Today’s law firms work with clients who have tighter budgets and greater expectations. This forces firms to find new and better ways to increase productivity and profitability. Since billing more hours and raising rates are not always the best solutions, progressive law firms are now looking to what actually makes their work profitable. They are working smarter, not only harder.
With routine profitability analysis, law firms are generating data to determine how profitable a client, attorney or practice area really is. Calculating profitability is something that most law firms can already do with the data found in their current time, billing and accounting systems.
Law firms can utilize profitability data to:
- Improve staffing and overhead efficiency
- Make better hiring and salary decisions
- Make smarter business decisions, and
- Increase net income per partner.
Having the capability to generate quality profitability data and the ability to use these data to support meaningful change in an organization are two entirely different processes. The actionable aspect of this process requires a skillful hand.
Because of the strategic and political factors that exist in all law firms, profitability results must be communicated with careful consideration to increase the likelihood of adoption. Why? Consider the possibility that a client profitability report shows that the firm’s largest client is actually the least profitable. In addition to the obvious financial implications, this client may be attached to a very influential partner who will not appreciate this result very much. If care is not taken, this information may never see the light of day.
The value of using profitability analysis on a routine basis is apparent. Most of all, it promotes accountability. A firm that understands the basic economics of their practice has the competitive advantage to improve the client experience and maximize profitability.