The Business of Personal Injury Law Practice

EDITOR'S NOTE:  If you have a topic you would like Mr. Speizman to
discuss, please contact him at
wlspeizman@gmail.com

Increasing Your Office Income Without Practicing Law

By

William L. Speizman

When you struck out on your own or accepted a partnership in a law firm, you ceased being just an attorney. You became the owner of a small business.

As an attorney and small business owner, your income is as dependent upon your business skill as your legal skill.

That presents a problem. Because if your background is typical, you received no formal training in business finance, law firm management or marketing. You most likely learned what you know about those disciplines through trial and error or by observing attorneys you’ve worked for. 

The purpose of these “business of personal injury law practice” columns is to fill in gaps in your business education. I want you to begin to think business with the acuity with which you think law. I want you to enhance your proficiency at running the business side your practice so that it begins to approach your proficiency at negotiation or trial work.   

It’s often difficult for members of the learned professions, personal injury attorneys included, to think of the business side of their practices as something other than a distraction from what they need to do to earn a living. But if you think that way, you cut yourself off from opportunities to increase your income by identifying and resolving issues on the business side of your practice.

For example, as I described in my first column, many personal injury attorneys leave themselves wide-open to employee embezzlement. In the cases I reviewed, a few simple precautions could have deterred the thefts. Often, the loss of money is the least important consequence of embezzlement. Anger, self-recrimination and loss of self-respect can exact a heavy toll on personal and professional relationships. Righting the ship can sap energy and time and undermine your efficacy and productivity. 

On a more positive note, in my second column, I outlined a procedure for turning rejected new case callers, “garbage,” into gold.  I demonstrated how to transform “good clients with bad cases,” into “Clients of the Future” and referrers of future cases. This procedure takes a couple of hours to set up and a few minutes per rejected new case caller to implement. It differentiates you from your competitors and helps maximize signups from your “Clients of the Future.”

“Thinking Business”
Two Quick Quizzes

(Please be certain to read the note of qualification at the end of this of this column.)

1.  How many cases must a marketing effort, such as a yellow page advertisement, generate in order to pay for itself?

Example: A personal injury attorney has an ad in his local telephone company directory. The ad costs $9,000 per month. The attorney’s average fee per case is $3,000.  How many average fee cases must his ad produce to pay for itself (ignoring for the moment that it will take many months before the attorney will collect his fees)?

a. 3    b. 5   c. 9   d. insufficient data provided to answer the question

Every dollar of revenue you collect must be dunned for its fair share of your overhead. If you fail to dun the revenue generated by a marketing effort such as a yellow page ad, you unfairly shift the burden of defraying your overhead onto revenue generated by other marketing efforts. Since you don’t know the overhead percentage of the attorney in the quiz, you cannot determine how much of each $3,000 average fee must go to defraying his overhead and how much he can use to pay for his ad.

Say his overhead equals two-thirds of his revenue. That means that each average fee must “contribute” $2,000 to defraying his operating expenses leaving only $1,000 to help pay for his ad. Since it costs $9,000 per month, his ad must produce nine cases per month to pay for itself.

If the attorney could reduce his overhead from two-thirds to one-half of his revenue, each average fee could contribute $1,500 to paying for his ad and six rather than nine signups would pay the bill. If the ad still produced 9 cases per month, the attorney could drop $4,500 onto his bottom-line each month or reinvest it in his practice.

Beyond the issue of fairness, if you don’t take dunning for overhead into account in determining how many cases your marketing efforts must produce in order to pay for themselves, you could end up with your marketing efforts paid for to the penny but without a dime to pay staff salaries, debt service or rent.

2.  Other things being equal, which is more profitable, investing funds in marketing to increase your practice revenues or investing them in cost-cutting procedures to decrease your operating expenses?

Example: By early November, a personal injury attorney could see that she had had a terrific year. Her pre-tax profit was running $80,000 ahead of the previous year. She decided to use some of that money to increase the profitability of her law firm in the coming year. By mid-December, she had narrowed her investment options to two.

The first was a new approach to marketing that several law school friends, who practiced personal injury law in other jurisdictions, assured her was a huge winner. The second was an innovative procedure for auditing the performance of her current marketing efforts which would allow her to determine quantitatively whether any of them was losing money. If she could identify and discontinue any money losers, she could save a substantial amount of money.

Say the attorney knows that her $10,000 investment in the new marketing effort will generate $60,000. Say she also knows that her $10,000 investment in the audit of her current marketing efforts will save $60,000. Which investment should she make?

a. Increase her revenues   b. Decrease her operating expenses

[Assuredly, such absolute knowledge of future outcomes is unavailable in the real world.]

We’re all familiar with the concepts of “pre-tax dollars” and “after-tax dollars.” By analogy, you can think of the revenue on your Profit and Loss Statement as “pre-dunning dollars” and the expense as “after-dunning dollars”.

Say that the attorney deciding whether to invest in increasing her revenues or decreasing her expenses was running at two-thirds overhead. Of the $60,000 in revenue her new marketing effort would generate, $40,000 or two-thirds would go to paying its fair share of her operating expenses. That would leave $20,000 she could drop to her bottom line. In choosing this option, she would put in $10,000 and take out $20,000, doubling her money.

On the other hand, if she invested in the innovative procedure for auditing the results of her marketing efforts, she would drop all $60,000 to her bottom line.  Remember, these are “after-dunning dollars.” So there is no need for her to divert two-thirds of them to covering a portion of her overhead. She would put in $10,000 and take out $60,000, increasing her money six-fold. 

With this example, I am not intending to deter you from investing in marketing. I am encouraging you to think carefully about how you allocate your funds in any effort to increase the profitability of your law firm.

Conclusion

Ever since you stopped collecting a pay check signed by another attorney, your income has been as dependent upon your business skill as your legal skill. If you are willing to invest the time and effort to sharpen your business skills, you can transform the business side of your practice from a distraction into a profit center and increase your office income without practicing law. 

[NOTE: The purpose of these quizzes is only to illustrate certain logics underlying sound business decision-making. The available space does not permit me to spell out the procedures in sufficient detail for immediate, valid application in your law firm. If you would like additional information, please contact me at wlspeizman@gmail.com or 800-695-4091.]

Copyright 2008 William L. Speizman
All Rights Reserved