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:
- Part 1: Capacity Management (You’re here)
- Part 2: Pricing Measures
- Part 3: Productivity Measures (Coming July)
For updates on this series you can subscribe to FilePro’s newsletter, Growing Together.
Part 1: Capacity Management
Most firms have a practice structure that doesn’t match their service offerings. Common misalignments include:
- Excess capacity – where there are more personnel than the workflow requires
- Top-heavy firms – where the there are too many senior lawyers given the commoditised nature of the work
- Hour glass – firms with lots of seniors and juniors, and no mid level lawyers
In most cases, firms are not willing or able to do much about these capacity issues. Worse, cultural norms have crept into practices that exacerbate the problems. The following measures highlight capacity and alignment issues.
Leverage
The number of employed fee earners per equity principal is commonly referred to as leverage.
Leverage is a straightforward economic model. If one is in the business of selling time, the greatest impediment to financial success is the availability of one’s own time. It is beneficial to acquire additional units of time beyond those available to the principal and on-sell them at a profit. The more you sell, the more you make. The only impediment to success now becomes the supply of appropriately talented labour. Not surprisingly, talent attraction and retention, along with client acquisition and delegation skill, are becoming the must-have skills of partnership.
In addition to the more obvious benefits of quantum, leverage also provides compelling cost advantages, as many of the fixed costs of practice can now be allocated across a greater number of chargeable hours. In short, a fully utilised, leveraged practice has a lower cost of production than a non-leveraged practice.
Leverage ratios need to be considered in the context of the legal services offered. For example, a practice that specialises in complex tax matters will find it difficult to leverage beyond two or three fee earners per equity principal, whereas a high volume conveyancing practice may have leverage of eight or more.
Hours leverage
Most practices consider leverage in terms of the number of fee earners per equity principal. Given that leverage is only successful when each of the fee earners are fully utilised, this measure of leverage only tells part of the story.
A better measure is to assess leverage as a ratio of employee chargeable hours to partner chargeable hours. Ideally, hours leverage would be higher than headcount leverage as this indicates work is not being hoarded by those at the top.
Our experience has been that by measuring hours leverage, firms are able to identify and improve key components of performance – such as:
• Whether or not practice groups are appropriately staffed;
• The effectiveness of delegation within practice groups
• Where time is being written off
Author dollars billed per equity principal dollars billed
Author dollars billed per equity principal dollars billed is a measure of the effectiveness of leverage. We would expect this ratio to be lower than the headcount leverage given the variances in hourly rates between principals and other solicitors.
Next steps
Implementing change within a law firm is notoriously difficult. You may already be aware of such capacity management 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:
• Part 2: Pricing Measures
• Part 3: Productivity Measures (Coming July)
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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• Scenario modelling to conduct ‘what if’ analysis on your firm – an ideal training tool for partners and lawyers
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