JordanFurlong + profitability   26

The Future of Profitability Models and Analysis for Law Firms — Tim Corcoran
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Because outdated measures of profitability tend to reinforce partner behaviors that drive clients away, law firm leaders have a compelling incentive to adjust their approach.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.
profitability 
10 weeks ago by JordanFurlong
False Profits: Venerating Both the Art and Science of Law Firm Profitability | The Legal Intelligencer
The modern law firm has all the complexities and nuances of any multi-line business, often compounded by a multi-national footprint and a wide variety of client types operating across a spectrum of business cycles. Consequently, identifying the appropriate measures of profit requires more than one simple, catch-all solution, despite the intoxicating simplicity of the olden days. Identifying and adopting more precise measures of profit, and then linking incentives to the lawyer behaviors that drives these measures of profit, is a nuanced exercise, to be sure, but not beyond the grasp of law firm leaders and the business professionals who support them.

Profit measures are, at heart, an indication of how well the firm’s capabilities and strategy are addressing evolving market demands. Getting it right will take time, in-depth analysis, and a change management mindset, but law firm leaders who embrace profit as an essential measure of a lawyer’s contribution, and over time incorporate these measures to drive and reward the behaviors consistent with the firm’s strategy, will enhance their firms’ staying power. Let other firms pray at the altar of false profits, resisting client demand and pursuing outdated production metrics. Come judgment day, all will be made clear.
profitability  firms 
november 2018 by JordanFurlong
The Empire Strikes Back 💥 and 2017 Is (Mostly) a 🎉 Win 🎉 for Am Law 100
In short, this view of the 2017 revenue growth takes some of the bloom off the top-line figures. At the same time, I think it’s generally consistent with ALM’s take — as Roy Strom summarized in his big picture narrative, there is some 😟 anxiety 😨 in the air.

For law firm leaders and equity partners picking up the annual rankings to check your PPEP ranking, don’t be lulled into a sense of complacency by the summary stats. As noted above, 5.5% revenue growth and 6.3% PPEP growth — on average — are undoubtedly great numbers. But if your own firm’s numbers were lackluster, know that it’s because one half of the Am Law 100 has grabbed the lion’s share.
data  metrics  firms  profitability 
may 2018 by JordanFurlong
What does the legal firm of the future look like?
What drives higher profits for law firms?

The Australian legal services industry is in transition. Across the market, firms tell us they are under pressure from cost-cutting clients, innovative competitors and disruptive technologies. Many have responded by rethinking the way they do business — introducing new systems, investing in technology and refining their client offering.

In these benchmarking results, we take a closer look at how firms of different sizes are remaking themselves, and discover what it takes to earn above average profits in today’s legal services market.


Let’s look at the numbers
Because smaller firms have greater scope to achieve high margins and rapid growth, we’ve used distinct performance benchmarks for large, mid-size and small firms, centred on each group’s average profit.
global  australia  metrics  future  profitability 
november 2017 by JordanFurlong
Your Law Firm’s True Profitability Revealed | The American Lawyer
Treating net income simply as profit means that, from an accounting perspective, equity partners receive no above-the-line salary and therefore represent no cost to the business. The result is artificially inflated profit margins that dwarf those at some of the most profitable companies on earth. The average profit margin across the Global 100 is 39 percent and goes all the way up to Quinn Emanuel Urquhart & Sullivan, at a staggering 68 percent.

The piece was intended as more of a thought experiment, rather than seeking to provide yet another metric to assess law firm financial performance. That said, I did refer to a series of specific notional equity partner salary bands, which had been proposed by Alan Hodgart, a law firm consultant. By assigning firms with notional equity partner salaries and deducting this cost from net income, you are left with “true” profit.

Hodgart suggested setting average equity partner salaries at a 25 to 30 percent premium to each firm’s highest-paid salaried fee-earner, or matching the compensation packages offered to general counsel at that firm’s core clients. That equated to around $1 million for an elite firm; $650,000 for a midmarket firm; and $400,000 for firms focused on lower-margin, commoditized work.

