Maximizing profitability is essential to an organization’s health and long-term survival. And law firms are no exception. However, the competitive environment in which they operate and the unique challenges they must navigate makes law firm profitability a complex and elusive pursuit. Understanding the factors that impact profitability and knowing how to optimize them can provide invaluable insight into the strategy firms employ in pursuit of maximum profitability.
Let’s be clear — profitability is not realization. While a firm’s billing or collection realization might look good, it doesn’t necessarily tell the whole story. Even if there weren’t any write-downs, the firm could still lose money on the matter. Handling profitability the right way will help the firm identify matters that should be restructured from a client perspective.
Getting profitability analysis right
While profitability should be a top priority for every firm, some may be conducting their analysis using inaccurate or incomplete information. For example, where many law firm financial teams will base their profitability analysis largely on revenue versus expenses, there is much more detailed information that should be considered.
Simply having a balance sheet that is in the black doesn’t mean that the firm is managing profitability as well as it could. Before firms can effectively develop and implement proactive profitability strategies, they must first have a detailed and complete picture of their financial performance on all fronts.
Where to begin with maximizing firm profitability
As a starting point, the high-level revenue versus expenses analysis is essential. But firms need to look deeper than that. They need to look at the profitability of every timekeeper and every matter to take truly meaningful action. It all starts with identifying the right metrics and measuring them with accurate data.
Step one is getting an accurate timekeeper cost rate. To get a complete and accurate rate, both direct (salary, bonus, benefits, etc.) and indirect (rent, equipment, technology, etc.) costs must be included. Some firms take different approaches to calculating indirect costs and allocating them to individual timekeepers, but it is a critical step to arriving at an accurate expense number for a given timekeeper.
Once firms have an accurate timekeeper cost rate, it can be used for profitability calculation and matter pricing analysis. These insights can inform several key aspects of the firm’s business, including budgeting, matter staffing, client profitability, and timekeeper profitability, among others.
How Profitability from Thomson Reuters can help
The Profitability solution from Thomson Reuters combines cost accounting capabilities with in-depth analytics. Users receive data-driven insights that offer unprecedented visibility into cost and profitability drivers for cost management and optimization. In addition, Profitability helps firms make informed business decisions around clients and timekeepers.
In every firm’s review of its book of business, the goal is to ensure that — as much as possible — every relationship is a profitable one. Using Profitability’s Elite Data Insights, firms can readily see which clients were profitable and which ones may need a closer review.
Profitability’s reporting capabilities can show which matters were profitable, how those matters were staffed, any discounts and write-downs that may have been applied, and other factors that may have impacted the client’s overall profitability. These insights are invaluable in the planning of future matters for a particular client as well as developing strategies for managing the relationships with those clients going forward.
Similarly, in the firm’s review of individual timekeepers, there are expectations around billable hours worked and those hours contributing positively to the firm’s bottom line. Elite Data Insights shows the key drivers on if the timekeeper was profitable. This could include utilization, worked rates, and write-downs.
Elite Data Insights can show timekeeper profitability holistically or specifically on the timekeeper, matter, or per hour level.
Discover Profitability from Thomson Reuters
In a competitive legal market, firms need every advantage they can get. With the insights available using Profitability from Thomson Reuters, firms can learn where to invest for profitable growth, where there is room to improve efficiency, how the firm is performing against targets, and much more.
In all, there are over 30 standard reports available, and all of them are 100% configurable. Firms can keep what they like, modify any that need customization, and easily create new ones to fit their unique requirements.
Contact a representative today to request a demo and learn more about the difference Profitability from Thomson Reuters can make for your firm.