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Economic Uncertainty: Focus on Law Firm Profitability

19.08.2010

In an economy that promises to be ‘choppy’ for some time to come, and in a legal sector where ‘choppy’ would be an optimistic description of the outlook, managers could do worse than to focus on law firm profitability.

Strategy and Law Firm Profitability

It is true that a hallmark of the profession over the years has been the emphasis on profit per equity partner, almost to the exclusion of any other measure. League tables have driven this approach, and figures have often been ‘massaged’ in light of their powerful role as a marketing and recruitment tool. This has indeed diverted attention from measures that could be of greater use to management teams, such as the firm’s cash position.

However, profitability is still an extremely important measure for law firm managers, and when used in the right way should underpin the firm’s competitive strategy.

Law Economics versus Law Politics

In even the most successful partnerships, politics has traditionally been the determining factor in strategic decisions and their implementation. Firms can no longer afford to allow law politics to defeat law economics. To be successful, the partnership must be united and divisive figures should be dealt with. This may be the best opportunity the firm will get to restructure and create a harmonious partnership (if one did not exist in the first place...).

Legal Cost Structures

Achieving optimum law firm profitability requires optimal legal cost structures – and this is no simple matter. Law firms have always been described as ‘fixed cost operations’, and to an extent this limits the scope for change. However, certain costs can be made more variable, using arrangements such as part-time working, paralegals and contract solicitors, and outsourcing (IT is the prime example, but more and more services are becoming susceptible to outsourced delivery, and make or buy decisions are an important consideration for managers).

Ultimately, any law firm’s cost structure will be defined by its people, and therefore any major restructuring must focus on people. This may be painful, but it should also be fair – and fair does not mean equal. Some departments, teams or support functions may need to be cut back, whereas others may require investment. Focusing on profitability means identifying and realising potential, whether this requires investment, divestment or scaling back.

Successful Partnerships

Although managers and partners may feel that the worst is now over, the partnerships that will succeed in a challenging environment will be those with a relentless drive towards efficiency. Whatever the approach, law firm strategy should be driven by a clear focus on profitability.
 

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