(Applying these figures to our latest survey data led to some pretty wild results: Assigning a salary cost of $1 million per equity partner causes Jones Day’s profit margin to crash from 49 percent to just 2 percent, while a $650,000 notional equity partner salary sees Norton Rose Fulbright’s profits wiped out entirely, with its margin plummeting from 31 percent to 0.003 percent. Impressively, Quinn Emanuel and Wachtell, Lipton, Rosen & Katz’s profit margins both remain above 50 percent, even after such deductions.)

Among the many emails I received from readers about the article were several questioning the levels at which these bands had been set.

Some suggested that the salary portion of equity partner compensation should merely be equivalent to that of a firm’s most senior associates. I somehow doubt that equity partners would be happy with that arrangement. Others suggested mirroring nonequity partner compensation. That’s better, but would again underestimate the true cost. Equity partners should have more responsibility or generate more business than their nonequity peers—that’s why they were given equity in the first place—and would therefore reasonably expect to be paid more. (This also wouldn’t work for all-equity partnerships, such as Cleary, Davis Polk, Jones Day, Paul, Weiss, Rifkind, Wharton & Garrison, Ropes & Gray, Simpson Thacher &
partners  profitability 
october 2017 by JordanFurlong
Why Your Law Firm Isn’t Anywhere Near As Profitable As You Think | The American Lawyer
He suggests either adding a 25-30 percent premium to each firm’s highest-paid salaried fee-earner, or matching the compensation packages offered to general counsel at the firm’s core clients. This equates to a notional equity partner salary of around $1 million at an elite firm, $650,000 at a midmarket firm and around $400,000 at firms focused on lower-margin, commoditized work.
Applying these figures to The American Lawyer’s latest law firm financial survey data has dramatic results.
Assigning a salary cost of $1 million per equity partner sees Latham & Watkins’ profit margin fall from 50 percent to 34 percent; Linklaters’ drop from 46 percent to 24 percent; and Jones Day’s crash from 49 percent to just 2 percent. (Impressively, Quinn Emanuel and Wachtell, Lipton, Rosen & Katz’s profit margins both remain above 50 percent, even after such deductions.)
Among the midmarket firms, a notional salary of $650,000 per equity partner sees Baker McKenzie’s profit margin halve from 34 percent to 17 percent, and DLA Piper’s drop from 26 percent to 16 percent. The same figure wipes out Norton Rose Fulbright’s profit entirely, with its margin plummeting from 31 percent to 0.003 percent.
It is easy to dismiss this as the kind of self-reflective navel-gazing of which firms are so often guilty. As much as partners like to obsess over and endlessly debate these issues, the truth is that a law firm’s inner workings are of little interest to anyone outside the industry. Clients couldn't care less about financial metrics and partner compensation systems, so long as the service they’re receiving is good, right?
Well, not entirely. Hodgart said that law firms are actually “shooting themselves in the foot” by publishing artificially high profit margins that don’t account for the cost of equity partners. “Clients see these results, compare them to those of their own business, which are usually much lower, and wonder why they are paying such high fees,” he said.
One might also consider the potential impact on a partnership’s attitude towards costs and efficiency. I go back to Norton Rose as an example. It's not a big deal if clients ask for discounts when your firm’s profit margin is 31 percent. But at a margin of 0.003 percent, even the smallest discount would mean that work had effectively been carried out at a loss.
firms  partner  profitability 
october 2017 by JordanFurlong
What Do the AmLaw Numbers Really Show? | Adam Smith, Esq.
irst and foremost is that a bell curve’s “average” is a highly descriptive number; it defines the central tendency of the universe under inspection.  For power curves, no such thing holds true; averages aren’t just misleading, they can approach falsehood.  Consider a few characteristics of this year’s AmLaw 100: (a) 10% of the group’s total revenue is accounted for by the top three firms; and another 10% by the smallest two dozen; (b) 25% comes from the top nine firms and 25% from the bottom 50; and (c) the top three’s combined revenue was over $8-billion and the bottom 20’s under $7.5-billion.  In short, big firms really matter.  Their performance can easily move gross measurements for the entire group.
