Preparing for an Economic Downturn: Part 3: Identify Unprofitable Clients and Services

 If you missed earlier parts of this series, you can read them here:

Part 1: Introduction

Part 2: Protecting Cash Flow and Client Base

There was a time when I was a little bit obsessed with productivity books. (That time was known as my entire adult life up to and including today.) I don’t know why, but I love them. All evidence to the contrary, I always feel like I am one good self-help book away from really firing on all cylinders. In actuality, I have a shelf full of books that I never look at and as for firing on all cylinders… I could charitably be described as cruising in eco mode.

Of the many, many self-help books I’ve read, one that has really stuck with me over the years is Stephen Covey’s The Seven Habits of Highly Effective People. I don’t think it’s especially magical, but it was the first one I ever read. I was introduced to it by my father-in-law when I was a third-year law student who had just gotten engaged to his only daughter. I try not to read too much into him putting that book in my hands, but a strong case could be made that he was worried that his daughter and I would one day end up living in his bonus room. (Fun fact: we did while studying for the North Carolina bar. Dream son-in-law!) 

Anyway, Seven Habits. 

One of the habits that Covey highlights in the book is “sharpen the saw.” If memory serves, it was based on the quote from Abraham Lincoln: “if I only had an hour to chop down a tree, I would spend the first 45 minutes sharpening my axe.” I’m sure you get it by context, but the basic idea is that when you have heavy work to do, the temptation is to immediately hurl yourself into as fast and hard as possible. But the wiser course of action is often to first take stock of your tools and make sure you have them in perfect working condition. It ultimately reduces how hard you have to work to get the result you want.

What, you may justifiably be thinking, does any of this have to do with preparing your law firm for an economic downturn?

Well, much like Lincoln (always a good day when we can find some reason, however thin, to compare ourselves to Lincoln) faced with chopping down the tree, preparing your firm for a downturn invites the very strong pull to launch yourself immediately into the fray: do more business development! Work the open cases harder! Call long term clients that you haven’t heard from! That headlong rush may be exactly the right set of things for you to do, but you also may be whacking away at a really big tree with a really dull axe. 

In this case, sharpening the axe has to do with taking an appraising eye at your clients and your services and determining if any of them are unprofitable. If you’re doing work that isn’t profitable, it doesn’t matter how much more of it you do or how hard you throw yourself into it… doing more isn’t going to get you any further ahead. As a wise person once said, the first rule of getting out of holes is to stop digging. 

Some of you may regularly review financial reporting and overhead costs and be able to confidently say that you have an excellent handle on the profitability of your work performed in your firm. Great! Others may not have the time to look at any financial data except the gross amount of revenue coming in and hope the amount left over each month after bills are paid is sufficient. I get it. Running a small law firm is a full contact sport. 

As we navigate the months ahead, it will be helpful to do at least some analysis to determine if you are working with unprofitable clients or areas of practice. Since nobody has enough time to get everything they want to done, I’ll offer here a few prompts for you to consider when you have a moment to step back and look at the big picture:

1. Do you have any clients for whom you are routinely writing off work, reducing bills, or otherwise not being compensated for the time you spend?
2. Do you have any portions of your practice for which your collection rate is lower than, say, 95%?
3. Do you have any clients or referral sources who routinely bring work that is of such an urgent nature that it crowds out your ability to do other work and absorbs more of your time than is captured in your billables?
4. Do you have any services that you are providing that require larger amounts of staff support to provide and draw staff members off of other billable work?
5. If you bill in fixed fees, when did you last audit how much staff and lawyer time was required to produce the work?
6. Do you have any work that comes in solely from a paid advertising or other paid marketing channel? If so, when did you last audit the cost per client of advertising or marketing spend?

(I’m trying really hard not hear Jeff Foxworthy asking those questions.)

If you’ve never evaluated the profitability of the work you’re performing, those prompts will give you a good place to start. You don’t need to go through them all or to know all the answers. If you’re new to this kind of analysis, it’s easy to get overwhelmed and just go into ostrich mode. Totally understandable, but I’d urge you not to. Picking just one of these prompts to start doing a little research will move you forward and better prepare you and your firm for challenges ahead. 

It goes without saying, but if you find that some clients or services are unprofitable, you will want to find a way to move on from them. It can be painful, but if you don’t do it, you’re swimming with a rock tied around your foot.

As always, if you’d like to schedule a consult with me to talk through this stuff, the consults (3 per year) are free for Lawyers Mutual insureds. You can schedule one that works for you on this page that automatically connects to my calendar.