March 15, 2007
Client Attrition Risk Scorecard for Law Firms
A recent study by Redwood Analytics as reported by Larry Bodine identified the distinguishing characteristics of clients retained by law firms. The absence of those characteristics and the presence of others can identify clients most likely to go elsewhere. The study is a reminder that law firms can use their business system to create a scorecard according to attrition risk and having done so can target those clients for remedial steps. The scoring part is the easy part; developing a culture willing to take action to improve retention is the harder part. As for actually producing the attrition risk scores, your business software should track the necessary indicators. To produce a scorecard you will need a custom reporting procedure. Law firms with in-house capabilities should be able to do that internally using reporting tools but, in any case, your software provider should offer custom reporting services for a reasonable fee. If not, you have the wrong software or wrong software provider.
What are the attributes you want to measure?
On the plus side Redwood found that long-term clients had the following attributes:
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Provides the firm a large amount of legal work
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Has a mature, established relationship with the firm
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Uses the law firm for matters involving two or more practice areas
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Two or more partners are significantly involved with the client’s work
Redwood also found the following:
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First year clients have an attrition rate of 50% compared to 20% for clients with a four year history.
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Clients with only one partner involved have the greatest attrition rate.
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Too much or too little partner time on matters creates an attrition risk. Morepartnerincome believes that the danger zone is anything less than 10% or more than 60%.
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Clients most at risk have an overall realization of less than 80%, i.e., discounts don’t retain clients.
You will have to play around with this but start out trying the following:
- Give 10 points to a firm whose prior year fee revenue met the 1% test. (To keep it simple, divide your annual fee revenue by 100. Use the amount in your report to identify clients meeting the “large amount of legal work” test.)
- Deduct 5 points if the fee revenue for the prior three months x four is less that the 1% test, i.e., fee revenue is declining.
- Add10 points if the client has been with the firm for three or more years.
- Add 5 points if the client has matters in at least two practice areas.
- Add 10 points if the client has multiple billing (supervising) attorneys on active matters with billed amounts during the prior three months.
- Add 5 points if partner hours on the prior three months’ bills were greater than 10% but did not exceed fifty percent.
- Deduct 5 points if unbilled fees exceed the prior two months’ fees.
- Deduct 10 points if billed but uncollected fees exceed the prior three months’ fees.
- Deduct 5 points if prior year collections where less than 80% of the prior year value of billable hours at standard rates.
- Deduct 5 points if the percent of partner hours on the prior three months bills were less than 10% or greater than 60%.
There is nothing magic about the above weights for the items listed. You can and should vary the weights to fit your firm’s experience. There is no perfect score. Those with the highest points are the least likely to abandon the firm within the next three years. Those with the lowest score are the most likely to leave.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
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Filed under Risk managment by Tom Collins
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