Planning for Profit
Power in law firms has, for many generations of lawyers, been associated with the lawyers who have the largest fee portfolios as it has been seen that these people clearly make the greatest profits. In the same way, management information has tended to focus on the number of hours worked and the billings of individual fee earners rather than on the amount of profit actually made.
The earliest point at which there has been any real consideration of profit is in the management accounts produced after the matter has completed and even then it is not normally possible to relate the profit earned back to individual matters.
With increasing market pressure on fee rates, there is growing evidence that it is possible to do work for a client and generate a large fee for the firm while actually generating a loss as the rate being charged does not cover the full cost of the resources being used. The cost structure of firms does vary but typically when discounts are given of more than one third on headline rates then this would result in the firm now undertaking the matter at a loss.
Turning it around
So, what can be done to give fee earners a greater understanding of whether or not they are actually profitable? A growing number of firms have recognised the need for much stricter up front matter planning where the fee earner is asked to plan the most effective way of undertaking the task and to consider the likely profit in addition to the fee being charged. Fee earners require a checklist of things to consider at the outset which can lead to cost efficiency without diluting the quality of what is being provided to the client. This list would include many things such as delegating more, making etter use of existing know-how, getting the client to do more of the work and thinking about the control of the timetable when one of the most common causes of cost over-run is delay.
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The fee earner preparing the matter plan would also need to consider the most appropriate way of charging for the service being provided, whether that is on the time spent, some type of fixed fee arrangement or even a performance related mechanism.
Once there is an understanding of how costs are going to be controlled and the fee is to be charged, it is possible to use spreadsheets to predict the likely fee, costs and hence profit of the assignment. This is of great importance to the fee earner as before the matter starts it is possible to see the likely fee which is of interest to the client and the anticipated profit which should be the main concern for the fee earner. Once the spreadsheet is established it is possible to quickly experiment with alternative ways of delivering the service which will hopefully still meet the expectations of the client on the price but which might generate a greater profit to the firm.
The danger for any firm that does not start to operate in the way suggested is that the constant pressure on fee rates and margins may result in the firm still managing to maintain overall fee levels but probably with a terminally declining profit margin.
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