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Profitability Analysis: The First Steps

By Donald J. Kondub

How profitable is your firm? This is typically an easy question to answer. Total up all firm revenues and then subtract all firm costs. The net result is the profits of the firm. Stated another way, it is what the partners of the firm have earned for the period under measure. When you then divide the profits by the number of partners, the average profit per partner has been determined. The basics of law firm partnership accounting 101.

The picture is not as clear, however, when the strategic decision is made to analyze a specific portion of the firm's practice. If your firm has a number of legal departments, how does one determine the profitability (or economic contribution) of each? Delving further into a specific department, how do you measure the profitability of a practice area? At my firm, we have 150 lawyers who have been assigned to six departments. In some of these departments, there are up to seven practice areas.

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