Law firm profitability: Surviving economic uncertainty

ARC CostsBy Legal Futures Associate ARC Costs

Law firm profitability is necessary for effective business growth and development. Many businesses within the legal services industry are currently facing financial difficulties due to recent law reforms, the pandemic, and the current cost of living crisis.  We even have a recession to look forward to which is being forecast to last up to two years. However, such difficult times can also provide opportunities for businesses to evolve and thrive, and it is now more important than ever to take control of your law firm’s financial health to ensure continued profitability and to stimulate growth. ARC Costs have provided advice on key areas you can focus on to help improve your law firm and increase profits for your firm.

Manage your legal costs effectively

Settling legal costs at the end of a case is something that must be dealt with by all legal departments, regardless of their practice area. Managing your legal costs effectively will help you to limit your overheads and maximise the profits generated through legal costs following the settlement of a claim.

However, costs should not only be considered on conclusion of a case, and should always be a consideration from the outset. Failure to manage legal costs from the outset can undo hard work in conducting a case. Firms should pay attention to ensuring the retainer is properly drafted with key areas including: (in the case of Conditional Fee Agreements) success fees calculated compliantly with a bespoke risk assessment; appropriate billable hourly rates set to reflect at the very least the most up to date guideline hourly rates, enhanced where appropriate for complex claims; and appropriate interim billing practices implemented in private instruction matters, or ensuring payments on account are obtained in CFA type cases.

In inter-partes disputes where additional fees can be recouped, negotiating your costs successfully will help to ensure that you are obtaining maximum profit from each case. An experienced costs draftsman or costs lawyer will significantly benefit your firm in recovering maximum costs and disbursements through expertly drafted costs budgets and bills of costs. They can also assist you through the process of detailed assessment and costs lawyers can represent your case if it proceeds to a detailed assessment hearing.

In legal aid matters, it should also be ensured that you are maximising your time recording and profit cost recovery, to ensure escape from fixed fees and that surplus Work in Progress (WIP) is not going to waste.  Consideration of issues such as discretionary enhancements in non-typical cases can also largely improve your costs recovery in legal aid cases, and simply obtaining the input of a costs professional in billing and processing matters on CCMS can drastically improve your firms costs recovery and cashflow.  It is also imperative for cashflow purposes that your firm makes good news of Payments on Account, for both disbursements (which can be recouped immediately) and profit costs (which require the case to have been open for atleast three months).

Debts and backlogs management

With every law firm, there is inevitably historic cases seen as difficult files which have been left without full costs recovery having been achieved.  Whether it is legal aid work where POAs have been obtained on historic cases and the final bills never submitted (we sometimes work with firms with legal aid case backlogs of more than 5 – 10 years!), or inter partes cases where an insurer has refused to pay certain disbursements or elements of profit costs, and has simply closed their case and no action has been taken.  These files will all contain lost amounts of profit costs which need to be reviewed, processed and either steps taken to obtain recovery of outstanding fees, or amounts written off and the files closed.

These backlogs of cases can be passed to a costs professional to clean up and deal with, and all our fees can be recovered in addition from either the Legal Aid Agency or Paying Party.

It is also a good idea to look at ways to improve your firm’s collection processes to ensure any outstanding debt owed to you (which has been agreed to be paid) has in fact been paid.  It is not uncommon for Paying Parties in civil disputes to fail to honour payment timescales, and ensuring prompt action is taken, either to issue Part 8 proceedings, obtain a Final Costs Certificate, or commence enforcement action, is imperative in maximising your cashflow.

Use legal technology to improve efficiency and profits

Most firms have now made the transition to going paperless; however some firms are still working using a paper file system. The benefits of working digitally are endless and will significantly improve your practice management. A digital case management system will increase the efficiency of all staff by reducing tedious tasks, such as searching through paper files, allowing file handlers to focus on more complex areas of litigation and settle cases more efficiently.

A reduction in paper files means that your firm will require less storage space. This will free up areas in your office for additional staff. You may opt to downsize your office, reducing your real estate costs.

Use of a cloud based case management solution, such as Proclaim will be beneficial for your firm as it can be developed in a way which improves processes, increases efficiency, improves client satisfaction and maximises profits. Using a Proclaim developer to automate or integrate your system can increase your law firm profitability due to the time saving impacts for fee earners.

Market your firm effectively to improve law firm profitability

Marketing is one of the main components required for improving law firm profitability. One of the biggest mistakes a firm can make during times of economic uncertainty is cutting back on essential services, such as marketing. All of the most profitable law firms make use of digital marketing in the promotion of their firms.

The best thing about digital marketing is that it doesn’t have to be expensive. Investing in organic marketing methods, such as search engine optimisation can have long term, sustainable benefits for your firm, as opposed to using paid advertising which can often be expensive and results will be short term.  It is not uncommon to see some firms spending tens or hundreds of thousands on paid aids, when the same results could have been achieved at less than a tenth of the price with properly implemented search engine optimisation.

Understand your firm’s data

Understanding your law firm data is essential for effective practice management, business development and of course, law firm profitability. Law firms collect and store huge amounts of data which can, and should be used to help make important business decisions.

Examples of real time data that can be used by law firms to make important business decisions include:

  • KPIs
  • Fee earner performance and utilization rates
  • Realization rates
  • Client feedback
  • Client and matter inception data
  • Financial data
  • Profit and loss data
  • Marketing data
  • Amount of work in the pipeline

How can ARC Costs assist?

ARC Costs are a firm of Law Costs Draftsmen and Costs Lawyers who regularly assist law firms across the country, and focus upon digital processes. Use of our legal costs services will vastly assist in improving your law firm profitability. We assist in all areas of costs, from legal aid billing and CCMS processing, to inter-partes negotiations and the preparation of Costs Budgets and Bills of Costs.

Furthermore we invest heavily in IT and digital marketing processes, and form part of a legal group that regularly provide assistance in software development and lead generation to increase your firm’s efficiency and profitability.  The team can be contacted via, or via phone on 01204 397302.


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