This Part 1 discusses why it may be a good idea to consider profitability at a more granular level than the firm as a whole, such as by client, matter, practice area or even partner. It also discusses how to allocate some types of expenses at the matter level.
Keith Mayfield, Chairman of an AmLaw 100 law firm, is spending another Sunday morning looking at his firm's recent financial reports. He wishes he had more granularity. Today he's focusing on profitability.
Keith's colleagues seem enamored these days with looking at overall realization rates, which are the amounts actually collected as a percentage of what was worked at standard billing rates. Keith understands that realization rates are important, but believes profitability is the purest measure of financial success. Because it takes into account rates, leverage, margin and utilization, Keith believes profitability should be the starting point. High realization rates on work with low profitability aren't such a great thing. Low realization rates on high-profit work, such as work that utilizes lots of associate leverage, may be an area for improvement but worth the effort to fix. Realization rate is but one of those four key variables that mathematically combine to equal profits, as discussed in an earlier post, “The Economics of Practice Management,” Parts 1 and 2.
“Wouldn't it be great,” thought Keith, “if I could see profitability by client, by practice area, by office and by type of work? Wouldn't it be even greater if I could see it by matter, by type of fee arrangement and even by lawyer and partner?”