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Law Firm Profitability: The Art and Science
The manner in which law firm leaders measure profitability has the potential to have a profound impact on behavior and motivation, particularly as more firms integrate this metric into their operational management and compensation systems. Yet the nuance involved in establishing profitability metrics opens the door for even the most well-intentioned to encourage and incentivize the wrong behaviors. In a competitive market, firms chasing the false profits of production will quickly be left behind. As law firms continue to embrace and deploy profit metrics, it is essential lawyer leaders — and not just their business advisers — truly understand the implications and risks involved in their decisions, every step of the way.
Pricing Pressures Open the Door
Law firms are early in their trajectory of understanding and applying profitability metrics. The relentless pressure from clients is forcing law firm leaders to better understand underlying performance. Client requirements for greater efficiency, flexible pricing options and reliable quality metrics (perhaps alongside tepid demand growth) have provided the initial impetus for exploring profitability, most often at the matter level. For the most part, this stage is where most law firms remain. Matter profitability and, relatedly, the improvement of matter management tools and techniques are today's most common profit-measuring activity. We estimate fewer than a third of AmLaw 200 firms are actively, systematically measuring and using matter profitability firmwide.
Matter profitability measures alone do not a profitable firm make, just as aggregate firm profitability measures don't guarantee timekeeper or matter profitability. Improvements at the matter level, depending on how profits are measured, may or may not have a positive impact on the firm's bottom line. As with so many concepts, to borrow a well-worn phrase, the devil is in the detail. To become increasingly effective, law firm leaders must not only embrace multiple approaches to measuring profit, but also rely on different measures for different business purposes. One size most certainly does not fit all.
Unintended Consequences
The utility of a profitability metric, and the behaviors it fosters, are heavily influenced by the underlying assumptions. For example, the seemingly straightforward approach of allocating higher lease costs to partners in more expensive cities may make these partners less desirable to those looking to staff a matter profitably. Similarly, highly utilized lawyers may appear to have a lower cost per hour than less busy colleagues. Accordingly, busy lawyers might attract even more work while others fight an uphill battle to secure enough work to break even. Focusing on the wrong profit metric may lead to underutilization of high-cost resources, lost opportunities to engage talent and staffing decisions at odds with what, ultimately, may be best for the client. If the most knowledgeable lawyer on a specific topic is deemed a poor choice for the bottom line and she's overlooked in favor a less experienced, yet less expensive option, quality will suffer.
The DOJ's Corporate Enforcement Policy: One Year Later
The DOJ's Criminal Division issued three declinations since the issuance of the revised CEP a year ago. Review of these cases gives insight into DOJ's implementation of the new policy in practice.
The DOJ's New Parameters for Evaluating Corporate Compliance Programs
The parameters set forth in the DOJ's memorandum have implications not only for the government's evaluation of compliance programs in the context of criminal charging decisions, but also for how defense counsel structure their conference-room advocacy seeking declinations or lesser sanctions in both criminal and civil investigations.
Use of Deferred Prosecution Agreements In White Collar Investigations
This article discusses the practical and policy reasons for the use of DPAs and NPAs in white-collar criminal investigations, and considers the NDAA's new reporting provision and its relationship with other efforts to enhance transparency in DOJ decision-making.
Bankruptcy Sales: Finding a Diamond In the Rough
There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.
A Lawyer's System for Active Reading
Active reading comprises many daily tasks lawyers engage in, including highlighting, annotating, note taking, comparing and searching texts. It demands more than flipping or turning pages.