Practice Management

Law Firm Business Model: Margin

By Brian J. Ritchey

The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above.  Today the focus is on margin.

Margin is partners' profits divided by firm revenues.  It is the percentage of revenue left after all operating expenses have been paid (not including partner salaries and distributions).  For previous posts on margin, look here, here, here, here, and here.

There's no secret to increasing margin.  Do a good job, be fair to clients, focus on client development, bill what you are worth, never devalue your time, and make sure costs rise proportionately to revenue.  You don't increase margin over the long term by cutting costs.  Reducing expenses is either done to correct a past mistake in investment or to replace lost revenues.  Neither are positive causes.  If you want to grow, you have to spend.

The point is made in the 2007 Law Firm Economic Survey from LexisNexis as well.  The firms who had the highest per partner income spent the most.  The firms with the highest margins spent the most. 

The firms with the highest per partner income are represented in the Q1 column.  The operating margin is at nearly 51% and their expenses per head are nearly $100,000.  Compare that to the lowest performing firms.  In the Q4 column, margin is a paltry 29% but they saved money - only $84,000 per head cost.  You can't grow with a constrictive operating budget.  Note that both the best performing and worst performing firms also spent a nearly  identical percentage of their budgets on technology.  This could mean that technology isn't being utilized properly in the poor performing firms (due no doubt to a lack of services if experience tells me anything) or that poor performing firms are attempting to utilize technology to manage their practice.  I am encouraged to think the latter and am curious as to whether those firms are improving their practice as a result.  There are so many variables to successful implementation of a process, but looking at these firms in 5 years might be a good follow up. 

 The way to improve margins may be different for each firm depending on where they start, but there are still two constants:  cutting costs do not equate to long-term increases in per partner income and measurement improves results.  With any action geared to improve the financial performance of your firm, you must measure it and adjust when you get off track. 

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Full post as published by More Partner Income on January 23, 2008 (boomark / email).