This is the first of five posts about the most dangerous mistakes that small law firms make with respect to profitability.
For purposes of this series of articles, the term "small firm" refers to a firm with fewer than 10 lawyers. These same concepts can apply, to a large extent, to solo practitioners. Of course, in some markets, the largest firm in the country might be "small" by this working definition; but the profitability risks remain the same.
In our experience and observation, the most dangerous profitability mistakes that small law firms make usually fall into four categories:
- continuing to serve unprofitable clients when there is no reasonable prospect that they ever will become profitable
- continuing to offer unprofitable services when there is no reasonable business case for doing so
- continuing to tolerate unprofitable performance by partners
- failing to make minimal investments in quality assurance tools and methods to improve productivity
These are not the only profitability pitfalls for small firms, but they are the ones that usually are the most troublesome. They can exist unnoticed even in otherwise well-managed firms, but each one can silently drain away much of a small firm's financial potential.
The remaining four articles in this series will examine each one of these zero-tolerance risks, trace its impact on sustainable profitability in a small firm, and suggest general approaches to managing these risks better.
Why do we focus on the small law firm?
These same problems exist with at least equal frequency in large and midsize firms. They are "zero-tolerance" issues, however, because small law firms usually have much less tolerance for unprofitable practices and operations than do larger ones. While larger law firms usually can absorb occasional lapses or even long-term structural weaknesses in the profitable management of their business, these same mistakes can put a small firm into a crisis from which it might not recover. For example, a larger firm usually can carry an unprofitable client or an under-performing partner almost indefinitely. In a small firm, the same unprofitable client or under-performing partner could have a disproportionately severe impact on the firm's earning potential and, in extreme cases, its very survival.