Given this, it’s worth looking at the 100’s nominal increase in revenue ($3.5-billion) from a few other perspectives:
How many of the 100 firms accounted for, say, two-thirds of that increase? The answer is about 20 firms; the other 80 didn’t grow enough in absolute dollars to make much difference, or else shrank outright.
18 firms reported their gross revenue decreased and 20 reported lower PPP; just as a matter of first-blush intuition, how does this square with what you assume when you hear +4.3% revenue growth and +3.0% PPP growth?
And, to exemplify how a small firm can have eye-popping percentage growth without moving the gross number needle much, while a big firm lumbering along with the pack can have the same overall impact but no one notices, consider:
Husch Blackwell was the #1 firm out of the entire 100 in revenue growth rate at +23.2% (they merged), adding $81-million to their year-before total.
Skadden was actually below the “average” growth rate at 3.5%, but tacked on $85-million, or a rounding-error’s difference with Husch.
FIRMS  metrics  profitability 
october 2017 by JordanFurlong
When Will Disruption Hit the Legal Industry | The American Lawyer
The data show that a similar number of firms (29 and 30) discontinued operations in each cycle due to bankruptcy, dissolution, merger into stronger entities, or falling below the Am Law 200 revenue cut off [Table 1(a)]. However, there is a sharp contrast in the number of firms that experienced RPL declines. Seventy-four firms experienced such declines in the second cycle compared with only 6 in the first cycle, [Table 1(b)]. This shows that the price erosion that we see for Big Law in aggregate since 2007 (Figure 1) varies markedly across firms and that, as evidenced by the slightly higher number of firms in the PPP 1-50 and PPP 51-100 cohorts that have experienced RPL declines, it affects higher-profit firms slightly more than lower-profit firms. Said differently: the erosion of price realization that economics tells us to expect is in fact occurring, is concentrated in a subset of firms, and is hitting firms of all profit levels.
So why aren't partners feeling the pressure more? A piece of the answer is that law firms have been able to mitigate the impact of price erosion on profitability. As Tables 1(b) and 1(c) show: in the first cycle, roughly the same number of firms experienced price erosion (RPL) and profitability (PPP) declines; in the second cycle fewer firms have suffered a decline in profitability than have suffered price erosion. There seem to have been two major levers in mitigating the effect of price erosion on profitability: cost reduction and nonequity partner changes.
On cost, as Table 2 shows, while firms of all profitability levels increased cost-per-lawyer over the first cycle, they slowed this growth dramatically through the second cycle. Indeed the 100 most profitable firms (the PPP 1-50 and PPP 51-100 cohorts) actually reduced average cost-per-lawyer. This probably reflects that it is easier for the more profitable firms to lower costs because they are typically starting from a higher cost position than their lower-profitability counterparts and thus have more to trim.
data  firms  profitability  future 
september 2017 by JordanFurlong
Incentivizing the New Normal | Timothy Corcoran - JDSupra
If we hope to thrive in the new normal, we need to know how we make money, and how this process has changed given the market disruptions. Law firms tend to rely on a scant few performance metrics, most of which are focused on production, most of which are wholly internally-focused, and most of which are inefficient proxies for what we really wish to measure: profitability. For our purposes, profitability isn’t a crass or one-sided measurement. It’s a scorecard that reflects how well the law firm has deployed its unique assets to meet a market need in a way that’s mutually beneficial to the buyer and seller. Calculated properly, profits are a measure of long-term client satisfaction, not of “beating” the client in an adversarial game.

