OVERALL FINDINGS

This month we looked at law firms’ plans relative to profit improvement. Specifically, we asked law firm leaders which profit drivers they planned to use to improve profitability at their own firms over the next few years. We also asked each to share his/her expectations regarding profit growth in the next three years.

Starting with expectations, we were pleased to see a measured optimism coming from the overwhelming majority of law firms. Only about 11% of firms expect their annual profits to be flat or declining over the next three years. Conversely, roughly 60% expect profits to rise modestly (i.e., less than five percent) annually each of the next three years. None, however, expect robust profit growth of greater than 10% annually.

EXPECTATIONS FOR PROFIT GROWTH

What strategies do firms expect to drive that measured profit growth? Two profit drivers were stood out as preferred strategies for the coming years – increased production (i.e., billable time) and improved realization. Meanwhile, increased leverage was far and away the least preferred profit improvement strategy – in fact a quarter of respondents consider increased leverage to be “not a viable driver for profit growth at our firm.”

PREFERRED PROFIT IMPROVEMENT STRATEGIES

These findings represent a marked departure from profit growth strategies of the past two decades.

• In the 1990’s (and the late 80’s as well), leverage was considered something of a “holy grail” for driving profits – it is now the least preferred approach to growing profits.
• In the pre-recession years of the 2000’s, rate increases drove profit improvement. Rate increases are now a somewhat distant third – and are even less important among firms expecting the most robust (5-10%) profit growth.
• Tighter standards for equity partnership – including de-equitizations and wide-spread adoption of two tier partnership structures – were an important driver of PPEP across both decades. That strategy appears to have waned as well. As a profit improvement strategy, it rates nearly as low as leverage – and, over 20% of firms do not consider it to be a viable profit driver for their firm.

THE MOST OPTIMISTIC FIRMS HAVE A DIFFERENT STRATEGY

Looking at the most optimistic firms responding to the survey (i.e., those expecting profits to grow five to ten percent annually) – and comparing them to everyone else – reveals that those firms are pursuing a somewhat different strategy. Namely, the most optimistic firms plan to put a much greater emphasis on improving realization (they rate realization as a strategy more than 20% higher than their peers in other firms).

Since the questions made clear that alternative fee arrangements were one means for improving realization, AFAs could be an important part of the most optimistic firms’ strategy. More simply, the more optimistic firms may simply plan to discount less and/or write-off less time. The most optimistic firms were slightly less bullish on raising rates (compared to others), so those firms very well could be focused on charging (and collecting) standard rates.

Given these findings, however, we plan to take a closer look at AFAs in an upcoming “strategy question of the month.” Thanks for participating and for commenting below.

SURVEY NOTES

The average ratings regarding profit improvement strategies were based on a four point scale in which:

1 = Not a viable driver for profit growth at our firm
2 = A minor driver of profit growth for our firm
3 = An important driver of profit growth for our firm
4 = A primary driver of profit growth at our Firm

Our response rates continue to grow month to month (thanks again for that). We hope that continues to grow and we encourage you to share your experiences with your peers.

Most law firm managers are familiar with the primary drivers of profitability – rates (i.e., the standard price per hour for professionals’ time); productivity (i.e., hours worked and recorded); realization (i.e., ability to collect on production at standard rates); leverage (i.e., the ratio of equity partners to other time keepers); and costs (i.e., salaries, benefits, overhead).

In the 1980’s and 90’s, profit growth at many firms was driven by increasing leverage – coupled with modest rate increases and improved financial management.  In the pre-recession years of the aughts, profit growth was driven largely by rate increases.  The “great recession” led many firms to turn to cost reduction – and many found that there was ample fat to be cut from the cost side of the business.

In addition, the high visibility of the American Lawyer’s AmLaw 200 rankings and their ubiquitous measure of profitability on a per equity partner basis (Profits Per Equity Partner or PPEP) has added a dimension to how many firms manage profitability.  Thus, many firms now also actively manage the denominator of PPEP as part of their respective approaches to profit management.

This month we are examining what firms’ priorities are going forward vis-a-vis profit management. Essentially, we are interested in identifying what profit drivers firm leaders believe offer the best prospects for growing profits over the next few years.  Further, we will look at how those profit drivers correlate to expectations vis-a-vis profit growth over the next few years.

Please take two minutes to complete the survey below.  If for some reason your web browser does not support the embedded survey (i.e., you don’t see it in the window below), click this link and you will be taken directly to the survey in a new tab.  Deadline for responses is midnight on March 24th – results will be published the following week.  Thank you for your help with this month’s survey!