Does this revenue model sound familiar?

Number of Fee Earners x Available Hours per Fee Earner x Productivity Percentage x Charge Rate x Recovery Rate = Revenue – Direct Labour = Gross Profit

If this is your model, you’re not alone.

The majority of law firms focus their revenue model around how many hours the firm has available to charge to clients in any given year. In fact, most professional service firms, including accountants, engineers and architects, also use this revenue model.

While it’s the norm, it’s a problematic model. It caps the revenue you can generate and causes your team’s daily behaviour to focus on production rather than revenue growth. It stops the leaders of the business getting out there and seriously growing the revenue of the firm.

I refer to this hours based revenue model as “Squeezing the Orange”, where a firm tries to improve profitability on efficiency gains and by attempting ad hoc sales and marketing activity.

The problem with this is you can only “Squeeze the Orange” until it runs out of juice.

You can only minimise costs and increase margin to a point, and ad hoc marketing activities will get you nowhere.

Sure, systems improvements produce efficiency gains; however, the greatest gains are only made when the systems improvements are initially implemented. Any further efficiency gains are minimal after this and any strategies are focused more on maintaining the improved margins.

adhoc marketing activites When Partners and Associates in firms constantly focus their efforts on achieving hours based budgets, they lose sight of the key activities that drive revenue in law firms.

But the only way to increase your revenue is by having more hours to sell, right?

Wrong! It means that your factory employs more people and to maintain margin you need to drive more revenue.

So why do anything different?

My challenge for law firms is to adopt “business best practice”, which means understanding that an hourly rate revenue model inhibits revenue business growth. The revenue activities that drive revenue growth come from product, marketing, sales and client relationship management activities, not the “factory”.

If you look at any successful business, it has separated the key revenue activities so that it can minimise the impact of variables on its daily/weekly/monthly/quarterly and annual revenue targets. For a business to truly be successful it must adopt the following 5 Dimensional Revenue Strategy:
5 drivers of revenue

Product = What you sell

Marketing = How you generate leads

Sales = How you convert leads to sales ($revenue)

Production and Delivery = How you build the product

Client Relationship Management = How you manage your clients’ experience so they buy and buy again

Each activity requires different skills and hinges on each other for revenue to grow. But each activity requires a different strategy so that the action plans are clear.

For a law firm to truly be successful the Partners of the business need to ensure that their mind set moves away from the hours based revenue model to one of a product focused and client relationship based model. A product focus doesn’t mean that you commoditise what you do. It merely means that you are clear on the list of services you provide, the value they give to the client and you have a program to improve and grow your service offerings over time. The opportunities that exist within a law firm are endless with the right action plans in the right areas focusing on the right activities.

Yes, you still need to have a focus on systems and efficiency and charging hours to clients to generate your revenue, but these strategies and action plans fall under the activity of “Production and Delivery”. The O&D activities can only drive margin, they can’t drive revenue growth. Revenue growth will only come from your Product, Marketing, Sales and Client Relationship Management activities.

To build your revenue model using the 5 Dimensional Revenue Strategy, you need to understand and apply the Revenue Growth Formula which is:

Target Revenue = (current clients+ new clients^) x transaction frequency^ x average sale^ x margin^

Growing revenue is simply a matter of maths. ‘^’ means ‘make it exponential’. Every strategy you implement must work to leverage the activity so that it produces consistent growth.

Any strategies you develop to grow revenue must fall within one of the formula components. If you analyse this further, each of the components relate back to the five revenue strategy activities as follows:

5 revenue strategy activities
With a “Squeezing the Orange” revenue strategy, if you focus on margin only, you can only squeeze the orange until it runs out of juice. But with a 5 dimensional Revenue Growth Strategy, the growth in revenue can be exponential.

In the below example, you can see that small increments in each component have an exponential impact on the result.
Revenue Strategy Example

The focus is to develop strategies in each of the growth formula components and then drive the activities to produce the revenue results. In implementing any revenue strategy you must first pick the “low hanging fruit”. Start with your current clients. They already know you, they already trust you. In nearly every instance they will have unmet needs.

You must prioritise your actions that will have the greatest probability of revenue growth so that you do these first. Any strategy must be assessed and categorised according to the following order of priority:

Priority #1 Providing existing products/services to existing clients.

This is the first priority because you already know the product/service and the client already knows you. Make sure you are providing all of your products/services to all of your clients

Priority #2 Providing new products/services to existing clients.

You already have a relationship with these clients, so their resistance to purchasing new products from you will be less.

Priority #3 Providing existing products/services to new clients.

We all agree that it is easier to sell to an existing client than a new client. New clients usually take time to acquire, time to understand their needs and time build trust with you.

Priority #4 Providing new products/services to new clients.

It’s simple. If new clients are harder find and new products are harder to sell, then this should be the last priority.

The Top 5 Revenue Strategies for law firms to drive revenue growth are:

Product

Marketing

Sales

Production and Delivery

Client Relationship Management

To review your current revenue strategy and determine what is possible in terms of growth from your existing clients, call elliotts on 07 3833 3999 and ask to speak to one of our Partners for a free, no obligation assessment.

Visit www.financiallywellorganised.com to obtain an even more in depth understanding of the 5 Drivers to Business Success.