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Measuring Practice Group Profitability
A number of surveys today compare the profitability of one law firm against another. Unfortunately, the reporting is often flawed due to a number of factors, from self-reporting to comparing the profitability of apples to oranges, e.g., comparing a litigation practice firm with a real estate practice firm. While such broad survey reporting may be suspect, that is not to say that measuring your own firm's profitability by practice group should be off the table. If done properly, it can provide important input when deciding where dollars should be invested and where your current operating model can be improved.
With the profitability analysis computer software available today, a firm's profitability can be measured by department, by practice group or even by lawyer. This article focuses on the profitability of practice groups. The software does not do everything, but it can generate relevant data for management planning. The key is to avoid distortions caused by temporary circumstances. Accordingly, any profit analysis by practice group should be done over at least three accounting periods. In addition to leveling out extraordinary factors that might affect a particular year, it highlights important trend lines for each group.
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