• utilization (hours per partner and associate)
• revenues billed
• realization rate
• leverage (hours of lawyers other than equity partners, divided by hours of equity partners)

• profitability (see #2.b below)
• exports and imports – the value of matters originated in the office/practice group and handled elsewhere and vice versa

b. Do we measure the relative profitability of our practice groups, offices, clients, matters and partners, and what do we do with the information?

Measuring profitability. Revenues, collections and realization rate address only one side of the income statement. Profitability also takes into account the expense side, including the important effect of associate leverage. A partner-intensive advisory assignment with a 95% realization rate could be much less profitable than a high-leverage transactional matter with an 85% realization rate. Similarly, a partner who hoards work that could be done by associates may have lower profitability on those matters than a partner who pushes work down.

Profitability can be measured at many levels – by practice group, office, client, matter and partner. Comparing profitability can assist in making decisions that improve profitability of the firm. While there are many reasons it may be the right decision to promote a less profitable practice group, office, client, matter or partner over a more profitable one, being unaware is not one of those reasons.

Sharing profitability information. Profitability information can be sensitive and a challenge for some to understand. Those are not reasons to avoid measurement. When this measure is first calculated within a firm, it may be appropriate to limit it to the most senior leaders, or perhaps even only to the chairperson or managing partner. As experience is gained, the measure as applied to some items can be shared with a broader group. For example, matter profitability may be introduced to partners as a metric alongside realization rate to sensitize them to the effects of leverage.

Further information. We wrote an article explaining the uses of profitability metrics and overhead allocation considerations when calculating it, entitled “Matter Profitability – What is it and how should you use it?” Law Practice Today (American Bar Association June 2015).

c. Do we actively invest in our profitable geographies, practices, etc. and, if not, why?

Measuring profitability as described in #2.b above leads naturally to this question of where to invest. Once a firm knows that certain offices or practices are more profitable than others, it should look further into the likely trends. If there is reason to believe current profitability will continue or even grow, then the firm will improve its overall financial results by expanding in those areas.

A firm that does not expand a profitable office or practice, may be justified. That result should occur through deliberate and thoughtful choices, though, and not be an opportunity that is missed through inattention.

d. Do we take steps to exit our least productive areas, and if not, why?

Exiting unprofitable offices and practices is the flip side of investing in the profitable ones. Both can improve substantially the firm's profitability. Exiting existing offices and practices is typically a more emotional decision, though. Still, failing to act through unwillingness to have difficult conversations or because of undue sentimentality is unfair to the majority of the firm. In this connection, a firm will find the going easier if it lays out in advance its expectations for productivity and profitability.

e. Do we have good mechanisms to price our services in a way that optimizes utilization and drives profit?

There is no one-size-fits-all answer to this question, other than that pricing should not be monolithic across the firm. Variations in fee structures – hourly, fixed fee, value billing, other alternative fee arrangements – and explicit or implicit fee rates should be based not only on the nature of the work – commodity, experience-based or high-value bespoke, nature of the competition and client preferences – but also on the firm's capacity to undertake the work profitably. Discounts may be appropriate to sustain utilization at some times of year, but not at others.

Many firms employ specialized business professionals to assist in the pricing of their services. The more that partners can also be integrated into the analysis that goes into pricing, the better will be the result.

f. Can we deliver differing standards of service if our client wants them?

The quality and scope of the firm's work should always be such that the client perceives it is getting fair value for the fee paid. In a few cases, this means leaving no stone unturned in the effort to achieve the client's desired result. In most cases, though, it means balancing the scope of the work and the quality against the fee charged.

Identifying at the outset work that the client does not value, and agreeing with the client that scope will exclude that work, is the first and easiest step.

The more difficult step is matching the quality of the work to the client's value assessment. For commodity work, the client likely expects the firm to rely heavily on forms, standard processes, paralegals and specialist lawyers, and pays a commensurately lower fee. In other cases, the client may expect a fully customized approach and use of more senior and generalist lawyers. In those cases, the client also expects to pay a higher fee, but only to a point. A firm that expends the effort to improve practice group efficiency will be better positioned to meet these client fee expectations.

The firm should have a process to identify the scope and quality required for incoming work and to match the firm's approach in undertaking the work.

3. Do we have good internal communication lines to partners and associates?

Morale problems generally accompany bad internal communication lines. On the other hand, where partners and associates have a clear sense of the firm's goals, and are timely informed of financial, business and personnel developments at the firm, they will:

• feel more part of a team and therefore more loyal,
• more readily come to a consensus on important firm issues,
• be more likely to give management valuable feedback and the benefit of the doubt during stressful times,
• more often act in accordance with the firm's goals, and
• operate more efficiently as a group and produce higher quality work product.

Communications should take the form not only of effective memos and e-mails, but also personal discussions, both at group meetings and in one-on-one settings. Establishing a comprehensive approach to communications will require time and effort. Over time, though, it will become part of the firm's culture and require less effort.

Building on good internal communication lines, management should make efforts to share with its lawyers good feedback from clients. The firm should solicit this feedback and not merely report what is volunteered. Even where clients are silent, management should notice and compliment lawyers on jobs well done. These thanks from management and the clients should be communicated in real time, when the work and memories are fresh. The sense of belonging and loyalty engendered by these communications can make all the difference between a firm that is tightly bound and one where lawyers are tempted to depart at the slightest financial or business downturn.

4. Do we have the systems in place to attract, integrate and retain lawyers?

The chances of a lateral partner leaving the firm are many times higher than those of a home-grown lawyer. Firms that do a good job of integrating lateral partners will reduce that risk considerably. This includes assisting them in forming professional and personal relationships with their colleagues, as well as institutionalizing their clients.

Departures of well-performing associates are expensive. A firm recoups its training costs and begins to seriously profit from associates only after several years. Efforts to provide ongoing training, mentoring and a sense of place and purpose to associates will pay off.

5. Do we have a good work environment?

Tone starts at the top. If senior management models bad behavior, others will see that as condoned. Others in authority may mimic the bad behavior. Subordinates will see that the problem is institutional.

An issue at many firms is the relationship between the lawyers and the administrative support staff. In the best case, these two groups understand the other's contribution and, in particular, the lawyers respect the work of the firm's allied professionals and other support staff. In some firms there is little contact and neither group understands the other. In the worst case, the lawyers do not respect the staff's contribution and can be dismissive – or even abusive.

Conclusion

The above list is intended as a starting point for law firm leaders. Asking these questions will often reveal opportunities to do better. In working on these questions, the following are worth bearing in mind:

• Try to be aware you have blind spots.
• Work through the questions in a disciplined manner.
• Build consensus along the way.
• Follow through in executing on your decisions.
• Consider whether you should seek outside help on these issues.

All this is much easier said than done, of course, but doing nothing misses opportunities to get the most from the firm's people.

[Photo credits: © Can Stock Photo Inc. / alphaspirit & gstockstudio]