Closing the Loop: How CFOs Help Law Firms Connect Marketing Spend to Profitability

[00:00:00] Michelle Calcote King: I’m Michelle Calcote King. I’m your host, and I’m the principal and president of Reputation Ink. We’re a public relations and marketing agency for B2B professional services firms, including law firms. To learn more, go to rep-ink.com. Today we’re focusing on a frustration that many legal marketing directors face. You’re asked to prove ROI, but you can’t see what happens after a lead comes in. Without data connecting your efforts to actual outcomes, you have no way to know which of your marketing activities drives profitability. My guest today is John Scott, a partner at Anders and a virtual CFO specializing in law firms. For more than 30 years, John has helped firms strengthen profitability by connecting the dots between marketing spend, client acquisition and financial outcomes. Welcome to the show.

John Scott: Thank you, Michelle. It’s great to be here.

Michelle Calcote King: I’m looking forward to this. Let’s start with what you do as a virtual CFO and how you help law firms and their marketing departments.

[00:01:05] John Scott: What you said about data is so important, because if you don’t have good, clean data, you can’t make business decisions going forward, and you can’t forecast or determine if your efforts are beneficial or not. I spent 17 years early in my career working with a very entrepreneurial attorney who grew his practice from one metropolitan area to all across the U.S. and the U.K., and he did it by focusing on data. It was a very marketing-driven firm. He would go into an area, flood the airwaves with advertising, and in six months he would be at break even, and beyond that he would be profitable. But it was all about paying attention to current data.

[00:01:48] Michelle Calcote King: Let’s get into that data issue and the marketing-finance disconnect. We know firms need processes to convert leads into clients. Where does that conversion process typically break down? Is it systems, culture? Is it just the lack of data?

[00:02:10] John Scott: It’s really the lack of data and the lack of good data. If you talk to many businesses, especially law firms, they might be two or three months behind in reconciling their cash accounts. They know there’s cash in the account and they haven’t taken too much out, but they don’t know exactly how much cash is in that account, and they should know that every day. And if you take it a step further, if they’re not paying attention to their financials, they’re certainly not looking at the metrics of how many calls did we get, how many of those converted to a client. You have to pay attention to the data. These folks have gone to law school, and their undergraduate degrees are mostly not in accounting or finance. They’re not focused on the numbers. They’re really good at their craft, but they need someone else to help them with the financial part and the data part.

[00:02:57] Michelle Calcote King: Is that often the first financial disconnect you typically see between marketing spend and actual profitability, just the fact that it’s not being tracked at all? Are there other disconnects?

[00:03:12] John Scott: I think that’s the quintessential one, in that they throw money at marketing but they don’t know what really works. And until you pay attention to what’s working and feed that, and then stop doing the other things that aren’t working… But a lot of times the first reaction is, “We’ll just spend more.” That works most of the time, but it could work so much better if you focused on what part of your marketing efforts are working.

[00:03:37] Michelle Calcote King: It’s that old truism: I know my marketing works, I just don’t know which half. Common problem. I know you told my producer about a story about a firm that had a website intake form bug. I’d love you to tell that story for our listeners.

[00:03:58] John Scott: It was a family law firm, and it was doing very well, and they decided to automate some of their intake. When a client went on the web, they would fill out this questionnaire, and at the end of the questionnaire, it would decide: Is it a good lead, a good client, or should we refer it out? There was a bug in the flowchart so that everyone who got to the bottom of the questionnaire was referred to another firm.

[00:04:22] Michelle Calcote King: Wow.

[00:04:23] John Scott: The only way the owner found out was when one of the referring firms called and said, “Thank you so much for all the referrals.” They realized that their new client calls had dried up, but they didn’t realize why until they got that thank-you call.

[00:04:40] Michelle Calcote King: Wow. That really does lead to: know your data and follow that path from lead to conversion. How common is it to have that kind of blind spot?

[00:04:55] John Scott: I think it’s fairly common, especially in smaller firms that are trying to grow, in that they haven’t done these things before and they try something new. But if you’re paying attention to data, you can course-correct pretty quickly and figure out this isn’t working. Whereas if you don’t pay attention to the data, it might be 12 or 18 months, and it’s really too late to make quick decisions based on data.

[00:05:23] Michelle Calcote King: Tell me about the kind of metrics you have law firms pay attention to. I know a lot of firms track cost per lead. Are there other metrics they should be looking at? And can they truly get to a cost-per-lead metric?

[00:05:40] John Scott: They can, and you have to be sure when you’re comparing their cost per lead to other firms that you’re calculating it the same way. In reality, it’s: what are we spending compared to similar firms of similar size, as a percentage of revenue? And are we growing? Is that what we want to do? There are firms that don’t want to grow; they just want to maintain the status quo. But a healthy firm wants to continue to grow beyond the current ownership. They want to transition that onto someone, either sell the firm or transition it internally. And to do that, you have to keep growing.

[00:06:13] Michelle Calcote King: Do you see any trends around percentage of revenue toward marketing in firms that are pursuing certain goals?

[00:06:23] John Scott: I think things are changing with respect to online advertising. It’s more of an AI-driven content world now, and Google constantly changes its algorithm, so you have to stay on top of that. That’s outside of my wheelhouse, but those are my observations from the finance side of things.

[00:06:42] Michelle Calcote King: And how is that impacting the finance side of things?

[00:06:47] John Scott: It’s a function of: are we wasting money on things that are 18 months old in the algorithm?

