June 20th, 2018 David Finkel (Taxloopholes.com Advisor)
Most professional service firms have operating profit margins from 25-40 percent. This means that out of every dollar of revenue, 25-40 cents drops to their bottom line as pre-tax profits. I want to share with you a simple strategy that one law firm I work with used to increase its operating profit margin by 29.5 percent, and how you can too. This particular strategy will help you boost your profitability not by increasing the number of clients you serve, nor by reducing your expenses, but rather, by making every client you serve more profitable.
First, let me set the scene. This particular law firm whom we’ve coached for a little over one year now, I’ll call Powers Law Group (not their real firm name, but they asked for some privacy and I need to respect that.) They do a bit under $5 million a year in billable work and have been doing this for close to twenty years.
But when they started working with us they felt a bit stuck. They were successful, but they were not really progressing. We looked at all the places in their practice we could help make a significant difference from their internal systems, to their marketing, to their hiring and onboarding systems. While we did work with them on all of these things and other items as well, the one strategy we brought to them that made the biggest different to their profitability (increasing their operating profit by over half a million dollars a year) was with respect to how they priced their services.
We did this as a two pronged approach. First, we did a thorough market review of what other competitive law firms charged in terms of hourly rates for their legal staff (e.g. attorney, paralegal, and legal secretary). We found that we could increase pricing across most of their staff. In some cases these increases were $25 an hour, in others the increase was $50 an hour, and even in one case the increase was $90 an hour.
Remember, every increase to hourly rate drops down to your bottom line since in most cases you are already paying the full salary cost of the team member who is performing the hourly work. That means an incremental increase in hourly rate has a magnified return to your profitability.
The second prong of our approach with Powers Law Group was to reduce the regular discounting they were doing on client bills.
You know the pull. You review your invoices and see that your firm charged Mr. Myers $20,000 for a project and you feel like he might have sticker shock, so you discount the bill.
In those cases, Powers Law Group was giving a standard discount of 22 percent. While I couldn’t talk the firm’s founder out of this practice in whole, I did get him to agree to reduce their standard discount to 15 percent. This added 7 percent to their operating project margin on all these previously discounted invoices, which kept the client happy, and the extra profitability kept my client happy.
When was the last time you reviewed your firm’s hourly rates? Not just your personal hourly rate, but what about the rates you charge for your other professional and support staff? Do you even charge for your support staff? If not, and if they are doing direct client work, I strongly encourage you to bill for it. When you explain how this saves them money since the support staff is doing the work at a much lower hourly rate of the other professional staff, generally this won’t be an issue.
For example, another of our business coaching clients, Eco Resource Group, was able to significantly increase the “project management” rates they billed at for their administrative team members who did direct client work.
Finally, if you do resort to discounting because somehow in aggregate the amounts you’re invoicing for seems too high for your client, my coaching to you is to discount less than your gut says you should. In almost all cases you’ll find that your client is still fine and the extra margin you’ll enjoy respects your firm’s value.