So we must understand the building blocks of our business, working ever backward from aggregate results, to the practices and offerings generating those results, to the matter types and activities contained therein, to the efforts necessary to win more of these activities. When we truly understand all that we do, and what we do well, and where we can improve, we can start to identify the critical behaviors necessary to generate greater success.
compensation  profitability 
september 2017 by JordanFurlong
How Firms Should Be Measuring the Profitability of Matters | The American Lawyer
How MPH Works
Consider two idealized matters. Matter A is a year-long counseling arrangement. It's relatively low leverage—1.5 associate hours per partner hour, but the client pays full billing rates. Matter B is a litigation matter that settles before going to trial. It's relatively high leverage—4.1 associate hours per partner hour, but the client is getting a 15 percent discount so realization is only 85 percent. Table 1 below shows the calculations of the matters' MPH. Gross revenues are determined simply as hours multiplied by billing rate, (the examples use the same average partner and associate hourly billing rates of $1,000 and $650, respectively). For ease of comparison, gross revenues are $1M for both matters. The matters' realization is applied to gross revenues to determine net revenues from which associate cost—approximated as one quarter of the associate billing rate (discussed more later)—is subtracted to determine margin. Margin is then divided by partner hours to provide MPH.

Hugh Simons
The final line of the calculation presents the matter's MPH as a percent of firm target, typically the MPH level implicit in the firm's financial plan, (every annual plan has such a metric in it ). There are a number of reasons to look at MPH in this way. One is that, because the MPH metric is new, partners don't have a feel for what constitutes a "good" level of MPH in the way that they do for, say, an individual's billed hours; comparison to a target level makes it easy to assess. Another is that comparing a matter's MPH with a target brings into the assessment of profitability how well the matter is contributing to covering the firm's fixed costs and to meeting the firm's profit expectation. Finally, as billing rates increase year by year, the level that constitutes a good MPH also rises; looking at MPH as a percent of firm target allows the assessment of what constitutes a strong MPH to rise naturally over time.
The calculations show that the high-leverage, low-realization Matter B has the higher MPH—111 vs. 80 percent of firm target. That is to say, each partner hour on Matter B is contributing significantly more to coverage of the firm's fixed costs and generation of its partner profit pool.
profitability  metrics  data  firms  partners 
august 2017 by JordanFurlong
Prism Legal Large Law Firms Must Improve Client Service Delivery - Prism Legal
Size Matters Not So Much, a guest post at Adam Smith, Esq. (aka Bruce McEwen) in March 2017 found that law firm size hardly correlates with profitability. “When an incumbent partner contemplates an investment in growth and asks ‘Will this put more money in my pocket?’ the answer cannot be supported by any broad statement about firm size among the American Lawyer Top 200”

The Untold Story Behind Big Law Mergers: Revenue Slips, Costs Rise in The American Lawyer in March, notes that an ALM Intelligence report found “that most major law firm combinations since 2000 have not resulted in significant growth.” Of course mergers made the firms bigger. But growing bigger did not fuel any additional growth.

Global Lateral Hiring by The Numbers: A Look Behind the High 5-Year Attrition Rate in American Lawyer International in February found that “Half of lateral partner hires are failures. To be precise, 47 percent of laterals don’t stay more than 5 full years.” And not staying at least 5 years leads to losses it found.
firms  profitability  partners  lateral  service  clients 
june 2017 by JordanFurlong
Time Capsule: The Original AmLaw 50 From 1985 | Big Law Business
connection with an ongoing research/whitepaper project, further about which affiant sayeth not, I had occasion to look at the Original AmLaw 50 from 1985. Here are the first three columns: Rank, firm, and gross revenue:



Aside from the historic time warp we experience looking at this, a few noteworthy statistics:
firmds  profitability 
october 2016 by JordanFurlong
Canadian law firms hold their own when it comes to making money | Financial Post
Canada’s homegrown law firms, the ones who have not been absorbed by the global behemoths and who still have most of their lawyers in Canada, are holding their own in international law firm rankings.
 
Osler, Hoskin & Harcourt comes in 77th on Legal Week’s “Global 100: By Revenue” list, boasting some $550 million in billings. Blake, Cassels & Graydon follows in 89th spot, generating about $425 million. By way of comparison, U.S.-based Latham & Watkins ranks first in revenues with $2.65 billion.

