You’re working hard, but are you making money?

18 06 2010

Holidays with the family are great fun, but relaxing they’re not. However, while soaking up the sun my mind did (very briefly) wander to those hard working lawyers who are slaving away without actually making much money for their firms. The recession has exposed the myth that all lawyers are making stacks of money, and aside from the efficiency savings that have been made, conversations I have had recently suggest there are many firms (or particular teams within law firms) that are still struggling. What surprises many of the people in these teams is that their viability is questioned when they are working harder than ever.

The mysteries of profitability

Much individual and departmental management information in law firms is often still centred on time as the primary unit of measurement: how many hours? utilisation rate? balance of chargeable and non-chargeable time? Ask a fee earner to talk about a particular work type or project and ask them what their profit margin is on it, and you will often be met with silence. Ask for more granular information such as the cost of sale, and the furrows in brows deepen. For many hard-nosed commercial operators, not only would they have this information about their products and accounts at their finger tips, many would know it off by heart. Indeed if these measures are linked to the performance management system and incentivisation scheme in place, they are more likely get the focus they deserve (because profit is a pretty important part of creating value for the business!).

Thinking about profit can take the lawyer down a  number of different paths. For example, what does it actually cost me to deliver the service? What’s the cost of opening the file, doing all the client UD checks etc? What about time taken with billing, agreeing fees etc? How about internal time spent briefing a team or research that is not charged for example? How do we allocate the cost of sale, in fact do we even know what it is? If money has been spent to win a particular client (for example £100k on a pitch process or £50k on promoting a new product) how long before the returns have paid for this cost?

Looking at costs can then also prompt a discussion about efficiency: how can we deliver this service smarter? Are we re-inventing the wheel each time? Are we sharing knowledge effectively? Does fee earner A always do the work at a lower cost than fee earner B? If so, why?

The other component is of course price, and pricing mechanisms are very much on law firm agendas at the moment. Is the service at a fixed price? If so, how is that price set? What’s the market price for the service (if there is one)? What are the aspects of the firm’s service that would mean the price should be above or below market price? Are there typically write offs with a particular service or client?  If so, what causes them?

The output of all this investigation may be surprising. maybe some work just doesn’t make money. If so, can the firm stop doing it? Could the firm partner with someone else for that area of work? Can the process be re-engineered or the work done by different resources (or automation) to make it profitable?

Now’s a great time to be asking these questions. It may be tempting to work harder, and often that’s needed, but sometimes you need to work smarter. To do that, you need good management information that can deliver real insight.


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10 responses

19 06 2010
Paul Rutherford

The other part of the equation is value. This has both upside and downside potential. There is much work that is the keep-me-out-of-trouble type, and great resentment that can cause (“I have to pay this because the law demands it of me – it actually add no value to my business whatsoever”). And there’s the help-me-make-best-use-of-my-assets work, which Clients see more as investment rather than legal projection.

The amount a firm charges should reflect both these.

21 06 2010
intelligentchallenge

Good call. Value based pricing as a concept is definitely reaching the legal market, but it’s harder to ascertain value for some services than others. Of course, really calculating value is hard in a lot of areas, and if it forces firms to understand their clients’ businesses better, then I think that’s definitely a step in the right direction

21 06 2010
Orijit

Mark as always you have raised very important questions. I look forward to the answers. How do we bake in processes into law firms thinking that enables them to use simple tools to understand ROI on their efforts. Other than utilisation rates and billable hours what other matrix can a firm use to enhance profitability and capture the cost of obtaining new clients / instructions.

Your thought leadership should help in influencing the change in our thinking as Legal Services play catch up with other business services.

21 06 2010
intelligentchallenge

I think part of the challenge is that law firms have very sophisticated costing systems when it comes to capturing the time involved in creating a piece of legal advice. They are less sophisticated when it comes to anything in the “non-chargeable bucket”, less so still when it crosses multiple teams or departments. Lawyers value autonomy very highly, and will often resist attempts to impose additional process and rigour. I believe solid change management and communicating the benefits of best practice are critical when trying to bake in any process to law firms. The associated challenge is that many firms do not have dedicated change management expertise inhouse, and this is an area where I think those advisors and corporates providing services to the profession can really help. There may be champions within the firm who are keen to drive change, and supporting them with wider change management resources and experience can get the critical mass needed to win hearts and minds.

21 06 2010
robin williams

Given the massive margins lawyers charge I don’t think they really need much advice on profitability. Most businesses would give their eye teeth to make money like that, so they can’t be doing much wrong really.

21 06 2010
intelligentchallenge

Hi Robin & thanks for the post. While it’s undoubtedly true that the most successful lawyers certainly do make very healthy profit margins, there are many, many firms (and this is just looking at the larger commercial law firms, not to mention the huge number of much smaller high street practices) that don’t begin to approach those levels of profitability. I’d also suggest that in my experience, even the top tier of firms can (and will, given the long term changes occurring in the profession) and will become more profitable.

21 06 2010
Chris

Without intimate knowledge of how law firms operate and speaking as a soft-nosed commercial operator I would raise a balancing comment; sometimes a raised level of awareness can drive a degree of transactional behaviour that becomes detached from the commercial “feel” needed to be successful in business….as usual a balance is needed, but do not let spreadsheet jockeys erode the commercial thrust of the business…..

22 06 2010
intelligentchallenge

Good call Chris, you make a good point: the yin and the yang; balance is definitely required.

5 12 2011
The end of the beginning « The Intelligent Challenge

[…] but in the world of commercial law, pricing models continued to vex the profession, with pressure on profits resulting from a growing rejection of the billable hour model and a re-examination of what […]

18 12 2011
Julian Summerhayes

Mark

I now find this debate almost entirely sterile (sorry – no I am sorry to be putting it so bluntly). I joined my first law firm in 1996 and the then senior partners were just being exposed to the notion of time recording, billable time and utilization. They hated it. And it wasn’t just because of the need to do it, it was the fact that it made the job so less enjoyable when the focus was entirely, and in a self-serving way, on the partners/partnership. Previously they had spoken to the client about costs, but they were much more interested in doing the best job possible. And that’s the point. Where it does it say: “That client was so delighted with our service when we billed them X (and made Y profit)?” Or “The client never asked about the cost because they thought we cared.” This is not me looking at things through Rose Coloured Specs – heaven no – but in all the discussion about ‘money’ it obscures the fundamental aspect that is so missing these days: you are in business to serve. Period. The process needs to be informed by the client. You will be familiar with Valorem Law – the firm that says pay us what you think we are worth. Even if this is a stretch too far, what about offering a 100% rebate if the client is not entirely satisfied or a no quibble guarantee? How many firms have service standards for returning a phone call in 10 minutes or offering money off of the bill. I could go on. As to the money issue, I worked in 5 law firms from £3M to £40 t/o. I didn’t come across many poor lawyers. Poorly paid support staff, or huge differentials with the bottom and the highest paid. Yep, there is a lot of that. Pricing is just one issue but unfortunately takes up a disproportionate amount of discussion time because it is linked to the partners profit. How about linking things more to performance? And you also have to bear in mind that legal aid work and other streams of work that are vital in some communities cannot be driven purely by profit. Enough for now I think. You probably get the point.

Best wishes
Julian

PS I look forward to seeing what the New Year brings.

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