Wednesday, November 15, 2006

Law Firm Client Retention Rates: You Can't Manage what you Don't Measure

The "Large Law Firm Client Retention Study" released by LexisNexis on November 14, 2006 reveals that the majority of law firms surveyed (61%) do not know their client retention rate!

Our commentary: “Retention rates” reflect the period of time, measured on an annual basis, that you are able to maintain an active law firm client. You can calculate your client retention rate very simply. Print out a copy of your 2004 law firm client list as of December 31, 2004. Then generate a similar 2005 law firm client list as of December 31, 2005. If you served 100 clients in 2004, determine how many remained active during 2005. If 10 of the 100 clients did not return to do business with your law firm in 2005, you have a 90% retention rate. While a 10% loss may not sound bad over the short run, you will need to replace all of the 100 clients you served in 2004 over the course of 10 years!

Your retention rate is extremely important, since it has a direct impact on your law firm’s profitability. Let us say, as an example, that your law firm’s total annual billings are $3 million. If you have 100 clients, that translates into an average of $30,000 in annual revenue per account. When you lose 10 accounts per year, you need to replace $300,000 in annual billings just to protect your base.

If you can increase your retention rate from 90% to 95%, you retain an additional $150,000 in revenues using the above example. Of course, some account loss is normal due to mergers, acquisitions, client relocations or other factors. Your goal should be to hold on to as many accounts as possible while you continue to bring in new legal business.

The LexisNexis study was based on responses from 2,198 law firm professionals at law firms with 75 or more attorneys in the U.S. and Canada.

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