Cost-cutting can improve margins in the short-term, but profit is just one gear among several affecting law firm profitability, according to a white paper titled Driving Profitability Forward.
Gears are a sound analogy for framing the business of law, because while a gear moves independently, as part of a system, gears are interdependent. When one gear falls out of sync… the other gears in the system are also affected.
The paper breaks down the gears law firm profitability into five parts:
1. Production value. Simply stated, it’s the amount of fee timekeepers are tasked with billing. However, “just billing the required number of hours doesn’t answer the question of how long a matter will take or how much it will cost to service the client,” according to the paper.
“If you consistently estimate all the different factors correctly, you’ll net a profit. Less successful firms, on the other hand, may be less particular about tracking the profitability of individual jobs, or even write off losses as the price of doing business, putting revenue on equal footing with profitability.”
2. Utilization. This is “the actual amount of billable time a timekeeper logs.” A path to improving utilization centers on reducing the time spent performing non-billable tasks – even those non-billable tasks essential to law firm performance.
The paper suggests requiring all time keepers to track both billable and unbillable time and dividing those tasks into two categories:
a) those tasks which should be delegated to administrative employees; and
b) those tasks that still require some timekeeper involvement – and then look at technologies to reduce the time required.
3. Realization. The paper states realization is “how much money your firm is paid compared to how much you bill.” Broadly speaking, the firms that perform at the top of the charts for realization, a) understand the value they deliver and bill accordingly and b) clients also realize the value and pay accordingly.
The paper lists – and explains – a number of culprits that drain realization. These range from poor billing practices to client communications to unrealistic expectations.
4. Leverage. “Leverage is one of the least-understood profitability gears because it requires” an investment in junior attorneys, staff and technology. The paper says, “The fact is, the most profitable law firms are usually the most highly leveraged,” and have “fewer partners with more associates, and often with a greater emphasis on increasing productivity through technology.”
5. Margin. In short, margin is the “the difference between the money your firm brings in and the amount” a law firm spends.” There are two basic philosophies on margin in any business, let alone law: high-volume work with low margin worth – or high margin worth low-volume work:
“In general, being successful with a high-margin strategy requires unwavering attention to detail and service; while following a low-margin strategy requires having the systems and processes in place to get your product out quickly and efficiently, with a minimum of wasted time and effort.”
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The paper concludes that every law firm is unique, begins process improvement “at a different point on the profitably scale.” What the authors are suggesting “is a framework” for thinking about profitability as opposed to “a forced march.”
A complimentary copy of the paper is available with registration here: Driving Profitability Forward: How to get the money-making gears moving in the right direction.
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