How Firms Should Be Measuring the Profitability of Matters

The MPH measure enables assessment of profitability on matters with widely varying realization and leverage in a directly comparable way. It also allows you compare profitability consistently across clients, practice groups and partners. But, from discussing the measure with law firm leaders, I know that the reasons the measure works aren't intuitive, so let me start with some principles and then turn to the particulars of MPH.

A first principle: In management, you should align accountability with control; holding people accountable for elements they don't control yields frustration and demotivates. Thus, as we look to partners to manage matters profitably, we should only include in how we measure profitability the things partners directly control: the realized revenues and the amount of time that lawyers of different seniorities dedicate to executing the matter. As partners managing a matter don't control things such as an associate's overall level of activity, office rent, etc., these should not be included. In management accounting, the term “margin” is used for profit measures like this that account for some, but not all, costs. Hence the result of subtracting the cost of the executing lawyers' time from the realized revenue of a matter is termed “matter margin.”