Professional Services Accounting ARTICLE -
Revisit economic drivers to enhance profitability

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners

Just a couple of years ago, many firms were experiencing double-digit profitability increases and wondering how they could continue to push their economic drivers to maintain those levels. My, how times have changed.

Despite the potential for growth in countercyclical practices such as bankruptcy, the recession is having a negative impact on demand for legal services. It’s also handcuffing most firms from making up for lost business by raising rates. So just maintaining profitability, let alone increasing it, is a struggle this year. In fact, in their January 2009 Client Advisory, Hildebrandt and Citi Private Bank projected very modest law firm revenue growth of only around 3% for 2009, with some firms likely experiencing flat or even declining growth.

This is a rather bleak picture, but the good news is that your firm likely has ample opportunities to enhance its profitability. One way to do so is to revisit your economic drivers.

Room for improvement

For many firms, the main driver of their double-digit profitability in previous years was increased rates. If that has been the primary reason behind your firm’s profitability growth, that means you still have a lot of room to improve your other drivers.

The most obvious one is expenses. Cost cutting can be a challenge for law firms. After all, presenting yourself as stable and prosperous is an important part of building client confidence and trust. So some expenses that other businesses might consider luxuries that can be easily cut from their budgets may be necessities to your firm’s continued success.

Take office space. It’s critical for most law firms to be in a nice building and have an attractive office. But you may not need to be at the most prestigious address in town or have the most up-to-date finishes. If your lease will be up soon, consider whether moving to a less expensive location and cutting back on your interior design expenses makes sense.

Also consider how much square footage your firm is actually using. If you’re using too little and moving is cost prohibitive, consider subletting the unused space. Perhaps other attorneys would be more than happy to sublet the space. They also may be willing to pay for some of your support staff’s time, which might help you avoid layoffs, and you might even be able to enter into a fee-sharing agreement with them.

Walking the walk

Law firms “talk the talk” about three other important economic drivers: 1) leverage, 2) utilization, and 3) realization — but they often don’t walk the walk. So when you can’t count on new business and increased rates to drive profitability, it pays to take a close look at this trifecta.

In terms of leverage, the goal shouldn’t be to have a lot more associates than partners. Instead, focus on the ratio of associates’ billable hours to partners’ billable hours. If you have many associates but they aren’t billing enough hours, your so-called leverage is providing little benefit to the firm. Unless you’re able to bring in more work, you may need to cut back on the number of associates.

As for utilization, it might seem like increasing — or even just maintaining — it would be nearly impossible when demand for legal work is down. But a big part of the utilization puzzle isn’t the amount of work that’s coming in the door but rather how to get partners and associates to actually bill all the hours they’re putting in on a matter.

Equally important is realization, which includes being proactive about collections and proper billing. This includes not only billing all the appropriate hours, but also drafting the bill in a way that increases the likelihood the client will pay quickly.

A change in culture

Focusing on economic drivers other than bringing in new business and increasing rates may require a change in firm culture. Leadership needs to make it clear to partners and associates that, in the current economy, everyone needs to work with other drivers — including expenses, leverage, utilization and realization — in mind.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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