Firms from the U.S. and U.K. dominate the list, but otherwise only two firms from China, one from Australia and a South Korean firm rank ahead of the Canadians.
 
On the partner profits front, three Canadian firms rank in the Top 100. Again, Osler is the top Canadian entity, standing 70th with average partner profit of $1.045 million; Blakes is 77th, coming in at $985,000; and Fasken Martineau stands 98th at $795,000. U.S.-based Wachtell Lipton Rosen & Katz leads the list with partners taking home $6.6 million on average.
firms  profitability 
october 2016 by JordanFurlong
Prism Legal The Coming Changes in How Lawyers Practice - Prism Legal
In this century we have seen dramatic changes in the legal market. From a period of plenty, we moved to one of seeming scarcity. Many commentators suggest that the legal market has been, is being, or will be disrupted. I have a different point of view: if the 2007-10 economic crisis did not “disrupt” the legal market, I am not sure what would.
firms  innovation  disruption  process  pricing  profitability 
august 2016 by JordanFurlong
Metrics can tell the tale of a firm's fate
All of these tools, and quite a few more, can be easily applied with readily available information. At a minimum, they should be used by management/leadership to generate a more detailed awareness of how the firm is performing at present, and especially over time. They should definitely be shared with the executive committee so that healthy discussion can be had about actions to take when unacceptable results or trends are made evident and there is still time to make corrections.

If the firm really is a partnership, all partners should have this information as well.

To what extent the exercise of politics and power in a law firm would restrict or deny this simple information to partners is not for this article to address, other than to suggest to a partner that if you don’t get it without putting yourself at risk of disapproval or discipline, can you really afford to stay?
firms  finances  profitability  metrics 
january 2016 by JordanFurlong
3 Geeks and a Law Blog: Creating a Law Firm Profit Culture
The first step in creating a profit culture is deciding on a profit methodology. This first step can be the one that brings the entire effort to a grinding halt. Partners can easily see that any profit method will eventually impact them, so they spend hours arguing about what it should or shouldn't be, trying to tilt the model in their favor. This is of course understandable. However, given the proclivity for and skill in arguing lawyers possess, having all of them engage on this at once is what usually kills the plan. In actuality, a given model favoring one partner over another is so minuscule, the arguments are not worth making. But remember our guiding light about fear over money, and you will understand this behavior. So the solution is helping partners understand the low value of arguing and that the real goal is having a method that is not focused on an unachievable, absolute profitability, but instead on one that is instructive for how partners can improve profit.
profitability 
november 2015 by JordanFurlong
Law Firms Embracing Metrics in Calculating Partner Compensation | Legaltech News
“One of the points that was surprising to me in attending these sessions we had is how few firms used profitability as a metric towards determining partner compensation,” Ian Oxman, vice president of marketing at Aderant, added. “There were several different reasons why they said they didn’t do it. Some simply don’t have clear access to that data. But some said, ‘Well, there’s inherent differences in different practices.’ For example, tax law is inherently more profitable than another form of law. That was a challenge to them.”
compensation  profitability  productivity 
october 2015 by JordanFurlong
Comment: K&L Gates' Tony Griffiths on profit, delusion and how Big Law became obsessed with the wrong things | www.legalbusiness.co.uk
In today's Big Law environment with its obsession with PEP, RPL, productivity enhancement and metric-based comparison, this sort of language comes close to heresy. However, if you strip away the startling rhetoric, the message is not so controversial. It simply means that a business's long-term viability depends upon constant reinvention through investment in innovative and differentiated client offerings. What is startling when you think about it, is how far Big Law has moved away from what I would argue is this basic truth in its focus on short-term consumption, particularly for and by its partners.
profitability  metrics  firms  leadership  management 
october 2015 by JordanFurlong
The 8 Habits of Highly Profitable Law Firms — BTI Consulting Group
Everyone loves profits. Everyone loves to talk about profits per partner. We will restrain ourselves and not talk about the value of profits per partner as a metric, as hard as it is. Instead, let’s focus on how people stare endlessly at the eye-popping numbers of the top reported firms. BTI's analysis of more than 330 law firms reveals the firms with best profits (reported or not) exhibit the following key traits:
profitability  firms 
september 2015 by JordanFurlong
Book excerpt: What should law firms do to improve profitability and LPM? (Part 1 of 4) - Legal Business Development
I’ve been with the firm a little over a year, and part of the reason that the firm brought me in was that we needed to look at our operational infrastructure and basically get caught up with the rest of the AmLaw 100. We didn’t have the ability to really measure profitability. We could just barely measure it at the firm level and at the office level, but not at the practice level, not at the client level, or matter level. About three months ago we finally started using a business intelligence platform that allows us to measure those things, and we’re still trying to make that part of the culture. – Senior executive
firms  management  profitability  process 
september 2014 by JordanFurlong
Basic Matter Level Profitability Reports: A Common Tool for Innovative Thinking
A Partner who is focused on matter level profitability will stare at one of these reports for some time to figure out how to improve client service without adding costs and/or drive more money to the bottom line. The series of basic questions they often follow, in order, are:
profitability 
september 2014 by JordanFurlong
What the Rise of Pricing Officers Says About Big Law's Future | The American Lawyer
This is old news at many firms. We’ve lost count of the number of partners who have left their firms because their clients couldn’t keep pace with the firmwide billing rates. Many firms refer to this as imposing discipline on their partners. As an indication of how widespread this practice is, our survey found that at only about one-third of the responding firms—32 percent—did the lead attorneys on a matter have one of the “final says” on its pricing. These lawyers may be part-owners, but they didn’t get to price the merchandise. Admittedly, these responses came mostly from firms with pricing officers in place.
pricing  firms  profitability  partners 
july 2014 by JordanFurlong
Law management: leading from the front | Feature | Law Society Gazette
In the keynote address, Edge International consultant Nick Jarrett-Kerr, one-time partner of what is now Bevan Brittan, told the conference that he backs that courageous junior partner. ‘Drawings should always match the cash coming into the firm,’ he said, ‘because a prime feature of a failing firm is when drawings exceed net profits.’

