MEASURING PROFIT - LOOKING IN THE ROUND
July 2009
An issue that often arises is that private client departments can often focus on one or two profit indicators, but don’t look at all three in the round. It is a sad but true fact of life that if departments try to increase recovery then seemingly inevitably the number of chargeable hours falls. Similarly it is all very well increasing charging rates, but if they become out of kilter with the market then recovery rates tend to fall.
The answer is that all three need to be focused on together in a co-ordinated way in order to ensure that profit is maximised.
Charging rates are set as a multiple of gross employment cost. Historically a benchmark of three times employment cost has been set, however this has varied more widely from firm to firm in recent times.
Therefore key profit indicators are:
- The amount of chargeable time recorded for each chargeable member of staff.
- The value of that chargeable time.
- The recovery achieved when chargeable time is billed.
Departments can also be interested in lock up, i.e. the amount of time that is either, charged but not billed, or billed but not yet realised as cash. This is because the higher the level of lock up, the more funding from bank or partnership resources is required.
One solution is to retain charging rates and chargeability hour targets, but measure and focus on the overall level of contribution achieved. In order to do this the calculation of contribution needs to be accurately measured and include not just labour costs, but also all of the other costs required to provide legal services, including technical resources, support staff costs and so on. This is because a focus on profitability percentages may not necessarily lead to the best outcome in terms of profit per partner. This, in turn, is because a higher contribution per partner may be achieved by having a larger department of staff with a lower profit per member of staff than a smaller department whose members are individually more profitable.
Conveyancing departments have, in recent times, been low margin percentage departments where considerable profits can be generated by having a very flat structure with a large number of employees per partner. Similarly accounting firms often have a much flatter structure than most legal departments. To a degree we find that this arises as too much focus is on recovery alone and not enough on the overall level of profit per partner achieved.
Do you know the level of profits generated by your department and are you confident that it is maximised?
Robert Holland is a Partner with James Cowper
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