Law Firm Profitability: The Art and Science

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.

Herein lies the conundrum: for virtually every assumption made for the purposes of developing a profit metric there are advantages and drawbacks. What may seem to an untrained eye to be a simple, logical choice can have unintended consequences. Multiply those consequences by a dozen — or more — assumptions that go into the creation of a profitability measure and it becomes clear why law firms have defaulted to simple, aggregate measures of profit. It's time to embrace wholeheartedly the necessary profitability metrics inherent to highly effective business models and enhanced performance.

Garbage In, Garbage Out

Law firm leaders have long enjoyed the luxury of high demand, which has stifled interest in more precise profit measures. For more than a generation, so long as the aggregate pie of equity partner distributions grew every year, leaders have been content to avoid tough conversations about individual or group performance. Even more troubling, during the occasional economic downturn when law firm leaders felt emboldened to address under-performance, they were as likely to target profitable growth engines that didn't enjoy favorable traditional metrics. The rainmaker with a $4 million book of business might have received compensation guarantees and the partner with a $2 million book might have been starved of resources, even if the cost to deliver their work resulted in equal profit contributions. Low rate practices that might generate significant profits from practice re-engineering might be overlooked in favor of high rate practices, irrespective of the cost of service delivery.