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Calculating Profitability

By James D. Cotterman

All $1 million practices are worth the same. Would you accept this statement? Many compensation decisions operate with this simple convention. Client acceptance and pricing of legal services often begin with this premise. Yet, we all understand that this is a simplification of reality.

Why simplify something as important as understanding where and how you make your living? Several reasons come to mind. For new law firms, such simplicity is generally rooted in a shared philosophy and similar practices/clients. For these firms, the economics and operating style of one practice versus another (within each firm) are not significant enough to warrant closer examination. Another reason is the collegial nature of law firm partnerships. Scrutiny of each practice and client can be a divisive issue. In addition, law firm partners are not generally well schooled in finance and accounting, so delving into cost allocations is outside their comfort zone. Finally, for many years the accounting systems and personnel in law firms were not robust and experienced enough to undertake this analysis.

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