Revenue Erosion from Discounts and Write-Offs

One common way firms lose revenue is through unwarranted discounts, write-offs, and rounding down time records. These practices, often seen as client-friendly, and a matter of ‘goodwill’, erode profits. Though a single discount may appear harmless, repeated across clients and matters, it results in significant financial losses. Firms need to value their time and expertise, setting clear expectations for fair compensation to maintain financial health.

Poor Time Recording

Accurate timekeeping is essential for proper billing, especially where hourly rates are the basis of charging. Many lawyers, busy with client work, delay recording time until the end of the day or later, leading to under-reporting (research shows that the underestimation is 10% to 20%). This means billable hours are missed, effectively providing free services. Firms should implement better time-recording systems and stress the importance of contemporaneously recording time as work progresses.

Inadequate Scoping and Cost Management

Failing to properly scope a project from the start creates challenges. Without clear definitions of tasks, timelines, and costs, scope creep can occur—expanding the project without adequate client communication about cost changes. This often leads to disputed invoices or unpaid costs. Law firms must communicate with clients early and regularly about scope changes and their impact on costs. Transparency builds trust and ensures fair compensation.

Improving Profitability Through Smart Billing Practices

Firms often prioritise attracting new clients but can improve profitability by enhancing billing practices for current clients. Retaining clients is cheaper than acquiring new ones, and ensuring existing clients pay properly boosts financial stability. Firms should consider alternative billing arrangements, such as fixed fees, success fees, or hybrid models, which can demonstrate and alignment of commercial interests and strengthen client relationships.

Valuing Law Firms as Businesses

Law firms must view themselves as businesses. Their success depends not only on legal work quality but also on sound financial practices. Firms should foster a culture where every billable hour and client engagement is part of the broader business strategy. Collecting fees in full and on time, with minimal write-offs, is crucial for sustainable operations. While business development is important, focusing on proper pricing and billing ensures that new clients and new work aren’t simply covering shortfalls from poor financial management.

Reframing Client Relationships

Many firms hesitate to enforce strict billing practices, fearing it may damage client relationships. Setting clear expectations from the beginning and maintaining open communication about billing fosters stronger, more professional relationships. Clients respect firms that value their work and can justify their fees. Lawyers should confidently advocate for fair compensation, just as clients do in their own industries.

Conclusion

Law firms need to balance seeking new business with optimising internal processes. Proper time recording, transparent billing, scope management, and resisting excessive discounts ensure existing clients pay properly and enhance profitability. A dual focus on business development and refining internal practices creates sustainable financial success, builds strong client relationships, and secures deserved compensation.