The Best Way for Law Firms to Increase Their Profitability in 2021

If you want to increase law firm profitability, you have to track it relentlessly and share the results of your analysis widely.


Although profits-per-partner has become a widely known metric for large law firms, most smaller firms don’t track profits assiduously. There is a world of difference between having your accountant calculate profits at year’s end for tax purposes and measuring profits on an ongoing basis for use as a decision-making tool.


Here are five elements of financial planning that your firm can implement to increase profitability in 2021.


  1. Start tracking revenues and expenses by practice area. This will allow you to run year-to-year comparisons and identify which people and practice areas are doing exceptionally well or underperforming.


  1. Create quarterly revenue goals by practice area and, if applicable, by office. And put these in writing.


  1. Use a consistent measurement, like full-time equivalent (FTE), to allocate overhead among profit centers.


  1. Communicate, on a regular basis, the firm’s progress toward meeting quarterly goals. As consultants to law firms, we have seen how weekly reports to partners can be easy to ignore; monthly reporting tends to work best, especially if the firm engages in meaningful discussions about the results.


  1. Create a marketing budget that is aligned with your revenue goals. Too often, the marketing plans prepared by individual lawyers (assuming they are asked to prepare such plans) are nothing more than rehashed versions of prior years’ reports. Instead, focus on each marketing activity in terms of its potential profitability. This will help you to avoid one of the biggest problems facing law firms – a lack of investment in effective marketing.


Understandably, lawyers are drawn more to growing their books of business than to worrying about boring accounting principles. When, as now, law firms, clients, and their vendors might be receiving government loans, it is especially important to be able to determine how your business is actually performing. More than ever, you should focus on profitability.

Raising Your Rates for Existing Clients

With a new year on the horizon, you may be thinking about how you can raise revenues. It’s common to consider upping your hourly rates or flat fees annually, but there are right and wrong ways to go about this. As we talked about last year, a simple “Happy New Year! We’ve raised your rates!” is not likely to go over well with clients.

Especially in circumstances where you’ve worked with a client for years without increasing their hourly rate, changing that unilaterally in January will likely lead to objections and may run afoul of the ethics rules. You don’t have to limit your fees even when it comes to your best clients, but you do have to communicate with them so that the change doesn’t come as a shock.

Clients need to be reminded of the value you have provided. When you’re looking to raise your rates on existing clients, it’s up to you to provide the context that lays the foundation for the price hike. Use the year end as a reason to schedule an informal (and free) call or meeting to discuss the relationship and review where things stand on various matters.

Compile success stories into a document that summarizes the progress you’ve made on matters for that client and showcases the value you have provided. This doesn’t need to be a glossy marketing piece. It can be a few paragraphs in a letter or a list in the body of an email. If you’re unsure about where to start, look over your invoices for that client to review what you’ve accomplished.

If you expect to continue working with this client for a good while, it’s worth taking the time to create a “year in review” summary and come to an understanding on how you want to move forward.

When it comes to actually asking for a higher rate, here are five specific guidelines to follow:

  1. Make sure your messaging is geared toward what matters to the client. Don’t try to justify your increase by citing higher costs. That is unlikely to be persuasive.
  2. Instead, discuss what you have done in the past and then suggest higher rates that appear reasonable in relation to what you have accomplished since the last time you increased rates.
  3. Consider suggesting an overall increase of at least ten percent.
  4. Be prepared to make a selective and targeted proposal. Suggest hourly rate increases on specific matters or on parts of a project that will arise in a few months. For example, suggest that the new rates kick in after the current discovery phase ends and dispositive motion practice begins.

Take a multi-year approach. The longer you have allowed rates to go unchanged, the more likely it is that you will need more than one year to get your rates to where you want them to be. Increasing rates the first year is the first step to increasing them again in subsequent years.