Many of our clients are faced with the challenge of sustaining profitability while meeting client demands for greater value. To help these firms stay on the right track and to maximize profitability, we conduct several client profitability analyses each year for these clients.
These client profitability analyses generate A LOT of data. And the level of interest for this data varies among partners.
Some only want the net income result.
If the result is to their liking, most partners don't ask for any additional information.
If partners are not happy with the result, they typically ask about other factors or what may happen to their compensation.
Regardless of the results, some want a complete review down to the file level and sometimes time-entry level. Partners seeking a full understanding soon learn to interpret the data and can immediately implement improvement actions. Others, however, don’t have or don't want to spend the time appreciating the results entirely.
It is important to give self-motivated partners the detailed information they need to manage their results. Partners who master the meaning of these data can implement corrective actions without further analysis.
But 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 employees to use. In these instances, employees can price goods or services without understanding the underlying pricing algorithms. This same approach holds true 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
Some partners may see this 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:
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.