Tag Archives: lawyers; profitability; cost of sale; costs

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

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.