Economic Sustainability Through Break-Even Analysis

The 2013 CBA Law Firm Leadership Conference is being held Nov. 4 and 5 in Halifax and is focused on the new economics facing law firms, with particular attention to mid-size Canadian firms. In addition to wanting a large turn out because I am on a panel on the last day of the conference, I think pricing decisions and the resulting economics will play a critical role in 2014 and beyond in law firm management.

Going out on a limb (it is always where the sweetest fruit is) I am predicting 2014 will not be a rosy year for law firms and in fact, many firms will see a reduction in their profitability. If this prediction is even partially correct, the need to be on top of the pricing game becomes even more critical.

One of the sessions at the conference involves a presentation by Rod Bristol of Profit Mastery out of Seattle, Wash. While its client base has been traditionally corporate, the conference organizers, Michael Sherrard of Sherrard Kuzz in particular, grasped how understanding break-even analysis would be beneficial not only to pricing but all kinds of situations including decisions such as taking on additional floor space.

So I decided to jump the gun a little and hopefully create a need-to-know curiosity in the break-even analysis Bristol will work through. While attendance is optional, knowledge of the tools required to manage your firms in these increasingly challenging financial times is mandatory.

Before we venture too far, explanation of some of the terms is likely helpful.

Break-even analysis in its purest form will help firms understand the relationship between cost-volume-profits.

From a pricing of legal services perspective it will enable firms to understand whether the rates or fee quoted are making a positive or negative contribution to the firm's profits.

The costs we speak of are divided into two buckets: variable and fixed. The former are those that vary (up or down) in direct relationship to a firm's revenue. Some variable costs in law firms are bad debts; some associates' compensation; contract lawyers' compensation; some staff compensation; borrowing costs; etc.

The latter type of cost does not directly vary with revenue and in fact would exist if the firm did not bill anything. Some fixed costs include rent; errors & omission coverage; law society dues; some marketing (web sites, ads); etc.

Another term necessary to understand is contribution margin. This is calculated by subtracting the variable costs from the revenue...

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