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Identifying risks to profit leakage
Blog //20-12-2023

Identifying risks to profit leakage

In an industry where every billable minute counts, profit leakage is a significant and very real concern. As profit leakages continually pose risks to their financial health, almost all firms have looked to raise the billable hours targets in 2023, while around half of UK firms had done so by more than 10%.

While this shows the need to raise additional revenue, fee-earners should continue to be supported by law firms in providing tools to not only maximise the number of billable hours possible, but also to ensure that those billable hours convert to the firm’s bottom line without profit leakage.

To do this, firms need to first understand the sources for profit leakage, before then deploying solutions that will help maximise efficiency and profit retention.

Profit leakage in law firms can arise from various sources such as poor or inadequate time recording practices, poorly managed finances, wasted resources and failure to charge clients for work carried out. Therefore, performing an audit to detect and assess each area of possible leakage should be an essential part of the management process.

Missing time entries

Missing time entries are a major concern identified by law firms as far as profit leakages are concerned. By not capturing time in an automated, accurate and consistent manner, fee-earners are often under-reporting hours, by up to 10% if fee-earners leave time entries to the end of the day or by as much as 25% if left by a day or two.

Time recording is therefore of upmost importance in ensuring that the billable time worked is billed and paid for accordingly. Even by automating the process, rather than making it an end-of-the-day task, the 10% reclaimed will cover the additional ask in billable hours recorded for many firms.

Time capture tools such as Carpe Diem provide automated time recording tools that will input time entries directly into case files, and even suggest time entries you may have missed through intelligent automation. Creating a time recording process that is regimented, automated, and backed by intuitive digital tools will go a long way in finding billable work that has otherwise gone unbilled.

Fee write-offs

Fee write-offs also pose a challenge to law firms in terms of profit leakage. Last year, it was revealed that almost half of firms had increased write-offs by more than 10%. These often occur either due to an estimate that was too high, or by expenses being flagged.

Scoping work effectively is key to a solid foundation with clients, but lawyers are often found lacking when discussing pricing with clients which causes firms to provide a fee estimate, which is usually incorrectly scoped and over-estimated in order to provide some ‘wiggle room’.

Fixed fees are on the rise, in fact fixed fees are used by 60% of small law firms in the UK. This can only be effective through rigorous analysis in the scoping phase to create a price point that is both profitable and competitive. Data from case management and time recording systems can be instrumental in driving solid data-led decisions to that end.

Mistakes, complaints, and delays

It’s all very good having the systems and workflows in place to be efficient, but it also takes accuracy and timeliness to complete a matter in an efficient manner – not least to the satisfaction of your client.

If work is incomplete or inaccurate, this can slow down lead times, which can add several weeks to the closure of a matter in some cases. This is particularly the case when liaising with third parties and government agencies. Firms can combat this by building in smart automation wherever possible to reduce the potential of human error, data inefficiencies and inaccuracies.

Identifying profit leakage areas and addressing them accordingly is essential for maximising a firm's revenue. Law firms need to systematically identify where they are losing the most revenue and implement measures to address those areas. Firms can implement a range of processes and technology to minimise profit leakage. By taking proactive measures to address these profit leakages, law firms can boost their profitability, streamline their operations, and ultimately deliver better service to their clients.


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