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The relationship between law firm growth and the bottom line

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In every industry, the ability to make data driven decisions to support business growth is becoming increasingly critical as the variety of options available to law firms seeking increased revenue grow exponentially. Of course, the difference between correlation and causation must always be borne in mind whether your target is gaining more referrals, increased profitability, greater efficiency or higher client retention rates. Nonetheless, increasing volumes of research are providing interesting insights to bear in mind as you formulate strategies.

One such insight (amongst many!) is provided by the 2021 Legal Trends Report published by Clio who identified strong links between a law firm’s growth and the revenues they realised.

Their study analysed the differences in revenue growth amongst law firms who were growing, holding stable or shrinking across a 5 year period and they defined the groups by examining total year-over-year revenue across that same period. The minimum year-over-year revenue change experienced by growing law firms was an increase of 20%. Those law firms (when an initial analysis in 2019 was re-examined) had also seen their client base expand along with leveraging increased casework volumes and increased revenue per client over the same time period and these were identified as playing a role in that revenue growth.

For law firms whose growth is stable, their associated revenues over the period didn’t shift by more than 20% in either direction but those law firms who are shrinking realised declines of more than 20%.

Consumption Pricing in the IP Industry

Unsurprisingly, there was a period of stalled growth for these firms correlated with the onset of the pandemic. However, over the long term view, these same firms have experienced persistent year-on-year increases which tot up to a hefty equivalent of 135% revenue gains since 2013. Law firms identified as being stable in terms of growth have, over the long term, achieved much smaller gains in revenue. The twist in the tail came from shrinking law firms who have seen small gains in the period since 2017, including 2020 when growth stalled for growing firms for a period.

Perhaps even more significantly, Clio’s report investigates a variety of technology adoption rates that may contribute to the growth status and strategies employed by these firms in relation to the revenue they generate. They examined these technologies, such as client portals, online payments and Customer Relationship Management (CRM) systems, through the lens of two key benefits - firm efficiency and improved client service. Across the board and amongst all the technologies they examined, growing firms are earlier adopters of technology and at a higher rate than firms who are shrinking.

The adoption of technologies has been found to be a critical question in several different sources as highlighted in Rightly’s own white paper “All you can eat - Consumption pricing in the IP industry” published earlier this month.

In one year, clients’ interest in technology tools has grown from 41% in 2020 to 51% in 2021. Over the past few years, and perhaps particularly with the impact of the pandemic, technology is becoming an undeniably influential factor in every aspect of the growth of law firms.

The 2021 Legal Trends report doesn’t answer the question of which came first, the chicken or the egg, but what is clear across the board is that growth strategies, revenue increases and technology use are inextricably linked and your choice of growth (or not) strategy may be more important than you think!

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