The biggest expense for a water utility is leakage. Water seeps out of the connections and valves consuming all the energy and labor costs along the way until disappearing into the ground. The same can be said for law firms and their clients.
Yesterday’s large client can disappear, vanish, fade away. Some clients get merged out of existence. Some hire another law firm. It’s inevitable. How inevitable is open to debate. Most client leakage is a self-inflicted wound—no one is watching over the clients to ensure the fee revenue isn’t shrinking—and taking action when it is. Urgent action.
The best performing law firms keep 92% of their clients on a year-over-year basis. The average retention rate for all law firms with 100 attorneys or more is 85.2%. And almost 20% of law firms report losing 4 of their top 10 clients every year.*
We know why the best-performing law firms remain at the top: Harvard Business School research shows increasing retention rates by 5% increases profits by 25% or more. The key words are increasing retention—keeping more of what we have.
The Astonishing Cost of Replacing Lost Clients
The cost of acquiring a new client is 8 to 12 times higher than acquiring business from an existing client. This cost will only go up as competition stiffens.
Pure math suggests the average law firm loses 15% of its top clients every year. The best performing firms manage to lose only 8% of their top clients. This difference between the best performers and all others has to be leakage.
Leakage Hits Law Firms Harder than Most
Of all professional service firms in the world, law firms have to be among the most vigilant when it comes to client retention. Clients have to give their CPA firms and advertising agencies of record notice of termination. Not so for law firms. Any corporate counsel can quietly move new matters to new law firms with little fanfare. In fact, most make a point of not telling their existing firms they are moving work—giving themselves the opportunity to avoid hard feelings, difficult discussions and general awkwardness.
Client retention is rarely discussed as a firm-wide goal and metric. Fewer than 40% of law firm partners know their firm’s client retention rate. Yet, this number tell us how much untapped profit we have sitting in our client base. And, at a more basic level tells us how good we really are at keeping other law firms out of our client base.
Some law firms argue their one-off cases contribute to low client retention. But, big companies have a continuing stream of legal spending in virtually every major practice area—and the spending is going somewhere. The aggressive law firm will make sure this work flows to their firm.
The most potent tool to boost client retention is to set a goal of where we want client retention to be—a number. Remember: increasing retention rates by 5% increases profits by 25% or more. This metric will remind everyone of the importance of keeping clients, and the profits per partner to be gained. A number likely to be read and re-read by every partner in the firm.
*Based on in-depth interviews with 210 law firm leaders.