You May Get Paid On Revenues But You Spend Profits

This month's column addresses the third "P" that today's law firms need to tackle to ensure they are tomorrow's law firms too. The January column Let's learn about process mapping addresses the need to have processes that ensure the efficient and effective delivery of legal services without which you could be out of step with clients' needs. February's column Pricing: too critical to be left to the accountants deals with the importance of having and sticking to a pricing strategy again without which you could be disengaging clients (unfortunately unknowingly).

This month's column addresses profits.

Jonathan Byrnes, a senior lecturer at MIT, presents a thoughtful and practical approach in his book Islands of Profit in a Sea of Red Ink. While focused on the corporate world, the book presents the concepts in such a way that they can be applied to law firms without too much imagination.

It is more effective to increase the profitability of the work you already do for the clients you already have, than spend valuable resources, both time and money, on chasing clients you don't have. STOP! I am not saying to terminate your business development efforts, I am just saying without the combination of a focused business development strategy and a focus on profitability, you could erode your bottom line (partners' income) while growing your top line (revenue).

While there may be different lessons for many firms coming out of the unfortunate demise of Heenan Blaikie (and not all of them financial by any stretch of the imagination), one is you can generate a net income but not have sufficient profits to go around to keep partners engaged.

Some myths which need to be exposed around profitability:

All client work is profitable.

The theory is a smaller number of clients contribute more than 100 per cent of a firm's net profits and the remainder create losses that bring the profits back to 100 per cent. But the profitability of any client's work can be enhanced by having the right people handle it the right way. Not all work should be done by partners in the way they have always done it.

All revenues are equal.

Too often if a firm's bottom line is 35 per cent of revenue this ratio is applied to all revenue — wrong! Work priced at $250 an hour done by a professional costing $225 an hour does not have the same contribution ratio of work billed at $225 done by a professional costing $150 an hour.

Lower profitability can be made up by volume of work.

Perhaps in...