How Bad Clients Hurt Law Firm Profitability Fast (Full Transcript)

[00:00:00] Speaker 1: Hi, I'm Stephanie.

[00:00:02] Speaker 2: And I'm Zach, and this is episode 593 of The Lawyer's Podcast, part of the Legal Talk Network. Today, Stephanie talks with Jeff Krause about bad clients.

[00:00:14] Speaker 1: Yeah, and the hidden cost of those bad clients, right?

[00:00:17] Speaker 2: Yeah, firing them, getting, I mean, he did Moneyball, your firm, right? So we're talking about the data behind bad clients.

[00:00:27] Speaker 1: Yeah, we get into all that too, and remind people about the Moneyball, the movie, or my version of the movie that I apparently get wrong every time. But you know, we, Brad Pitt, I remember him.

[00:00:40] Speaker 2: Yeah, well, yeah, and there's Jonah Hill. Oh, yeah. I don't know that I've fully seen the movie.

[00:00:44] Speaker 1: You should, there's a great, actually, because you said, do we talk about how to fire clients or people, and the answer's no, but there's actually a great scene in that movie where Jonah Hill has to fire one of the baseball players for the first time, and you know, he's freaking out because he's gotta go fire a professional baseball player.

[00:01:04] Speaker 2: And he's just a little data guy, and yeah.

[00:01:07] Speaker 1: And Brad Pitt, in his very cool, sophisticated, nonchalant way, is just like, here's what you're gonna do. You know, Zach, it's been a pleasure working with you. We're moving in a different direction. I'm gonna need your playbook. You'll see the front office. They'll have all the administration for you. And he's just like, it's quick. You get it, you know, hit him up front. This is what's happening, boom. It's actually a great scene. People should watch this before you have to fire an employee. I'm serious, because we, don't bury the lead. Tell people right up front, this is what's gonna happen. Like, you don't need to drag out the conversation. They don't wanna sit through it. You don't wanna sit through it. It needs to be quick, and you get on and get out.

[00:01:50] Speaker 2: And you can be empathetic. You can be thoughtful and still be that. Honestly, I think there's empathy in getting, doing that quickly.

[00:02:00] Speaker 1: Yes, there's empathy. No, like, that person does not wanna sit in that conversation with you for any longer than they have to. It sucks, like, I don't know.

[00:02:08] Speaker 2: They may not like you very much anymore, and they'd like to get out.

[00:02:11] Speaker 1: Yeah, you don't have to be a jerk about it, but being quick about it, to your point, is nice and empathetic. Like, you know, you just wanna, like, take it from someone who's had to fire some folks in my lifetime.

[00:02:22] Speaker 2: Yeah, and I think more importantly, the thing that does scare people, getting back to what y'all were talking about, is the, like, the quote-unquote firing of clients as well. Like, that's, how do you do that? That's not easy.

[00:02:32] Speaker 1: Hey, Zach, I'm gonna need your playbook. We're done. No, that's just, I mean, it is silly, but most people do, I mean, yes. But the same thing with clients, right? We did an episode once, this is kinda related, but, you know, call back to former episodes, apparently. I did an episode with a woman who talks about the science behind delivering bad news, and she actually did all this research. I'll, we'll find the episode and reference it in the notes, because I can't think of that lady's name right now, but I thought it was a, she has, it's a great book, and I was excited to interview her, because I really liked the book, because it's all about how do you deliver bad news to someone and not lose their trust? Because, you know, you just got a bad result in their case, and you need to tell them, and she talks, and she did all this research. They actually ran clinics and law schools, and showed, like, what is the best way to deliver bad news to clients? So, a little tangent there for you, that I didn't know we were gonna talk about, but that's also another great episode. Apparently, this is just episode Stephanie wants to talk about today.

[00:03:34] Speaker 2: This is, that is episode 384. Oh, you found it? Yeah, Delivering Bad News to Clients with Marjorie Aaron.

[00:03:40] Speaker 1: Yes, that is her name, I love that. Yeah, that's a, yeah, and check out the book, too, if you really wanna go deeper into it. I think, I think those are the kinda skills that they should be teaching us in law school that they don't, right? Did anyone tell you, it's so important, you need to be able to deliver bad news to your client, and still have them trust you. I remember once, a quick story, and we'll be done, but I had somewhat of a famous client, which is funny, because I also dreamt about that client last night. So, I don't know where this is going.

[00:04:11] Speaker 2: We were gonna have this conversation today.