That is blindingly obvious, you might say, but Jarrett-Kerr said that only the best-managed firms regularly review and, occasionally, reduce equity partner drawings to reflect prevailing market conditions. It is the first of his top-10 tips to ensure a firm makes a profit by banking more money than it pays out.

Another top-10 tip is to speed up the work cycle. ‘Work piled up on your desk is in lock-up,’ he says. ‘Cutting the time between first speaking to the client and invoicing for the work means a surge in revenues because there is less work in progress (WIP), more money coming in and a better cashflow.’

Other tips include urging partners to ‘get out more’ and drum up business; empowering assistants and associates to get involved in marketing; reducing salaries rather than making redundancies, so as maintain the firm’s knowledge base; and ‘reviewing, hiving-off and closing non-core businesses’ – typically, these days, criminal defence and personal injury.
profitability 
may 2014 by JordanFurlong
Solving for Profitability | Timothy Corcoran - JDSupra
Matters will be priced more competitively, because the objective is not only to win the work, but to win subsequent work
Matters will be delivered efficiently to maintain price competitiveness, and profiting from the learning curve is always more sustainable than profiting from high prices
Satisfied clients not only stay longer (leading to higher retention rates), they buy more services (a.k.a. cross-selling, leading to higher penetration rates at a lower cost of sales)
Satisfied clients insulate the firm from consequences of lateral partner defections. Even when a key rainmaker or service partner leaves, satisfied clients remain
firms  profitability 
november 2013 by JordanFurlong
Law Firm Counts On Analytics For Profitability | Big Data
Law firms haven't done much analyzing of their practices, though some firms were early leaders in the use of text analytics. Analytics is on the rise in law firms, thanks to the 2008 recession and the rise of e-discovery and e-billing.
data  metrics  profitability 
september 2013 by JordanFurlong

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