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The Forum’s newspaper Daily News containing the key events of the Forum 2015:
Forget About Revenue
"If you are truly managing, you need the data to determine profitability. How you share the data is a different matter"
Profits are a better way to measure a law firm’s financial health. This article explores why so many firms are preoccupied with revenues instead of profit and what you can do about it…
If you double your revenues and your margins remain constant, you will double your gross profit. If the number of partners doubles in the same period, you are standing still (well, less the cost of champagne).
Why are so many firms preoccupied with revenues instead of profit? Here are the most common reasons firm leaders focus on the wrong numbers:
- Various publications rank firms by revenues. Firm leaders are therefore motivated to try to achieve as high a ranking as they can, for both wholesome and unwholesome reasons–wholesome including positioning to obtain marketing advantages, and unwholesome being basically ego.
- The partners themselves understand the simplistic measure percentage increase, and it is appealing if you don’t know any better.
- Percentage increase included inflation, without highlighting it, so even if there are margin squeezes, revenue enhanement still sounds good.
- Revenue is simpler to calculate than profit, at least firmwide.
The visibility test
When it comes to measuring the performance of individuals, many firms still focus on recorded billable hours. Recorded hours are perceived to have value, so if we know the billable hours of two lawyers, A and B, and B’s are 120 percent of A’s, we can safely assume that B is producing more for the firm than A. Or can we?
Some slightly more sophisticated firms measure billings, and even more sophisticated ones measure cash receipts. These measurements fail to disclose the true profitability of the practice, which is ascertainable only by going beyond hours or billings or receipts to include costs allocated to the revenue source.
For example, knowing that a lawyer recorded million worth of time is a beginning. Knowing that 0,000 was billed is better, and knowing that 0,000 was received is better yet. But we cannot really assess the value of the practice until we know that the costs associated with that revenue generation were 0,000–producing a net contribution of 0,000.
Allocating costs (the dark side)
Why are so many firms reluctant to allocate costs? Here are some of the reasons:
- It is not simple to allocate costs. What do you count and what don’t you count? It may be easy to allocate staff if there is a 100 percent allocation to a group or team, but in the real world it usually gets a lot messier than that. And then there are issues like this: Is the new office in Timbuktu, which specializes in Practice Area X, a cost of that practice area, or is it the beginning of a presence that benefits and adds international credibility to the entire firm and therefore a cost of all practice areas? Having discretion as to allocation creates dilemmas. And we hate dilemmas.
- The computer systems may not allow the flexibility to do the combinations and permutations of calculations, or the people who operate those systems may be ill-equipped or just plain reluctant to handle the changes.
- Change means some uncertainty, and therefore discomfort. It won’t be done the way we have always done it so successfully. It’s not broken, is it?
- Politics. Individuals with significant personal power are not about to allow any new measurement process that they have not already analyzed to the nth power to determine exactly how it might affect them personally. Partners are as sensitive about cost allocation as they are about compensation.
- The ramifications of doing the analysis may be dangerous. If practitioners in Practice Group A were to learn how much more profitable they really are compared with Practice Group B, they may begin putting tremendous pressure on decision-makers as to compensation and other important issues. There might even be a drive to expel Practice Group B from the firm. Worse, the entire Practice Group A may shop for another host firm where they will be more appreciated, or break away to become a boutique. Either way, the firm’s fabric is torn.
If you are truly managing, you need the data to determine profitability. How you share the data is a different matter.
Profit is typically deduced by subtracting expenses from revenues, usually firmwide. Instead, financials ought to calculate profit from many more perspectives: by lawyer, practice group, industry served, client, geographical location, and by any other useful dimension within the firm.
I am not saying you should publish this information; I am saying you need to ascertain it.
If your systems won’t give you the data (or worse, if the data are not being captured), priority one is to create systems that will. You may have to make reasonable compromises, but sit down with your data processing people (internal and external) and determine what is possible. Talk to your counterparts in firms using the same software and find out how far they are going in this direction. Compare notes.
