Law firm clients historically monitor the ‘Per Partner Profit’ of their legal providers to determine which firms are being better managed than others. Attorneys do the same, closely watching year-end partner distributions.
The conundrum for law firms today, however, is that client demands are forcing firms to operate differently to win their business and make a profit.
A new paradigm of profitability management has emerged, that requires a different way of thinking and operating for law firms…that of a professional services corporation.
Law Firm Profitability = Enterprise Profitability – Overhead – Losses
Enterprise Profitability = Total Revenue – Costs of Goods Sold – Expenses – Losses
Project planning and management, resource planning and management, cost of goods sold and gross profit margins…these are just some of the new formulaic components of law firm profitability.
What does this means for law firms?
- It means running the law firm as an enterprise as opposed to at the individual partner level.
- It means leveraging legal and non-legal teams both inside and outside the firm to ensure profits are protected or increased.
- It means productizing services and then leveraging alternative fee arrangements to the firm’s advantage for increased revenue and profits.
It means law firms are being forced through the scariest and riskiest paradigm shifts they have ever encountered.
Even scarier and riskier than making this change…NOT making it.
Firms that try to stick with the status quo will not survive. They will implode as partner distributions drop causing potential partner defections to occur in rapid succession.
The key to success lies in the thoughtful codification and re-engineering of business processes to coalesce previously siloed cross-functional teams into a cohesive, well-oiled machine.
Luckily, however, there are tenets that remain constant amidst this sea of change.
- Identifying and driving efficiency improvements throughout the firm continues to provide higher profitability as resource bandwidth increases lead to more work getting done faster.
- Ensuring the right people are leveraged for the right work means maximizing value out of each resource (which controls costs of goods sold, thereby increasing gross profit margins).
- Preventing losses through the mitigation of firm risk still results in higher profits as expenses are driven down in the form of lower insurance rates and lower outlays for firm defense surrounding malpractice.
The difference today for firms is how these constant tenets must be employed, applied and rolled out firm-wide in an incremental fashion, with constant 'tweaking' as changes occur.
How to start? Start with the end in mind.
The end goal is:
- Increasing efficiencies (to increase profitability)
- Reducing risk (to decrease losses)
- Enhancing differentiators (to increase revenue to provide more opportunities for increased profits)
Therefore, we need to look at where we are today, and draw ourselves a map of how to get from here to there.
You never just get in a car and start driving. You always think about where you are going, and then what direction to go and what turns to make to get there.
The same holds true when looking to improve how the firm is operating as an enterprise…the destination being increased profitability. And the directions we are seeking are those that get us there as quickly as possible. We want to avoid windy, country roads in this case, and look for nice straight freeways with high speed limits!
In business, windy roads = inefficient business processes. The straight highway can be found through improved, streamlined business processes. And the fast speed is provided by ensuring the right people are doing the right work at the right time armed with the right information so their decisions are faster and more accurate (less wrong turns).
First, let's look at our starting point for our drive by running through the following:
- Assessment of current processes provides insight into who is doing what, when and why on a cross-functional basis.
- Identification of redundancies highlights areas for fast increase of resource bandwidth.
- Getting visibility into inconsistent application of policies and procedures across offices or regions provides insight into immediate risk and loss prevention opportunities.
- Highlighting of labor-intensive work that is stealing the time of our more valuable resource (our people) shows areas for immediate improvement through automation.
But hang on…let's go back to the driving metaphor for a minute. When you think about this simple act of driving from one place to another, notice where the focus is, the emphasis…it's on the destination more than the starting point.
And, just like with driving, you don’t just start at point A and end up at point B all at once. You make incremental changes in your position. BUT, you do so with the idea to get to your destination in the most efficient way possible.
To be effective in business process improvement, you need to follow these same rules of thumb to achieve fast, high-value results. More on that next time…