[00:04:13] Speaker 1: Exactly, and we lost emotion, but I knew we were still gonna be fine in the case, but in the moment, it felt very, and I did, I think I did give a sports analogy, like, listen, we've, I don't remember exactly now what I said, like, we've lost this, but we, you know, something.

[00:04:30] Speaker 2: We're gonna win the war.

[00:04:31] Speaker 1: Exactly, and she just came at me hard, and was like, don't give me that analogy. Whatever, she really didn't like that, and I was like, whew, I was like, I just got shot down by my teenage person, because she was famous, a singer, and I listened to this person a lot when I was in high school. So, my teenage self was a little crushed in that moment, because she totally did not like the way I delivered bad news to her, and she told me, and I was like, that was harsh, but then later, I was right, and we did win the case, and she did realize, and she did apologize, and I got to go to one of her concerts free in the front row. So, you know, my teenage self was vibed. I still love her, apparently, and I dreamt about her last night. I dreamt that I was in a show, I was in a room with her, and her, and the band, and one of their songs came on, and I looked at them, and I was like, is this weird, when you hear your own songs playing, like, anyway, okay, sorry, podcast listeners, for the ramblings of Stephanie. I still don't know what's happened on this intro.

[00:05:42] Speaker 2: Well, now, we're gonna get into your conversation that is less rambling with Jeff Krause.

[00:05:52] Speaker 3: ♪ Ooh, ♪ My name's Jeff Krause. I am a strategic consultant with Affinity Consulting. I have been working with law firms in a variety of capacities since 1998, a few years out of law school. Everything from helping firms with IT, I mean, I always said I help firms choose the right technology and use it the right way was sort of my personal tagline, but as part of that, I also started to see where firms were struggling with things from profitability and process and all kinds of things. So, over the years, I've also began helping firms with things like that as they came up, and that's really where the money ball and some of these things we're going to talk about today came from.

[00:06:51] Speaker 1: Well, welcome back to the show. For those who are longtime listeners, Jeff was with us back at episode 474. I looked it up. So, where we first kind of introduced this concept of money ball for lawyers and those who, probably more people are familiar with the movie than the book at this point, but the idea of using numbers, of using stats and data to manage your business, is that a good nutshell version?

[00:07:20] Speaker 3: That is a good nutshell, but it's a little more than that. It's, I mean, it's a lot more than that, but it's a little more than that. I like to say in that it's about kind of looking at the right numbers, the ones that matter. We have a tendency to kind of look at things and focus on things that maybe don't make that much of a difference, plus looking at some things differently that maybe others are not looking at and that can give us a competitive edge.

[00:07:49] Speaker 1: You know, I like that. Cause I think in the movie, what I remember is they really started focusing on singles and getting on base and like lots of people in baseball had been looking at stats for years. It wasn't that they were the first people to think about numbers, but they suddenly said, wait, we need to care about on base, getting on base more times than like home runs. That was my, that was my big takeaway. I'm probably murdering the movie, but.

[00:08:13] Speaker 3: And they looked at it and they said, you know, we are at overall a competitive disadvantage. If we are just looking for the same things that the rich teams are looking for, we can't compete. So what can we look at that will give us an edge that perhaps they're not? Yeah. That was a big part of it.

[00:08:30] Speaker 1: Oh, I love it. That's a great, that's a great little recap. And, you know, encourage folks to go listen to that episode for 74. If you want to dive in more, what we thought we'd do today is kind of take a piece of that as a little bit of the follow-up, which is really thinking about clients and maybe asking ourselves some hard questions about who we're serving and why and which clients really belong in the formula. When you set this up for people, when you talk about it, you know, well, maybe just that, how do you, how should we dive into this topic of like clients and picking the right clients for our firm?

