Calculating Profitability

Why simplify something as important as understanding where and how you make your living? Several reasons come to mind. For new law firms, such simplicity is generally rooted in a shared philosophy and similar practices/clients. For these firms, the economics and operating style of one practice versus another (within each firm) are not significant enough to warrant closer examination. Another reason is the collegial nature of law firm partnerships. Scrutiny of each practice and client can be a divisive issue. In addition, law firm partners are not generally well schooled in finance and accounting, so delving into cost allocations is outside their comfort zone. Finally, for many years the accounting systems and personnel in law firms were not robust and experienced enough to undertake this analysis.

Much changes with the passage of time. New law firms mature. Individual practices travel different paths, resulting many years later in having quite different economics. Law firms grow (lateral growth has accelerated this aspect), adding new partners, practices and clients. Each addition adds to and blends into the law firm. How well these additions fit together over time are important strategic, cultural and financial considerations. And, of course, the recent recession has increased competition among lawyers and caused clients to be more aggressive in seeking discounts and/or alternate pricing methods. Now the profession has sophisticated financial tools and expert financial staffs to analyze performance.