Law Firm Profitability | Legal Practice Managment

I recently presented at the ALPMA June seminar in Sydney on the subject of law firm profitability.

Part of my legal practice management presentation reviewed the results of the recent ALPMA Crowe Horwath survey of law firm profitability.

The results are interesting in that the best performers are smaller firms ( in their survey , this was firms with a turnover less than $5mill) or large firms ( firms with turnover of greater than $20mill).

The critical key performance indicator was return on capital ( ROC). The best performers using this indicator, were large firms with a ROC of 56% and then the next best was the smaller firms with 34%. The two groups in the middle ( $5mill to $10mill and $10mill to $20mill) went as low as 19% return on capital.

The results are affected by firstly the law firm profitability and secondly by the amount of capital that has to be tied up to produce the fees.

In the case of large firms, they turn more of each dollar of revenue into profit, but they also need the least capital tied up in debtors and work in progress to produce those fees. Not surprisingly that means that their return on capital is dramatically better than all other firms.

An obvious question in this type of survey is “Why are the middle group of firms ($5 mill to $20 mill turnover) such poor performers?”

I think the answers to this can be found by looking at what makes the small and bigger firms such good performers.

Small firms perform better, because:

– They are hungrier. They can’t generally afford to have massive amounts of money tied up in debtors and Work in progress, so they manage their working capital better

– They are more nimble. They can quickly adapt to changing circumstances and new opportunities and so take advantage of these situations

Large firms perform better because:

– They are more disciplined. The firm will not tolerate partners not following firm policies. If they don’t they are quickly shown the door.

– They have better systems. Partly as a result of more resources, large firms have implemented better systems in every phase of their business and the firms have the discipline to ensure that the systems are followed.

When you look at the middle firms, you tend to find that those strengths of small and large firms are often weaknesses in the middle firms.

The middle firms have often started as smaller firms, but now some of the original partners are more likely to be passengers. They have got “comfortable” with their financial situation and are in cruise mode until retirement.

Unfortunately you don’t need too many partners like that and trying to implement change becomes like trying to change the direction of a super tanker. It is a very slow drawn out process.

While these middle firms have grown, they are still not big enough where the large firm culture of perform or get the sack prevails. As I call it the “FIFO” principle ( this is an accounting term). “ Fit In or F Off”. Consequently a lack of discipline or lack or will by various partners to bill or collect or record time or whatever will tend to be tolerated, particularly if that person is a senior partner.


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