“A ruthless market will simply and increasingly ignore law firms whose leaders’ pursuit of outdated success metrics position them loudly and wildly out of sync with market demand.” So begins my chapter on new approaches to measuring law firm profitability in a recent Ark Group publication, “The Future of Profitability Models and Analysis for Law Firms.”
Law firm profitability is traditionally measure in the aggregate, i.e., at the overall firm level, and then divided by the number of current equity partners to produce a profitability metric, profits per partner, that is as useless as it is simple. More than a few law firm leaders perceive PPP to be a useful measure of financial success by which one firm’s performance can be compared to another’s, similar to Earnings per Share in publicly traded corporations. They are wrong. It would be just as insightful to compare the relative shoe sizes of two firms’ lawyers. Or the frequency by which two competing firms’ partners stream Yacht Rock music.
Many law firm leaders who dig a bit deeper perceive profit to be solely a function of the “cost of an hour.” This is a calculation of how much revenue remains from a lawyer’s billable hour after his or her direct expenses and an allocation of the firm’s overall expenses are deducted. This approach tends to reinforce that the most profitable lawyers are those who bill the most time and those who bill the highest rates… each of which is only sometimes true. This approach also overlooks key long-term drivers of profitability such as client retention, client expansion, client satisfaction, and non-hourly fees.
Because outdated measures of profitability tend to reinforce partner behaviors that drive clients away, law firm leaders have a compelling incentive to adjust their approach. This book provides guidance on how and why to do so, what to expect on the journey, how to identify and overcome the obstacles to progress, and how to build a profitability culture based on clients rather than on production.
The official book description provides some additional insights into the quality and depth of content from some of the brightest minds in the field:
The convergence of changes in the legal landscape – wider economic pressures, the growing implementation of legal technologies, the disrupting influence of alternative service providers and their competitive pricing offerings – means that the corporatization of the law firm is well underway.
The “business of law” is now more of a priority than ever before, with procurement and pricing professionals playing increasingly significant roles within firms, and a growing focus towards the measurement and analysis of profit, rather than simply its generation, becoming apparent. With this becoming common practice, it is now essential for those at the helm of their firm’s profitability to take a deep dive into its real fundamentals.
The Future of Profitability Models and Analysis for Law Firms is the latest publication to provide this kind of comprehensive exploration into the recent and revolutionary approaches firms are adopting in their pursuit of greater returns in this current period of renaissance for the law.
Featuring contributions from field experts and thought leaders – including pricing directors, chief financial officers, and management consultants – The Future of Profitability Models and Analysis for Law Firms combines trendspotting, exploratory intelligence with case studies and real-world examples of best practice to act as a launchpad for application and instruction.