Next, begin to analyze–even if you have to guess–what is going on. Begin to formulate your views (or educated suspicions) as to where profitability is being enhanced and where it is under attack.
Third, manage accordingly. What does that mean? Well, individual situations are far too unique to generalize here, but you may find this list of questions helpful. Whether you are analyzing individuals, groups, or locations, thinking about these issues might get you started:
- Are we placing excessive emphasis on hours?
- Are we placing insufficient emphasis on rates?
- How can we get rates up, if not today, then over time?
- Are we honestly assessing the quality of the client list?
- Are we accurately assessing the contribution each client makes to our firm?
- Should we fire some of the clients at the bottom of the list?
- Do our marketing efforts bring us sufficiently high-quality new clients?
- Are we measuring individual performance accurately (as opposed to simplistically believing billable hours or cash receipts in the absence of data on related costs)?
- Are we still recruiting based on linear thinking like the quality of the schools and class ranking, or are we beginning to think about other attributes, such as collateral experience (summer jobs), other degrees, and how that nonlegal experience and education may fulfill future firm needs (even several years from now)?
- Are we tolerating people who are hurting us?
In the long term, it may be sensible to tolerate and even foster less-profitable practices if they complement more profitable practices and the people in them are part of the glue that holds the firm together (leaders, founders, facilitators, and mentors of value).
On the other hand, it may be imperative to stop tolerating less-profitable practices if they include people who are difficult, unresponsive, or adversarial to management, harsh with junior professionals or support staff (or peers), or who consume a lot of time and energy (high maintenance).
Practice group leaders
When the firm doesn’t know how to properly measure your group’s performance, ignore the Neanderthal measurements and focus on making your group powerful and successful. The suggestions above can be applied to your group as if it were a firm. Your success will give you options. Be patient, but over time if you cannot persuade your firm to measure the group’s real profit contribution rather than merely revenues, maybe your group would be better off in a more enlightened environment.
If you are managing the top line without regard to the bottom one, you are on a perilous journey–a slippery slope to oblivion. There are as many bottom lines in a professional firm as there are ways to examine a multifaceted gemstone. Firm leaders who begin to explore true profitability (even secretly, so the billable-hours-and-revenue freaks don’t find out) will enhance the real performance of their firms.
It’s like having a new indicator on your car’s instrument panel showing fuel efficiency by miles per dollar. After all, this is what partners are really seeking: maximum return on their financial interest in the firm.
Gerald Riskin, B. Com, LLB, is a former managing partner and a Principal of Edge International, a global consultancy serving many of the world’s most prominent firms.
© 2014 Gerry Riskin. All rights reserved.
"The Suits series, which premiered in 2011, is the most fashion oriented legal drama. Characters’ wardrobes are almost a fully-fledged element of the plot"
A few words about the author. Lesya Mikhailovskaya – fashion journalist and stylist. Worked as a fashion director in the In Style magazine, Elle, Citizen K and as a creative director of L’Officiel magazine. Now she is a fashion columnist of the Vogue.
The Suits series, which premiered in 2011, is the most fashion oriented legal drama. Characters’ wardrobes are almost a fully-fledged element of the plot. Clothes are either much or concisely discussed, they are always in the focus of camera with all its details, and eventually, the style of each character, regardless whether it is a man or a woman, embodies their nature, their development or, on the contrary, stability.
However, there are not that many stable elements in the series. Action develops so quickly and sometimes in such an unexpected manner that audience (and this series has not a merely loyal audience but the whole fan club) can hardly follow what happens or has already happened. The story is built around the two main heroes. The first of them is a brilliant lawyer Harvey Specter, who is, as befits a main character, handsome, not married and cynical; he wins the most desperate cases, charms the most independent beauties, lives in a fashionable penthouse under the sky of New York City, and wears suits and ties that are so perfect that even the most unsophisticated viewer will notice it.
