Now that we all have religion about organizing firms by practice
groups (well, most of us, anyway), the next logical question is,
to paraphrase Ed Koch, "How are we doin’?" In other
words, which practice groups are the strong economic engines driving
profitability of the firm as a whole, and which are the laggards
which are calling out for a strategic re-think, a tactical readjustment,
or both?
Getting the numbers on profitability by practice group has become
almost trivial given today’s financial management software suites: The
question is what to do with it, and a devilish question it is.
To be sure, one may debate methodology ad infinitum. Should
all revenue from a given matter be credited to the practice group
where the billing or originating partner resides? Should
it be allocated among groups in proportion to the hours actually
worked on the matter by members of various practice groups? Meanwhile,
on the expense side, it’s easy enough to simply allocate overhead
"per capita," but some practice areas do in fact demand greater
infrastructure resources than others. Should that be reflected
accordingly? Whatever choices are made, the mantra should
be, "Transparency!" Articulate your assumptions,
describe why they were chosen over alternatives, and—hey,
go crazy!—even think about doing the profitability calculation
more than one way.
Meanwhile, what’s happening in the real world? The
consultancy Edge
International conducted
an online survey last month of 341 COO’s and Executive Directors
of "large U.S. law firms" (no further specificity provided), and
garnered a response rate of 46% which I will stipulate for purposes
of discussion amounts to a representative sample. (Without
access to the underlying questionnaire I’m not in a position to
judge whether it was well-designed to defend against self-selection
among respondents.)
According to them,
the truly fascinating aspect is not the green-eyeshade debate over
debits and credits, but what use firms actually make of the results—if
any:
- 21% use it as a factor in partner compensation;
- 15% in setting rates;
- 12% in allocating marketing expenditures;
- 1% in setting recruiting priorities (One percent! Think
about that, unless it makes your head hurt, as it does mine);
and - an overwhelming 78% consider it simply "general information."
Ironically, the one significant trend Edge espies is that some
firms are moving from analyzing practice-group profitability to
analyzing the profitabililty of specific lawyer/client relationships. Aside
from playing with kryptonite, does this risk regressing from the sine
qua non of collaborative practice groups to the bad old days
of super-star silos?
This leaves me almost at a loss for words about the backward status
of practice group profitability analysis. Can you imagine
a single Fortune 1000 that considered the profitability of its
various brands or services merely "generally informative?" No,
not a single one. But we evidently have 78 of the AmLaw 100
(by extrapolation) taking that head-in-the-sand position. Perhaps
it’s best if I conclude by simply citing the title of the most
recent book by the Edge consultant who authored the survey summary: "The
First Great Myth of Legal Management is that it Exists."
