Law Firm Best Practices Blog

Law Firm Client Profitability That Everyone Can Understand

 

bigstock-Arrow-Maze-88385396-1.jpgMany of our clients are faced with the challenge of sustaining profitability while meeting client demands for greater value.   To help these firms to maximize profitability, we conduct several client profitablity analyses each year.

 

In conducting a client profitability analysis,  much data is generated. Typically, the level of interest for this data varies among partners. Some only want the net income result. If the result is to their liking, they don't want any additional information. If these partners are not happy with the result, they may ask about other factors or what may happen to their compensation.

 

Regardless of the results, some want a complete review down to the file and sometimes time entry level. Those seeking a full understanding soon learn to interpret the data and can immediately implement improvement actions. Others, however, don’t have or do not want to spend the time to appreciate their results entirely. 

 

It is important to provide self-motivated partners with the detailed information they need to manage their results. Partners who master the meaning of these data can implement corrective without further analysis.

 

What about partners who struggle with profitability data? What can managers and consultants do to help these partners?

In our experience, simple guidelines are most helpful.

 

Many businesses, for example, develop pricing guidelines for use by employees. In these instances, employees can price goods or services without understanding the underlying pricing algorithms.  This same approach can work in a law firm. We suggest creating simple guidelines that partners can use to manage their practice. We can refer to this as a profitability cheat sheet. 

 

Consider the following example:

Overhead and cost per hour recap for a sample firm

(CLICK HERE TO ENLARGE IMAGE)

Table1- Overhead_Cost_Per_hour.png

 

Some partners may see these data and seek to understand each column and each row thoroughly. They will want to know the source of each number and the assumptions used in arriving at the reported results.  Other partners may see this analysis and immediately ask what it means.

 

To ensure that all partners benefit from these data, we can create a set of guidelines as in the following example.

Assume that Partner 1 works with Associate 1 and Associate 2.  Our cheat sheet might look as follows:

 

Table2_cheat_Sheet.png

 

 

Our profitability guidelines provide Partner 1 with basic per hour cost information for pricing and profitability; necessary billable hours to achieve a target profit margin; and the per hour cost impact of missing or exceeding the targeted billable hours.  With a few simple calculations, Partner 1 can determine his practice profitability with reasonable certainty.  We recommend updating these per hour cost factors quarterly.

 

Turning the full analysis into a small and easy to understand guideline will likely engage more of the partner group. More engagement will lead to better decisions and increased profits.

 

Reducing complex analyses can work also work in other areas including compensation, client pricing and lateral and merger modeling.  We will write more on creating simple metrics from complex data in upcoming posts.

 


 

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If you are a law firm partner or manager and would like a fee estimate for a client profitability analysis for your firm, please submit a no obligation fee inquiry.

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