Mike Ross is Harvey’s antipode. A charming young man and a uniquely gifted looser, he earns a living and makes money for the treatment of his beloved granny by passing bar exams instead of other people, without attending law school himself, and helps a friend to deliver weed. During one of these operations, he happens to be at the job interview with Harvey Specter. The latter, astonished by Mike’s talent, immediately hires him.
The two woman characters of the series include Jessica, managing partner of the law firm and a gorgeously beautiful black woman, and a young associate Rachel, Mike's girlfriend to whom he eventually proposes. The only supporting male character is Louis Litt, a man with the face of a pit bull, heavily built and a bit pot-bellied, he, however, is fond of elegant dresses, ballet and drama theatre. In the course of 4 seasons he is striving for his own place in the firm, fights with everyone and at the same time tries to make friends.
Fashion key points are highlighted in the first episode. Louis Litt, staring at Specter’s new classy suit, flings off scornfully: “You start looking like a pimp!” This note, however, is partly right. All Harvey’s suits are by Tom Ford, and this designer is well known for his demonstratively sex appeal clothes. Jackets by Tom Ford are so slim waist and pats are so ambiguously narrow that they can be called a “near miss.” But Harvey is a fan of fashion in all senses. His first requirement imposed on Mike is to change his clothes.
During one of Mike’s first days in the firm, Harvey looks at his suit despisingly and says: “Haven’t I told you to buy some appropriate suits?” “But I’ve spent 500 dollars!” – Mike replies. “And how many suits did you buy?” “Five,” Mike answers, confused, as 500$ is a fortune for him. But Harvey doesn’t stop here and he adds: “And hide this tie from my sight!” Harvey, on the contrary, has very lavish silky ties with soft folds, so that sometimes his look is even too festive for the atmosphere of a legal office. Mike Ross, however, dresses not in a poor, but in a completely different manner.
For this reason, a tailor, which has been recommended to Mike by Harvey, having seen a young man in his dressmaking atelier, says through his teeth to his assistant: “Horrible look…” and then he addresses to Mike: “We don’t sell skinny jeans, sir!” So, a tailor treats Mike as a typical hipster from Brooklyn. But Mike is the one who changes in each episode: his suits are getting more and more elegant, his ties – more expensive and his eye – harder.
For sure, his transformation is also supported by his girlfriend, Rachel Zane, daughter of a famous attorney, girl from a rich family, which has grown up surrounded by beautiful things. Apparently, she incarnates a true NYC style, which is a blend of fashion with a strict office dress code. Rachel often wears pencil skirts with cashmere jumpers or moderately cropped tops, high heel shoes and modest, yet expensive, jewelry. She is prudent and polite, as opposed to her boss Jessica who revels in her power and opportunities.
Looking at Jessica’s dresses, it seems that a costume designer of the series has let himself go and has bought the most lavish, the most expensive and the most glamorous clothes. In one of the episodes Jessica shows up at an important meeting wearing a scarlet slim fit off shoulder dress. Her interlocutress honestly says: “Jessica, you are an elegant woman but this dress doesn’t suit here!”
Jessica swallows her pride but, apparently, she is just not able to cope with her passion to spectacular and dramatic dresses. Low, often asymmetric, necklines, open shoulders or back in broad day-light, huge frills or ruffles as if for an opera stage, jackets with bouffant basques, dresses with a medieval pelerine… all of them look like costumes for a historical movie. Of course, these pathetic clothes suit this tall black beautiful woman but such a drama is inappropriate in the office interiors of a thriving law firm in the center of the City of New York.
Apparently, the costume designer Jolie Andreatta finds it a little bit boring to dress lawyers and she uses all the opportunities available to make it more interesting. We can easily forgive her, as Suits is just a movie and not a real life. And, may be, these theatrical costumes of one of the main characters also contribute to the charm of the series.
© 2015 “CC “SPBILF” Ltd. All rights reserved.