At FMRC we have been collecting benchmarking data for over 25 years via the Legal Business Monitor. During this time, we’ve identified two underlying trends in the legal profession with relation to profitability. This blog series will present those trends and outline three indicators your firm can manage to stay ahead of the game.

The first trend is an increased polarisation between profitable and stagnant firms.  Despite similar operating environments, successful firms are more easily building on their successes, while struggling practices are working harder and harder for diminishing rewards.

The second is an increasing reliance on price. Firms are depending on regular fee hikes to grow or maintain profitability – a strategy that leaves you vulnerable to price-based competition.

These two trends are compounded by external pressures such as further commoditisation of legal services and increased competition, particularly among smaller practices.

To ensure profitability, firms need to understand and manage a number of key performance indicators (KPI). We’re going to cover three primary KPIs in this blog series. They are:

For updates on this series you can subscribe to FilePro’s newsletter, Growing Together.

Part 3: Productivity Measures

One of the key indicators for a more profitable practice is its fee earner’s ability to do significantly more chargeable work than their contemporaries in other firms.

It is not unusual for employed lawyers to average 900 effective chargeable hours a year. Better performers are capable of 1200 chargeable hours a year – some achieving 1400 in the Australian and New Zealand markets.

Maximising productivity involves adherence to policies and systems, as well as effective delegation and supervision.  Supervising partners should work with lawyers who fail to achieve performance benchmarks and determine the root cause.

The old maxim, ‘if you measure performance, performance improves’, holds true with chargeable hours.  If your pricing mechanic and cost of production rely on chargeable hours, it is essential to capture all activity.

Return per dollar of salary

A false rule of thumb is to assume that all lawyers should be generating three times their salary.

The reality is, return on salary is largely a function of experience.  Lawyers with less than two years experience will struggle to generate more than $2.30 for every dollar paid in salary.  Those lawyers with three to six years experience will often be capable of returning 3.5 to 4.5 times their salary.

For more experienced lawyers, i.e. those with seven and more years experience, this return drops back toward $2.25 for each dollar of salary.  The loss of return for these senior lawyers is due to increased salaries and expanded roles which include more client and staff management.

Our benchmarking has shown some firms are struggling to generate a $3 return on salary for their lawyers, whilst senior associates and salaried partners can be as low as $1.50.  At these levels the firm is providing charity.

Performance relative to budget

There is enormous variation for a lawyer’s capacity to meet budget.  Whilst the aim is to achieve at least 100% of budget, it is worth noting that lawyers who manage busy general practices seldom record the quantum of chargeable time that highly specialised lawyers (who might only work on a couple of files at once) manage to record.

One should also remain aware of the reality of available work – underutilised lawyers never achieve benchmark performance.

Margin management

The salaries, overheads and profit margins in a firm will be impacted by the practice structure.

A well leveraged firm will most likely have a salaries margin (excluding the equity principals) of greater than 40%.  This will usually result in a profit margin (before principal’s salaries) of less than 30%.  The overall profitability of such a firm, in terms of net profit per principal, will be high as the profit is shared among fewer principals.

Conversely, a non-leveraged firm usually has a lower salaries margin and a very high profit margin.  This high profit margin does not accurately reflect the profitability of the firm, as no salary cost of the equity principals is taken into account.  Usually the net profit per principal of low leveraged firms is low unless their charge rates are significantly higher than average.

As a benchmarking exercise, salary margin, overhead margin and profit margin are all lag indicators.  In terms of directly managing the margins there is very little that you can do except reduce expenses.

Whilst thrift has its place in the successful management of any business, you cannot save your way to success in the law.  Most firms have a reasonable cost base, where many of these costs are fixed or partially fixed (such as salaries).  Therefore the best way to improve profit margin and ultimately net profit per principal is to focus on the drivers that increase gross fees.

Next steps

Implementing change within a law firm is notoriously difficult. You may already be aware of such productivity measure issues, however lack the information or proof to carry out improvements.

Reaching agreement on the changes required to improve your firm will be made simpler if you can educate your staff and peers by demonstrating the benefits of change.

Benchmarking can calculate the KPIs of your firm (such as capacity management) and assess your performance against appropriate targets. There are a number of KPIs you can measure against, as covered in this blog series:

By using benchmarks to understand the gaps in your firm, you can readily identify where to focus your efforts to improve performance – leading to increased profit optimisation and a financially robust practice.

For updates on this series you can subscribe to FilePro’s newsletter, Growing Together.

About FMRC

FMRC is a specialist consultancy firm providing research, training and management advice to law firms. To measure the performance of your firm and improve your profitability visit www.legalbenchmarking.com.au

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  • An instant comprehensive report highlighting factors impacting performance
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  • Excel export for you to tailor your own graphs and reports
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  • Scenario modelling to conduct ‘what if’ analysis on your firm – an ideal training tool for partners and lawyers
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