A Little bit about Profit

profit for lawyersMany lawyers don’t have a good grasp of profit, so here’s a quick summary to get you started.

Simply put, profit is, in a law firm, the return that is paid to the equity partners.  If a firm is not profitable – then you won’t be working there for long.

For the partners of the firm, you should consider that what they put into the firm is an investment.  Profit paid them is their return on the equity (time and effort and money) that they have invested.

Profit, ultimately, is usually measured on the basis of both firm-wide profit, and profit per partner.

Profit is the function of three major factors:

  • Margin
  • Productivity
  • Leverage

These factors contribute in essentially equal proportions to the overall profitability of the firm.  It is tempting for many to think that only margin plays a role, but no one of these factors can be given undue weight.  Let’s have a look at what I mean.

Now experience tells us that not all firms will necessarily think this same way.  In fact reporting in some firms is poor enough that partners who in fact contribute less to the firm’s profit show up as better achievers.  Such errors occur like this:  Partner A bills $100k per year.  Partner B bills $500k per year.  Therefore, even for those who failed maths, it is clear that Partner B is a better contributor than Partner A.  Or at least it would be, if the firm’s reporting system is as shallow as my example.

As it turns out, Partner A also keeps 5 junior solicitors busy in her own team, who in turn bill $250k each, resulting in total billings of Partner A of $1,350,000.  Partner B, on the other hand, keeps his junior solicitor busy only 50% of the time, and so Partner B’s total team billings are a mere $625,000.

My initial myopic look at productivity would keep Partner B over Partner A.  A real analysis, however, shows that Partner A is ultimately the superior performer by virtue of her superior work generation and delegation to junior staff.

This is an example of how productivity shows one result, whereas leverage (in this case through delegation by Partner A) results in another.  Neither factor is more important than the other – both are indicators of something.

Profitability as a driver of firm survival is able to be improved by the following strategies:

  • Raise Prices
  • Lower costs of delivery of the service
  • Remedy underperforming staff issues
  • Increase volume of work done
  • Lower overhead costs.

Since this is not an economics or commerce lecture, I don’t propose to send you to sleep with a detailed explanation of each at this point.  They should be self-explanatory enough that you get the idea.

Importantly, however, you should now have an appreciation of how and why the well managed law firms are looking at some of these issues.

When you see the mountain of reports on the partners’ desk, then you will understand more about how complex an analysis of ongoing profitability can be.  Making a decision about what factors require improvement is a further exercise in complexity, and one on which I need not dwell for now.

Happy Lawyering!

>