Firms seem to have an annual budgeting process that works for them. There might be lots of to-ing and fro-ing, but a budget for the firm gets produced and partners get a sense of what profit they’ll earn by the end of the year. Or do they?
What seems to be missing is any attempt to manage matters on a day-to-day basis to improve the chances that the required level of annual profit is achieved. In some firms a partner can finish a meaty transaction feeling chuffed that they out-negotiated the other side, without any qualms about writing off lots of time and having just lost the firm money.
Without any focus on whether individual matters produce a profit, it is as if firms are crossing their fingers and hoping that the income comes in at a margin that ensures they make the profit they agreed on their original overall budget.
When we realize that clients are becoming wiser in how they buy lawyers and tougher in their negotiations regarding price and what they get for their money, this “fingers crossed” approach seems misguided.
Here are some thoughts and questions which I hope will help improve matter profitability.
Elements of Matter Profitability
The following factors should be considered when assessing matter profitability:
1. Investing in non-chargeable activities to improve matter profitability
How your members of staff manage their time on the matter and between matters can help determine whether a matter is profitable or not. For example, time invested in any of the following activities can improve profitability when working on matters:
- Building increased knowledge to speed up delivery on similar matters
- Sharing this knowledge amongst colleagues in other practice areas
- Investing in new more innovative methodologies ( what you might call R&D)
- Increasing the firm’s profile to attract similar work and thereby cut down time spent selling
2. Pricing the matter appropriately
Several factors influence the basis of charging. For example:
- Will you charge based on what the job has cost you or on what the job is worth to the client?
- Where on the scale of you-bet-your-company vs. commodity work is the matter?
- How experienced is the client in buying and using lawyers?
- Is the work going to a competitive tender?
- Should you offer capped fees (and manage the matter tightly), estimated fees, contingency fees or is the client willing to write you a blank cheque?
3. What reputation does your firm have in this area?
The higher the reputation, the higher the client might be prepared to pay, particularly if it is you-bet-your-company work.
4. How efficiently can you do the work?
- Do you have all the necessary skills to do this work?
- Are the members of staff with the appropriate skills available to do the work?
5. What is the value to your firm in doing this work?
You might consider doing the work at a lower margin because of other potential benefits. For example:
- Is there likely to be more work from this client?
- Could you win similar work from other clients?
- Is this work which your staff want to do (the happier the staff, the lower the staff turnover figure and the lower the recruitment costs)?
- Is it leading edge work?
6. What else of value might your staff do if they were not to commit to working on this matter?
If your staff are sat around twiddling their thumbs, perhaps any job, even an unprofitable one, should be considered. At least the income will partly offset the costs of employment.