Redwood Analytics

Margin, as used in the Law Firm Practice Model, is the percent of fee revenues left over for law firm partners after deducting all expenses other than compensation or distribution payments for the law firm owners, its partners.

In terms of dollars, margin divided by the number of law firm partners yields profits per partner or PPP.

Parkinson’s Law is always at play. Without effort to the contrary, work expands to fill available time and expenses rise to meet revenue. Thus, prudent management requires that firm expenses be watched to prevent Parkinson’s predicted gradual increase that will eat into partner income. However, expenses are just one of the factors influencing a law firm’s margin level. As it turns out, other than salary-related cost and facilities cost, operating expenses within a law firm play a rather minor role. Margin is driven more by the fee revenue line than by efforts to reduce expenses. Management’s time is better devoted to increasing productivity (utilization), effective rate and realization.

It may surprise you to learn that law firms with the highest per-partner income spend more per attorney than those with lesser PPP. On average they pay higher salaries for better people and more leverage. They spend more on overhead, technology and marketing. At the same time, they reported a higher margin percent. What is their secret? While they spent more, they also achieved higher revenue per attorney. They had higher leverage, productivity and effective price.

The Juris Law Firm Economic Survey of Midsized U. S. Law Firm results for the year 2005 included a table of operating margins. Reporting firms were divided into quartiles based on per-partner income. The average operating margin for the top performing 25 percent of firms was 42.8 percent. Law firms in the next highest performing group were not far behind at 40.0 percent. The chart below reflects margin results by quartiles:

The most successful firms plan, set goals, measure performance and hold their people accountable. In the absence of those management efforts, a firm's margin level is merely an accident, one that is likely to erode over time. The question thus becomes, what will the margin level goal be for your firm? Start by comparing your firm’s margin to those of comparable firms. A low margin rate as compared to peers of equivalent sized firms in similar geographic areas can indicate that the firm is addressing less favorable practice areas, is under utilizing its resources, or is under-pricing services for the value delivered. Less likely, the analysis of a variation from peers can disclose that the firm’s tastes are too expensive compared to the competition. Click here to download an Excel worksheet to model your firm’s financial performance. Work with the key metrics with an eye toward a combination of achievable goals that will yield the competitive per-partner income levels your partners deserve.

While the path to higher margins is higher revenue, prudent expense management is important.  However, over management of expenses may have a negative or even destructive impact on the efficiency and success of the firm. For example, see my post Cost Cutting Isn’t the Answer. With the need for a balanced approach in mind, you can find ideas for reducing operating cost in the following posts: Cost-Cutting Tips for the Law Firm, Internet Shopping and Parkinson’s Law in the Law Firm.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center: 877/377-3740, e-mail info@juris.com or go to www.Juris.com.