[00:09:07] Speaker 3: So I would say that, first of all, it goes back to one of the original concepts of my Moneyball for lawyers. And that's sort of understanding, you know, what goes into client generation and revenue generation and profitability. And I always start that conversation when I talk Moneyball with anyone with something I call a profit formula. It's sort of the five things that determine clients, revenue, and profitability. And ultimately it all comes together to determine how profitable you are. Those five things are, first of all, are leads. It's people who've expressed some interest in working with you. Not everyone who drives past your billboard on the freeway, it's someone who, it prompted them to call you and say, maybe you can help me. Second is conversion rate, and think of it as a percentage. If you had 100 leads and 25 of them become clients, you have a conversion rate of 25%. So leads times your conversion rate equals your number of clients. I mean, that's, you know, the simplest way to, that's the first part of the formula there. Once you have a number of clients, then what comes into play is how many times they work with you. Sort of like a, it's a way to kind of calculate lifetime value if you think about it. How many matters do they come back and work with you again? And we all know it's easier to work with and kind of start a new matter, if you will, with an existing client than a brand new one. We didn't have to go through all of the marketing and the kind of that sales process of converting them. It's much easier to just get returning clients. So number of transactions is sort of that next thing. And then how much they spend each time, you know, the average value of a matter with that client. So if you take the number of clients times the number of times they come back on average, and then the average dollars per matter, you end up with revenue, right? It's again, it's a really simple formula. And then the last piece is just sort of a generic word. I'll use that of margin. I kind of phrase that as, I know this isn't like an accountant's definition of margin perhaps, but I look at it as the amount, the percentage of that revenue that you get to keep. It's just kind of a simple way to look at it. So leads times conversion equals clients. Clients times number of transactions, dollars per transaction equals revenue times margin equals profit. And one of the reasons I think, I just love that formula, but one of the reasons for that is that, we both talk to lawyers all the time and they say things like, if I just had more clients, I'd be doing so much better. If I had more revenue, if I was just more profitable, they're looking at a result when they say those things, but those things are, they're the result of these other five things that you are doing. And if they could just kind of take their mind away from I just need more clients and look at, how do I generate more leads or better leads? And how do I convert more of them? They would have more clients, but they almost, they kind of say there's, it's almost like they think there's like this client tree and you shake it and they fall off. No, you work for it through leads and conversion.

[00:12:27] Speaker 1: And I think, and so thanks for that. That's a great overview of the formula. And where we're gonna focus today on, which clients you should say yes to, because I think, well, you tell us, if we say yes to the wrong clients, how does that show up in the formula?

[00:12:47] Speaker 3: So just in general, they will just say the quality of your client, just kind of as an easy way to say that, but client quality impacts all of those five things I talked about. In terms of leads, clients tend to refer others that are like them. So better clients will refer other better clients to you. It's as simple as that. And clients that, this isn't just about annoying clients. Some clients are entirely annoying, but it's not just about that. But some of those clients who are problem clients will refer others just like them. You don't want that. In terms of conversion rate, better clients tend to be easier to convert. Everything from getting your engagement letter back to you on time. And they're just better at doing those things. And when a client refers someone else to you, they've actually done a lot of the conversion rate stuff for you. So good clients refer great clients and they've already convinced that other person that, hey, you should work with this attorney. Matter or number of transactions, like how many times they will come back. Again, good clients that you provide good service to, you're the first one they think of. Just in general, a good client will kind of remember you. Dollars per, they have a massive impact, right? Because that's one of the places where just sort of poor quality clients impact your bottom line. Because they are the ones who demand discounts. You prepare their bill and you say, wow, they're not going to want like that. So we kind of write it down a little bit. Maybe they'll be more willing to pay this one. They haven't even seen the bill and we're giving them an additional discount. And they're also the ones who don't pay on time or at all. So now we end up writing them off. So they have a huge impact on that bottom line. And then just margin. Margin is, one way to look at margin, it's my expenses and that, the percentage I have of expenses and whatever's left is what I get to keep. But there's sort of some intangibles in margin. And it's like, you could be spending your time on better things if you weren't wasting time on certain clients. So you're paying staff to kind of work with these clients who are wasting their time or being even abusive to them sometimes in the worst cases. Your staff could be working on more important things. And that has this impact on margin that's kind of hard to quantify, but it is there.

[00:15:30] Speaker 1: I think so many of us are worried we get a call from a potential client. We see some red flags or yellow flags. We were, I don't know if we should take it, but the fear of when's that next client gonna walk in the door? When's that next dollar gonna walk in the door? Sometimes pushes us to say yes to work that we shouldn't say yes to. And what's so great about your formula is you see sort of a compounding effect of that yes, right? Because now when you do say yes to the clients we shouldn't say yes to, means you have to, like, especially if we're discounting and they're not paying us. Now we have to, it's like we have to get two or three new clients to replace that one. Like it's not just that client that impacts us. It impacts so many parts of the formula.

