How Do You Profit Your Firm?

How Do You Profit Your Firm?

If Oscar Wilde's famous definition of a cynic - "someone who knows the cost of everything and the value of nothing" - is true, then many associates may need a dose of cynicism when assessing where they stand in their firms.  Not the superficially cynical "why don't they appreciate how much I do?," but the far more realistically cynical "what am I worth to them?"  If you haven't asked the question, the answer might surprise you.

Leverage is the financial reason for hiring and using associates as a cost-effective way to do billable work in a team setting while boosting partner profitability. Leverage is only effective when associates are effective and it is profitable for the firm to keep using them.  While associates may not earn more than they cost the firm at the start of their careers, at some point that situation must change.  

What should firms expect from their young lawyers to justify keeping them?  The fundamental question in this regard is obvious:  is there enough work?   In analyzing an associate's worth to the firm there is no formulaic expression that specifically depends on origination, billing or collection.  To say that an attorney is worth the amount of profit due to billing or the amount of profit due to business brought in does not take into account the subjective factors that should be considered.  For example, does the lawyer's combination of skill and attitude demonstrate potential for career growth beyond the immediate level of business?   And skills mean both knowledge of the law and the ability to understand "The Business of Law"®.

This latter point leads to analysis of the associate's profitability, which is something different from worth to the firm.  All associates can determine their own personal balance sheet if they plug in the right numbers.  This is what they need to know:

  • Their total billable hours by month.
  • How many hours the firm billed out for them
  • The percentage of write-offs the firm will take on their work when billings are done. In larger firms there may be a difference in the write-down percentage based on associate class (first year, second year, etc.).
  • Their direct compensation expense - salary, bonus, pension, allowances
  • The indirect expenses they represent - overhead for physical space, insurance, education and more; if the firm lacks an accountant to provide this information, a general rule of thumb to use is one-third of gross revenue or billings.

With this information associates can compute the net profit that they provide to the firm:  Billings - [Associate's Total Compensation + Direct and Indirect Expenses] = Net Profit.

The net is the profit available resulting from an associate's effort.   Generally within three to years of hiring, associates should become net profit contributors.  The associate's responsibility is to do the work assigned in the most effective and efficient way possible and in the shortest amount of time. Fulfilling this responsibility in a way that produces net profits for the firm is essential for an associate to grow a career at a given firm.

This bottom line figure is the reason (how good is open to debate) why firms terminate associates that they presumably had good reason to hire in the first place, but subsequently decide they can't afford.  The better solution comes in two parts.  Firms should only hire an associate when needed, hiring the right person the first time for the right job.  And associates should understand how to grow a career by assessing the value they provide in terms of their profitability performance.  Profitable associates are the ones that every firm wants to keep. 

For a fuller discussion of this topic, see Ed Poll's articles "Determine Your Profitability to Assess Your Worth"  and "What Does It Profit the Firm?" .  Also view the LawBiz Legal Pad Video, "Associates Must Be Profitable" .

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Ed Poll, J.D., M.B.A., CMC, is a recognized expert in law practice management. He partners with attorneys and law firms to increase profitability, coaching them on issues of internal operations, practice development, & financial matters. Ed enables lawyers to be more effective with their clients with less stress for both the lawyer and the client. He practiced law for 25 years, has coached lawyers for 20 years, and is the author of 13 leading books. His latest book, Growing Your Law Practice Through Tough Times, was released in April 2010. Ed is the recipient of the Lifetime Achievement Award, State Bar of California (LPMT Section).

Ed is a Fellow of the College of Law Practice Management, a board-certified Coach to the Legal Profession and a charter member of the Million Dollar Consulting® Hall of Fame. He can be reached at (800) 837-5880, www.lawbiz.com, www.lawbizblog.com and www.lawbizforum.com.