When I was a private banker in the late ‘90s in Wilmington, North Carolina, I found a successful niche prospecting law firms. There were a couple of things I learned first-hand about attorneys that I believe contributed to my success:
- They want referrals. I sent a ton of real estate closing business to attorneys because in the late ‘90s, there was an influx of wealthy retirees moving to coastal North Carolina from Pennsylvania, Ohio, New Jersey, and New York. These transplants were buying and mortgaging their dream homes and beach properties; I was able to spread the wealth to many attorneys and kept them quite busy for a while. These same retirees needed estate planning attorneys as well, so I became a great referral source for the firms I called on.
- They tend to experience cash shortfalls in the first quarter. Because I had so many attorneys as clients, I learned a lot about their cash management challenges. Most need cash in Q1 because they collected receivables aggressively at the end of the year and dished out annual bonus payments in the fourth quarter to partners and staff. Most carry a line of credit of $1-3 million for these reasons…and others…so I became the “Line of Credit Queen.”
Making your case to attorneys
Thinking of trying your hand at banking the law firm niche? Here are some other things that you should understand about attorneys. Knowing the trends and challenges that they care about allows you to offer advice and solutions that are tailored to their needs and gives you a huge advantage over your competition that focuses only on pricing and rates.
Alternative fee arrangements
Driven by client demands for cost containment, firms are offering alternatives to the traditional billable hour model. These alternative fee arrangements (AFAs) include fixed fees for all or parts of an engagement, caps on hours charged, contingency fees, and billing rates tied to achievement of specific outcomes. As technology has reduced the time required to conduct research and prepare documents, clients are questioning the fees billed for such tasks. While hourly billing is expected to remain the primary billing method for law firms, use of AFAs is expected to grow.
Pressure to reduce fees and costs is increasing the outsourcing of work to onshore or offshore legal service providers. Onshore service providers include contract lawyers, paralegals, and other administrative specialists who work offsite and online to provide legal support services to the firm’s specifications. Offshore legal service providers, typically located in India, can reduce the cost of transcription, research, patent searches, data entry, and billing services by up to 80 percent. The ABA has approved the use of outsourcing, given that the outsourcing lawyer is responsible for all the work done and clients are informed of the arrangement.
Lower leverage ratio
Leverage is the ratio of associate lawyers to partners at a firm. Higher leverage allows firms to generate more revenue per partner and delegate work to lower cost associates. Leverage has been a key element of the business model at large law firms, but these firms expect reduced leverage to be an on-going trend as they rely more on contract lawyers and clients balk at paying billing rates for recent law school graduates. A recent survey of large law firms found that 47 percent of respondents had clients who refused to pay for work done by first- or second-year associates.
Fewer equity partners
To boost profits per partner in the face of flat or slow revenue growth, many law firms are reducing the number of equity partners. Some are lengthening the traditional 7- to 10-year time period before associates are eligible to become partners. Some have created the position of “non-equity partner” as either a stepping stone to equity-partnership or as an alternate career path altogether for associates. Almost 60 percent of surveyed law firms expect to increase their staff of non-equity partners from 2012 to 2017. Many large firms are asking under-performing partners to leave the firm or are “de-equitizing” them.
Efficiencies from technology
Law firms continue to use information technology to improve productivity and reduce costs. The time required to conduct legal research, prepare documents, and create client presentations has been greatly reduced by searchable online legal databases and personal productivity tools. The use of electronic documents reduces costs for delivery services and records storage. Small law firms are also adopting Software-as-a-Service (SaaS) practice management systems to eliminate the cost of maintaining in-house servers and software.
Mergers and acquisitions
Slowing growth in demand for legal services has forced some firms to turn to mergers and acquisitions to achieve increases in revenue. Altman Weil reported that there were 85 mergers involving U.S. law firms in 2016. This was the highest number since the consultancy began tracking merger activity 10 years ago.
Clients are increasingly demanding discounts or refusing to pay for fees they deem unreasonable. Disputes over the hours or billing rate charged for work delays collection and often results in negotiated discounts. Clearly setting client expectations about fees in the engagement letter can help avoid billing disputes.
Increased billing complexity
Law firms are being asked to modify the traditional billable hour model by clients seeking cost containment. The addition of fixed fees for certain work, caps on billable hours, or variable billing rates adds complexity to the billing system. This additional complexity can negatively impact the timeliness of invoicing and lead to more disputes over line item charges.
Businesses have cut the budgets of their legal departments, forcing them to reduce spending on outside legal services. Clients are carefully scrutinizing legal bills and questioning or refusing to pay for line items they consider unreasonable. Law firms have been forced to discount billing rates or perform work for fixed fees. Some clients refuse to pay for “soft costs” they consider covered by overhead rates, such as charges for copying, scanning, and faxing.
Want to have this kind of in-depth analysis on more than 300 other industries?
All of the industry information in this post came directly from the Vertical IQ Industry Profile on Law Firms. Reviewing this profile, or even doing a quick 5-minute review of the industry’s Call Prep Sheet, gives you valuable insights into your attorney banking prospect–their opportunities as well as the issues that may be keeping them up at night.
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Susan Bell | Senior Sales Director