This the third and final post in the current series about the most frequently observed factors in the business failures of law firms. The previous two articles on this subject described the failure to observe and anticipate and the failure to invest as two weaknesses that, if one probes deeply enough, can be found in most law firm failures. They also describe important risk management tactics that can improve the odds of long-term success.
The third frequent factor in law firm failures is the partners' lack of an understanding of profitability -- how their firm makes money or, as is often the case, doesn't.
Most law firm partners have at least two points of reference for profitability:
- at least a simple academic concept of profitability; and
- at the other end of the spectrum, a practical application of profitability as it produces (or fails to produce) year-end profit distributions.
It is the part in between -- what happens between the consideration of the concept and the delivery of year-end cash -- that many law firms and law firm partners don't understand.
This is why many initiatives to improve profitability in law firms produce disappointing results, short-term at best, rather than sound, flexible foundations for sustainable profitability for the long term.
For example, can your partners answer questions like these?
- Who are your most profitable clients? Which ones are least profitable or actually lose money for your firm?
- What practice areas and services are most profitable? Which ones offer the best long-term growth potential?
- Which partners have the most profitable books of business? Why are they profitable?
- What specific factors explain any unsatisfactory realization rates?
- What are the causes of fee write-offs?
- What factors explain any major variation in realization rates over time?
- What is the relationship between quality assurance and partner productivity in your firm?
And finally, one of the most important questions is: How do you know that your answers to the above questions are accurate and reliable?
Discussing these questions, perhaps over a series of partner meetings, is one of the best investments of partner time that you can make. Some firms find it useful to get outside help, such as through the Walker Clark Profitability Self-Diagnostic.The important thing, however, is to ask the questions and to demand well-informed answers.
And do it now, as part of your planning process, rather than as part of a post mortem.