of an inkjet printer is much cheaper. For 5,000 pages, the per-page printing cost for an inkjet is almost 15 cents a page, versus four cents a page for a laserjet.


Potential for Loss

$0.02/page
x 300,000 to 600,000 pages per year

=$6,000 to $12,000 per year

Solution

Lease a printer
Leasing a printer/photocopier (rather than buying a laserjet printer) is likely the cheapest option. Leasing costs from between ½ cent a page to 10 cents a page (the supplier pays for maintenance and toner), but you should be paying no more than 2½ cents a page, says Moon. He worked with one small law firm who negotiated a rate of ½ cent a page. In contrast, a good quality office printer/copier costs $3,000 to $4,000 and up.

Charge back printing costs to clients
There are several print cost (and scanning cost) recovery software packages on the market today (e.g., Equitrac). In theory, you should be able to charge back the final print cost – but it’s a grey area as to whether you can charge for drafts. In reality, whether you can recover your printing costs, and at what charge, depends on what you can negotiate with your clients. You’re more likely to be able to recoup your costs from individual clients than from savvy corporate clients.

One option with corporate clients is to try and recover your costs by charging a one-time administration fee. One of Moon’s clients, an insurance law firm with eight lawyers, charges 2 per cent of its yearly overhead to each client instead of individual charges for printing, copying, faxing, long distance calls, etc.

More on CBA PracticeLink

Guide to Time Management for Lawyers

9.  Surrendering Control of Your Time

Most lawyers aren’t in charge of their time, observes Cole. Faced with hundreds of interruptions a day – from phone calls and emails to staff questions and drop-in visits by other lawyers – the typical lawyer develops a reactive way of dealing with the world. But the costs of not controlling your time are enormous, says Cole. Like failure to record working hours, it’s estimated that you lose 10 to 30 per cent of your billable hours because of time chaos.

Potential for Loss

1,400 billable hours/year
x
10 to 30% of lost time 
x $
200/hour  =


$28,000 to $84,000 per year per lawyer

Solution

The solution is to structure your time. Block out time for returning phone calls, working on files, meeting with clients, etc. Ask your secretary not to interrupt you between 9:00 and 10:00 in the morning, for example. Cole notes that when you’re always accessible, staff are less likely to think for themselves. Get staff to collect their questions in a group (and request that they prepare possible answers too).

10.  Cutting Corners with IT Consultants

As with many things in life, you “get what you pay for” when it comes to your information technology consultants. Cutting corners on their services may prove more costly than the apparent savings. Moon recalls one law firm client that wanted to use their own IT staff person to assist the outside consultant with a document automation service. Unfortunately, their staff person was unfamiliar with the legal field, and considerable time had to be spent educating this person on legal terms such as “plaintiff” and “defendant.” In the end, the firm paid more than if they had simply let the consultant do the work.

Potential for Loss

Difficult to estimate, but can range from hundreds to even thousands of dollars.


Solution

For small and mid-sized law offices with up to 100 people, outsourcing your IT work is cheaper than retaining an inhouse IT employee, advises Moon. You can choose between a “call-on-demand” or a regular maintenance and monitoring service. A five-lawyer firm can expect to pay $500 per month for call-on-demand service; for preventative maintenance, the cost is about $700 per month. Larger firms can expect to pay up to $4,000 month (the consultant may be in almost daily to work).

For names of recommended consultants, contact your sales rep for your legal billing or practice management software.

Janice Mucalov is a freelance writer in Vancouver.

Neither the author nor the CBA should be construed as endorsing any product or website listed in this article. The views expressed in this article are those of the author and do not necessarily reflect the views of the CBA.
In this document, any reference to "jurist" or "lawyer" includes, where appropriate, "Québec notary". Please note that "Potential for Loss" figures are meant as broad estimates only, and will vary based on the unique circumstances of each law firm.
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