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Common Misconceptions About Law Firm Profitability

Posted by Sarah Rosenberg on Mon, Apr 09, 2018

Common Misconceptions About Law Firm Profitability

by Sarah Rosenberg / April 9, 2018

The Ark Group’s 7th annual Mechanics of Law Firm Profitability conference is a superior event for law firm management. BigSquare was excited to sponsor this event in Chicago for our first time. Our team enjoys the professional atmosphere that allows for education and networking opportunities with so many great legal professionals throughout the legal industry.

The conference topics highlighted the changing scope of matter management in support of client value, practice efficiency and ultimately law firm profitability. The sessions examined what law firm profitability truly entails, as well as addressed the continued evolution of matter management and how firms are marshaling their resources to provide the necessary framework, metrics and leadership to manage the business of law more strategically, and profitably.

We found all of the topics to be extremely valuable and found that there were many common themes between the different sessions. The Keynote Address and The Panel Discussion were two sessions that we found extremely interesting and brought to light two topics and theories when it comes to law firm profitability:

  • Is the BigLaw “Merge or Die” approach the best model?
  • Why is the billable hour killing law firms?

Keynote Address:

The keynote address “The Death of the Sears, Roebuck Era in Law” by John Alber, Practical Futurist for the Institute for Future of Law Practice, outlined the financial and market factors that once made department stores thrive and challenged how many of those ever really applied to law. He discussed how law firms capitalize themselves and make money, and how markedly that differs from the financial underpinnings of publicly held companies like Sears. As you may know when Sears emerged as a company the store grew, and it grew fast. Why? For numbers and to increase the storefronts they had. As this growth occurred their costs in turn decreased. It’s important when looking at this from a law firm perspective this is where growth differs. The bigger firms get, the attorney costs do not go down, they will remain the same or even increase. We see so many law firms going through mergers right now. Why? To grow, but what’s important to keep in mind is that those mergers (law firm growth) need to happen for the right reasons. Law firms are not Sears, they don’t want to grow for more people, attorneys, office, more practice areas, etc. John shared three good sources of growth for law firms:

legalbusinessintelligence

1. Increased demand from existing client

2. Exploiting inconsistencies in markets

3. Exacting a winner’s premium in a two-sided business

It’s important to remember that growth is vital to continued success, but the right kind of growth separates good firms from the best firms. What was our biggest takeaway from this session? Rather than trying to merge and grow your firm by numbers some key areas to focus on are growing by spending on areas like service innovation, price innovation, best practices training, and retention.

The Panel Discussion:

The keynote panel discussion “Profitability and Outcomes (and why hours are killing you)” included three extremely insightful individuals: Jeff Carr, SVP, General Counsel, Univar Inc,  Sean W. Gallagher, Partner, Bartlit Beck Herman Palenchar & Scott LLP, and Michael Roster, Co‐Chair ACC Value Challenge; former GC of Stanford University; and former managing partner of Morrison & Foerster’s L.A. office. This session touched on a very hot topic right now, billable hours. We were one step ahead of the game recognizing this as one of the "Top 10 Legal Tech Trends in 2018" in our blog post earlier this year, so hearing these individual's thoughts was captivating to us. The main battle between what the client wants and what the firm wants is the main reason this area is of discussion. Firms are requiring attorneys to bill more hours and the client wants costs down. From that simple statement alone, anyone (legal background or not) can recognize there is the issue. Clearly, there is much more to it, but breaking it out into simple terms is always a good place to start.

billable hours

Billing by the hour has not always been the way law firms function. Until about 30 years ago, legal work was done at fixed prices, contingency fees, long-term retainers and similar arrangements. Law firms often functioned as client’s general counsel. Doing billing legal work solely by hours is not the original and only way to run a law firm, it is actually a more recent invention. It was quite interesting when the speakers brought up the idea that hours are inherently contradictory, let me explain. There are two competing functions that are performed:

  1. Monitor production
    - How many hours needed to perform the work
    - Goal should be to reduce both the hours needed and the cost of each hour
  2. Generate profits
    - Firm benefits by increasing hours for a task or matter
    - Likewise benefits by regularly increasing hourly rates

Value-based relationships bring this long standing tension to the forefront. Ultimately, takeaways from this panel is that the billable hour is slowing dying. Fixed fee pricing is more appealing to customers, and law firms are going to have to change and adapt to that. How? These questions the speakers provided are a great place to start to strategically approach law firm profitability in regards to this topic:

  • What’s a competitive price for a given type of work?
  • How much profit is desired?
  • How to create highly competitive legal product for the difference?
  • How to still exceed client expectations?
  • How to get rewarded for results?

Law firm profitability is such a hot topic right now. For this reason, we focus on many profitability insights on the BigSquare blog in addition to legal BI, law firm analytics, and law firm reporting. Profitability modeling varies firm to firm in approach and methodology, it's not a one-size-fits all solution. There are many ways to define profitability, while we can't specifically say one is perfect, there are best practices to help guide firms in the right direction to come to a conclusion that works best for them.

 

BigSquare is the leading provider of Business Intelligence for law firms and professional service organizations.  We focus exclusively on law firm reporting, law firm BI, law firm profitability and law firm analytics.

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Tags: Law Firm Profitibility Key Profitibility Metrics Profit Drivers

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