In an earlier blog on pricing and profitability analytics, I commented that in my experience I have found that there is no single configuration of business drivers and metrics that govern the generation of acceptable law firm profitability. Billing rates, realization, associate and paralegal leverage, attorney productivity and cost structure interact together in different ways and in different combinations with the end result being “satisfactory” law firm profitability. Some of our clients tested this notion, employing the analytic functionality of our ViewPoint business intelligence application.
One law firm, with average profits per partner close to seven figures over a recent 12-month period, discovered striking variations from that level among its diverse client base – with client to client profits per partner ranging from as high as twice the firm average to as little as less than half. The top ten clients of this law firm in terms of profits per partner had, in the aggregate, 65% higher profits than the firm average. Analysis showed that, as a group, they had substantially higher performance in a number of law firm metrics, including associate to partner leverage in terms of billable hours, much better billing and collection realization and markedly higher attorney productivity in terms of billable hours per attorney. But only three of these clients had superior performance in every metric, with the other seven clients of the group falling short in at least one, demonstrating that above average profitability is possible notwithstanding less than optimal performance in one or more key law firm performance measures. In a few cases the revenue effect of non-attorney production, i.e., paralegal and other non-legal personnel, was substantially positive to per partner profitability. I call this hidden leverage.
On the other hand, not surprisingly, the least profitable clients in terms of per-partner profits showed, in varying degrees and combinations, key metric performance well below the average, sometimes with negligible leverage, high write-offs and poor realization, and underutilized and less productive attorneys.
The results were eye opening to law firm management, providing insight not only to individual client profitability issues but also revealing issues with respect to at least one consistently under-performing practice area. Delving deeper, the same law firm analytics were applied at the individual partner level and, similar to results revealed by like analysis at other firms, certain clients which were dilutive to overall law firm profitability were found to be recruited, retained and managed by partners who appeared to have little understanding or appreciation of the impact on profitability of the key drivers of performance, drivers which were often in their control to manage. There are many partners today who still believe that the ultimate accomplishment of success is the billing number alone, notwithstanding how many wasted resources may be expended in its achievement. I have found that the opportunity to educate is perhaps one of the greatest benefits in the application of business intelligence and analytics in law firms.
The value of the law firm analytics uncovered by a discovery application proves itself time after time, providing to law firm management rich insight and a clear road-map for action. Properly viewed, law firm analytics spotlight which clients and which matters are the most important to the firm, not just to the top line but to the bottom line, as well. They identify for action those responsible partners who may need a refocus on client and matter management skills. They identify poorly performing and unproductive revenue generating personnel. They help to identify those practice areas and matter types with the most potential and those with the least. They provide valuable information about trends over time in law firm metrics and performance, which is very often much more illuminating than point-in-time data. There is little doubt in my mind that the most prosperous law firms are those who continually seek to discover and understand the underpinnings of their business and then take the actions and make the necessary adjustments to keep it on course.