[00:16:23] Speaker 3: What you just said there is sort of the biggest thing and having that profit formula and plugging some numbers into that, you suddenly see that. It's like you kind of know that, but when you have those numbers in there it's just become so apparent. Like if I'm just to throw some real basic numbers into the formula. So I get 100 leads, 25% become clients, my conversion rate. And so I have 25 clients. They come back twice on average, 5,000 each matter. So I have 250,000 in revenue and I get to keep 40% as my margin. So I have 100,000 in profit. Again, just simple numbers easy to work with from my math impaired brain. But now let's throw a client or I habitually take clients who demand discounts and so on. Just take one thing in that formula, dollars per transaction and let's reduce that to 4,500. Let's reduce it by 10%. All of a sudden my revenue is 10% lower and my profitability is 10% lower. If I want to get back to where I originally was with 250,000 in revenue and that 100,000 in profitability, I actually have to find three more clients. So instead of 25 clients, I need to be at 28. If you plug those numbers in the formula you will immediately see that. I have to make it up somewhere. And where am I going to do that? So you started that discussion. We have this thought of where's the next client coming from. You got to find three. Now, you take a bad client because you're worried about where's the next client coming from. And now I literally have to find three more to make up for taking this one bad one. The numbers show you that.

[00:18:09] Speaker 1: Yeah, no, that's a good point. Cause I think when you see it in black and white, it makes more sense. But I think conceptually we're all like, I know I shouldn't take this, but I just will. I say yes for these reasons.

[00:18:21] Speaker 3: And let me, while we're on that particular subject of kind of putting those numbers in, let me flip that around. Let's say that I raise my rates by 10%. So now instead of 5,000 per matter, it's 5,500. I can lose some clients. I don't, I no longer need 25 clients. I need like 22.7 or something like that, but I can lose some clients and still be where I was on that revenue and profitability. So you think about it and I don't have to work as hard to get where I was originally by simply raising the rates. And if you think about it, which clients are going to suddenly leave you when you raise your rates, right? Most of your best clients that you've been providing great service to are not.

[00:19:10] Speaker 1: Yeah. What about if we have, you know, I know we always talk about like grading clients. And so you go through your list and figure out who are your A's and B's, maybe who are your C's and D's and F's. Hopefully you don't have too many of those, you know, who should you be saying no to? What are your thoughts on those mid-level clients? Is there a way to sort of move them up? How do we get them to grade better so that, because we already did the hard work, the marketing work and converted them to clients. So before we just kick them to the curb, what can we do to rehabilitate those clients?

[00:19:45] Speaker 3: And, you know, when I talk about, you know, moving clients up or out, it's really not about moving them out so much as can we move them up? So yeah, you know, I should have said that at the beginning. It's not really about firing clients. This is more about what can we do to make that relationship that we have with those clients better. It primarily comes from setting expectations, right? You know, there's the old expression that we get what we tolerate. And if we are letting clients, you know, argue about the bill constantly and not pay on time, we allow them to just kind of call us constantly. And, you know, and then we put that on the bill that, you know, phone call 0.25 or whatever it is, you know, and we allow them to kind of argue about that and dispute that all the time and so on. We are basically setting the expectation with them that that's okay, that it's okay for them to do that. And when we take that away and we, you know, we upfront set those expectations, you know, our calls are 15 minutes, 20, you know, 0.25, because I have to drop everything I'm doing. I have to record, you know, some to-dos and some tasks about our call. You might think it only took five minutes, but I have to completely go off my other tasks, take the call and now do some follow-up. That takes 15 minutes, even though you think we only spent five. You're just being clear about how, you know, we are going to bill them, what they get billed for and so on goes a long way. The clients will tend to sort of stop doing some of those behaviors we don't like when we just make it clear that they shouldn't be doing those. And, you know, another thing about that is a lot of the clients who don't want to kind of follow those expectations will just sort of self-fire, you know, whatever that term would be, self-terminate. You know, they will just say, well, look, if I can't just kind of call you anytime, night and day that I feel like it and you're going to take my call and not charge me for it anyway, then I've got to find a lawyer who will. And great, it's not me, you know, go find that lawyer who will.

[00:21:59] Speaker 1: I agree with everything you're saying. And I feel like it's probably important that we talk about a little bit of maybe an uncomfortable tension here, which is on the one hand, we're pushing firms to be choosy about who they serve, which I am on board for 100%. And on the other hand, we still live in a system where there's a lot of people who are, the legal market isn't serving them either. They can't afford us, you know. I mean, there could be lots of reasons that they're not getting this help. And so I appreciate like raising our rates and being picky and this tension of how do we also make sure that people who need legal help get that help? And so I wonder, I thought maybe you and I should talk a little bit about how we can hold those two truths together.

