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Law Firms and the Future of a Recurring Revenue Business Model

Law Firms and the Future of a Recurring Revenue Business Model stride services

How many times have you told your client that in order to stay competitive, they may need to re-invent themselves? “Hey, it may be time to reinvent yourself.” It rolls off the tongue so smoothly… But actually try to do it and WOW! Talk about tough, right? Many law firms today ask themselves this very question, one fills partner meetings with fear and uncertainty. “How will we sell it? How will we measure success?” We work with a number of law firms at Stride, so let me provide some insight by diving into the idea of a recurring revenue business model.

Let’s consider Equinox Business Law in Seattle Washington, for example. They’re approaching a portion of their services on a managed general counsel contract: pay a monthly retainer and we’ll be your outsourced general counsel across a range of solutions. It’s a cool idea, allowing them to focus on selling results vs. time. In turn, their model becomes more predictable without having to sell and market for new clients all the time. What do firms wanting to re-invent themselves need to consider from a financial metrics point of view? Here are 5 key items you should consider measuring:

Cost of Customer Acquisition

If you’re working on a recurring revenue model, you should be able to pay more to acquire a customer. Of course this assumes they stay with you for a reasonable amount of time. So, consider turning on your marketing engine. Lawyers don’t like to market, neither do doctors and accountants. But in the new world of re-invention, it works and is important.

Contribution Margin

If I’m selling a recurring revenue service, theoretically, I should be able to operate at a higher margin (more capacity with my existing staff to take on more clients with lower variability). Operating at a higher margin without a material increase in my operating costs, except for marketing, could yield higher profitability. But if you don’t measure contribution (revenue – variable costs), you won’t know how you’re trending.

Retention

Law firms would love to retain their clients for recurring work but in a recurring revenue model, it’s imperative. Retention increases client lifetime value (LTV) and if you spend a bunch of money to acquire the client, you want to keep them. Tracking your retention closely on a monthly basis will let you know if you are delivering consistent value.

Churn

The flipside of retention is churn, the number or percentage of clients you lose on a monthly basis or downshift their service. Churn is a recurring revenue business model killer. If you stem the tide of the leaky bucket, you can grow very nicely.  If you don’t, it’s not pretty.

Monthly Recurring Revenue (MRR)

This is easily the #1 most important metric, measuring the growth in monthly recurring revenue. MRR is a function of adding clients, retaining them, and upselling them. Watching MRR like a hawk is priority #1 for the reinvented law firm.

So rather than tracking hours billed by partner per year or how much rain the partners brought into the firm in the form of new clients, think how the financial metrics of a recurring revenue model can shift your internal discussions. Of course, what to sell and how to sell it must be driven by your customer development research, but the metrics you measure and manage will transform how you think about the machine of delivering law services to your clients.

If you are a law firm pushing for re-invention and want to provide law services in a more innovative way, then consider teaming up with a bookkeeping/accounting firm like Stride that delivers information and data to help you measure progress. To learn more, Contact Us today.

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