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The Two Simple Drivers of Law Firm Profitability

The Two Simple Drivers of Law Firm Profitability-3

Finding the bottom line, or net profit, at law firms is not easy.

Law firms aren’t widget makers, and the business model is unique because the model centers on people not widgets.

At the same time, any firm that wants to stay in business has to establish a framework for understanding the drivers of profitability at your firm: The simple definition for profitability is revenue minus expenses.

The Two Simple Drivers of Law Firm Profitability-illustration-small

The equation answers a simple question – has the firm made money or lost money? If a law firm wants to increase profit, it can either increase revenue or decrease expenses. In many cases, law firms seek to do a little of both.

There are two paths to profitability:

  • Work Harder. In law firms, we look at two areas when we talking about working harder – realization and utilization. Utilization means essentially billing more hours. Realization is about converting attorney work into cash.
  • Work Smarter.  When we talk about working smarter, we want to focus on two key data points – fee income and compensation.

Profitability for any business is the ratio of revenue to cost for specific areas of a business.  For law firms, it is the ratio of fee income to compensation.

Law firms should look in greater detail at these two areas to understand which parts of the firm are truly profitable, and that’s when you can start really making informed decisions to affect the bottom line.

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Note: This submission followed a session by Joel Eaton, a professional services manager, titled “Profitability, Realization & Utilization” at the 2015 LexisNexis Juris Customer Conference in Las Vegas.

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About Kevin Bonsor

Kevin Bonsor
Kevin Bonsor is the Creative Services Director for the Business and Litigation Software Solutions business of LexisNexis. In this role, Kevin guides the creative, branding and content strategy for the business. Kevin began his career as a reporter in his hometown of Augusta, Georgia, and he has also worked as a magazine editor and was the new editor for HowStuffWorks, where he co-authored several books. Prior to joining LexisNexis in early 2012, Kevin held marketing communications and creative roles at several information services companies. He holds a Bachelor of Science degree in journalism from Georgia Southern University.
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