[00:22:45] Speaker 3: So the first thing I would say is that, you know, when I talk about, you know, these clients who are not paying or paying on time and so on, I'm not talking about their ability to pay. I am talking about people who agreed to pay you and now don't want to or, you know, for whatever reason or just not, but I'm not talking about so much their ability to pay. I'm talking about the clients you chose to take where there was that red flag and, you know, you just, you did it. I would also say that there's certainly the ability to carve out a place to take those underserved clients, but you have to kind of get your house in order to be able to do that. You know, if you are, you know, we talk about this profit formula and we say, this is the profit at the, this is your bottom line. If you can't sustain the right level of profitability, you can't serve anyone, including those who really need it and can't afford it. On the other hand, if you can get your financial house in order, now you can carve out a place and you can say, look, I am, and I say this again, this is really going to express the tension that you were talking about here, but it's a choice, right? You can choose now to forego some revenue, forego, you know, what would otherwise be profitable work. You can choose to forego that and carve out a place, right? Or, I mean, I understand it's a choice. I always say that though.

[00:24:22] Speaker 1: I think you can do both. So I think you could have that higher, you know, let's call it the Cadillac offering that's at a higher price point. And if you want to, and if you think about the work that would say no to that, the clients who should say no to that level of work, you can offer something different at a lower price point, but the scope has to be different. So you don't build a Cadillac and just charge, you know, I don't know what the Toyota price. I don't know. Sorry, car people.

[00:24:51] Speaker 3: But- I've had a Camry for years and I love it. So, yeah.

[00:24:53] Speaker 1: Okay, I mean, yeah, there's lots of good cars and all cars now I feel like are expensive. We're shopping for a new car and it's just, I have a lot of sticker shock right now. But anyway, my point is, and we talk about this a lot when we do alternative fee pricing and how to think about the model, you just have to build the business model so that it works. And so you can offer a lesser, a less expensive product, but the scope of the work needs to match the price so that you can do it profitably. Maybe you're leveraging technology. Maybe you're leveraging, you know, the scope of the work. You're not offering full service A to Z representation. You're coming in and doing a piece of the case that the client really needs, but can afford at this price. So I think it, I think your points, you know, I don't think it even has to be a choice. It has to be a choice because we have to be intentional about the business, but it doesn't mean that we, well, I'm just gonna offer the same service and charge people less or pro bono, although they certainly can. And there is a place for that too, right? But it's about being intentional, I think.

[00:25:57] Speaker 3: Yeah, and that's what I'm getting at. And again, that profit formula and being able to put numbers in there, you can see it. And now you can be intentional about how you're doing that.

[00:26:06] Speaker 1: Yeah. And I think the other good news here too for folks is, man, it's just easier to run your business when you're not chasing those clients who, like you said, agreed to pay us and then don't want to or don't wanna listen to us. I mean, they could be bad clients for lots of reasons. I mean, it could be the ability to pay or the willingness to pay. It could just be like, hey, these clients aren't listening to us. They're not following our advice. They're not doing what we need them to do. I mean, it could be, I've even had people say, well, I just wanna have my, I wanna have all my client meetings on Zoom and these clients aren't willing to do it. Well, it's like, well, maybe that's not your ideal client. If that's how you're trying to build your business, you need, there's plenty of people out there. Find the ones that wanna work the way you do.

[00:26:48] Speaker 3: I talk about in that profit formula so much about these numbers and using data. And certainly there are ways to kind of quantify all of these things, like how many time entries do we have for the client and how many small ones. There's all kinds of ways you can sort of quantify this. You can look at phone records, all kinds of things. But a lot of this actually goes back to those gut feelings that Moneyball would tell you to not base your decisions on, right? And the simplest way to look at this is the phone rings, I see the caller ID, do I smile or do I cringe? I mean, that you know, you know which clients these are. Yeah, it's, you just know.

[00:27:32] Speaker 1: If you were gonna give some folks some homework and they just said like, hey, I only have time to do one thing in the next 30 days to sort of start applying this to my practice, what would we tell them to do?

[00:27:43] Speaker 3: I would start with that profit formula. I would put my numbers into that. And the reason for that, it's going to help with these things, but it's also going to help with so many other things, just kind of seeing those numbers. That's the starting point. It not only will it help with this whole idea of which clients are profitable and which ones are the best ones to work with, but what is my lead generation doing? Where are my leads coming from? It's going to tell you so much. And I would just simply start there. That's the one thing, you know, more strategic plan. There's other things that I would do there, but that is the one thing that I would start with. It just tells you so much.

[00:28:23] Speaker 1: Awesome. Jeff, thanks for coming back and being with us today and getting us started, being intentional, thinking about our numbers and using this profit formula. I think it's a great way to kick off the new year.

[00:28:36] Speaker 3: Great, thanks for having me.

[00:28:38] Speaker 1: Thank you.