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December 14, 2016

Pricing legal matters (Part 2 of 4)

There are many challenges in defining law firm profitability and then managing the firm to become more profitable. For my book, Client Value and Law Firm Profitability, I conducted in-depth interviews with managing partners and other leaders of 50 firms from the AmLaw 200. One question I asked was, “If you compare profitability for two lawyers in your firm, is there a software program or formula used to calculate profitability or is the comparison more intuitive?” (p. 52). Seventy-four percent said profitability in that case was defined by a program or formula, but 26% said it was more intuitive.

As one senior executive put it:

We don’t calculate profitability by formula. It’s really seat of the pants.

The managing partner at another firm put it this way:

Profitability is to some extent in the eye of the beholder. We’re still looking for good tools to evaluate what is profitable and what is not.

Other evidence suggests that even the firms that have formulas are measuring profitability in a variety of different ways. A growing number of software programs are available to handle the calculations. The two long-time leaders in the field—Intellistat Analytics from Data Fusion Technologies and Redwood Analytics from Aderant—have been providing sophisticated tools to quantify law firm profitability for several decades. But to use these tools one must make a series of assumptions, and that’s where the trouble lies.

At the LMA P3 conference a few years ago, Jeff Suhr, senior vice president of products at Data Fusion Technologies, noted that his company then had 91 clients actively using their tools, including 10 of the top 35 AmLaw firms. Exactly how did these 91 clients calculate profitability? Ninety-one different ways. The fundamentals were the same but there were important differences in the details, which can have significant implications for the way profitability is interpreted and used to motivate changes in behavior.

Suhr distinguished between the relatively straightforward science of calculating profitability and the art of determining the exact methods that best fit the needs of each firm. He also discussed the different challenges of “macro strategies” for analyzing profits for a firm, an office, or a practice group vs. “micro strategies” for analyzing a book of business or a particular matter. These sometimes require different assumptions and different approaches.

As Suhr summed it up:

The right way to measure profitability is one that is accepted in your firm. The art is to measure it in a way that keeps everybody happy.

In an email exchange, Donald Ware, chair of Foley Hoag’s Intellectual Property Department, summed up the state of the art more critically:

I’ve never heard of a law firm that has a good way to measure matter profitability. Many say they do, but when you push on the details it becomes clear that they really don’t.

This post was adapted from the recently published fourth edition of The Legal Project Management Quick Reference Guide.

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