[00:06:54] John Scott: We need to rely on the marketing professionals to tell us what the new algorithm is and how to spend toward that. Throwing dollars is like casting seeds: some grow and some don’t. You need to figure out where you’re throwing them.

[00:07:09] Michelle Calcote King: That leads really well into my next question. You mentioned to my producer that your forecasts are dynamic, so you’re looking at them monthly and you’re able to course-correct. It sounds like that helps with the fast pace of technology right now and how much marketing is changing. Can you give me an example of when you’ve looked at a forecast and how that’s changed what you’re doing with marketing?

[00:07:38] John Scott: We really excel at forecasting. That’s our big value add. And when you can forecast, you can tell where you’re going and, as you said, you can course-correct. We help clients set up a forecast. Whether they’re an hourly billing firm, a fixed fee subscription firm or a contingent firm, we can forecast the next 12 months of revenue. What we do is visit that on a regular basis and look at the revenue drivers that are building that forecast, and we monitor that with the owners and say, “We expected charge hours were here, which should convert to billings, but they’re really below that.” Maybe there’s a good reason for that. Maybe we had people out on PTO or FMLA. But what many firms do is set a budget for the next year and not open it up until October. By then, there’s not enough runway left to course-correct. But if we look at it on a monthly basis and say, “Hours were down in January, what’s going on?” OK, there’s a good explanation, but we have 11 months to course-correct and manage our people to get production up so we can hit the forecast. I liken it to when your grandfather took the family on vacation. He looked at an atlas the night before, and the next morning he piled everyone in the station wagon. He couldn’t anticipate that when he got outside of Atlanta, there was construction.

[00:09:00] John Scott: Today we have GPS and a Waze app, and the Waze app will say, “Two miles ahead there’s construction, but here’s a workaround that will still get you to your destination on time.” And that’s what forecasting on a dynamic basis can do.

[00:09:14] Michelle Calcote King: That’s incredibly important. Marketing, especially technology, is moving so fast right now. It’s really critical to stay current and look at what’s working and what’s not. I’d love you to tell another story you told my producer about a family law firm spending 10% of revenue on radio ads.

[00:09:36] John Scott: That was my origin story firm, where I’d spent 17 years with their finance department watching them grow and make decisions based on data. They were a heavy ad-spend firm. Radio stations loved them because they would come to a metropolitan area and just flood the airwaves with marketing. They experimented for a time with cutting the ads every other month, and once they had enough market visibility, it didn’t impact calls that came into the firm at all.

[00:10:07] Michelle Calcote King: Wow.

[00:10:08] John Scott: The radio stations don’t like that. The marketing companies don’t like that because it doesn’t equate to half your ad spend when you cut it off half the time. They catch onto that and they want to charge you a little bit more. But it did tell us that we had enough credibility, enough visibility in the market that we could go dark for a month, and it wouldn’t impact calls that came in.

[00:10:33] Michelle Calcote King: That is fascinating. The other point I want to talk about is that not all clients, not all matters, are equally profitable. How should marketers be thinking about which practice areas and which types of clients to focus on in their marketing?

[00:10:51] John Scott: That’s where we can help in the finance area as well, because we can classify the income statement and give you gross profit by line of business. If it’s a family law firm that also does some criminal work or PI work, we can look at those individually and say, “We’re breaking even on criminal work, but family law is killing it, and the PI work is killing it once you get the flywheel full of cases.” With that information, you can decide as a firm to feed the two areas that are growing and very profitable, and just maintain or maybe even get out of the line of business that’s not doing well.

[00:11:31] Michelle Calcote King: Which is really important. You don’t want to be marketing for work that’s not going to move the firm forward. Another point you made to my producer is that you often hear a consistent pain point around cash flow, so not enough cash. Do you find that drives a reluctance to invest in marketing, even when resources are stretched?

[00:12:00] John Scott: It is, but the foundational issue is delayed gratification. What we help clients do is set targets for how much cash they need just to pay the bills and run their business, and if they want to grow, they need a little bit more cash on hand. The general rule of thumb is 10 to 30% of the next 12 months’ expected revenue should be in your operating account or available on a line of credit. I want to encourage firms to hold onto that money, because when the next dollar comes in, as long as you’ve hit your cash target of what you need to run your firm and grow your firm, you can take the next dollar that comes in. But too many firms look at the operating account at the end of December, see $100,000 in there and take it all out, not thinking about, “I have to pay payroll in two weeks and I have to pay rent the next day.” The worst thing you can do is over-distribute and have the owners put money back in. The other worst thing, arguably worse, is borrowing on the line of credit in January and February only to chase your tail to pay off that debt in the spring.

[00:13:09] John Scott: I would much rather see firms get to their cash targets, build that up, take out the excess, and then they don’t have to draw on the line of credit in the early part of the year and chase their tail to pay it off.

[00:13:22] Michelle Calcote King: Tell me, what haven’t I asked you about how law firms can think more strategically about their marketing with financial data?

[00:13:34] John Scott: I think the next big wave in finance, marketing and law firms is AI. They’re already embracing AI in their casework. On the finance side of things, AI is going to help us be more efficient in recording the debits and credits and reconciling accounts. You still need human oversight, but if we can minimize the time spent getting the financial data clean and accurate, we can spend more time analyzing the data, working with marketing, working with the owners to grow and scale the business.

[00:14:09] Michelle Calcote King: AI is transforming every aspect of our jobs. I completely agree. Thank you so much. I’ve really enjoyed this conversation, and we have been talking to John Scott, partner and virtual CFO at Anders. Thanks for your time today.

John Scott: Thank you, Michelle.