Because of client pressure on fees, law firms are scrutinizing their profitability numbers more than ever. If the clients are right, firms are looking for new efficiencies, better project management and innovative staffing. But we see that law firm leaders are looking at profitability as “business lines” as well. Is this area of practice a drag on our overall profits and should we drop it? To the extent that some firms have a culture of “One for all and all for one,” that culture is fraying.
If you are a managing partner or an executive committee member, the way that you share profitability numbers can threaten a unified culture. The flip side is that a shared analysis of profitability signals transparent management. We are not talking about firm-wide monthly or annual profits. Of course, all partners get to see those figures. But who gets to see profitability at a practice-group level or the individual-partner level?
We expect the CFO, managing partner and an executive committee to look at profits at a granular level. It would be irresponsible to ignore flagging practices or partners without counseling them. But beyond that group, these seem to be the choices:
1) share practice-level monthly profitability figures with the practice-group leader and keep them confidential beyond that;
2) share practice-level monthly figures with all partners (with the greater risk that bad news will leak beyond the firm);
3) share both practice-level and individual-partner profitability figures with practice leaders, but individual numbers only with each individual; or
4) share all profitability figures at each level with all partners.
There is a cultural consequence for each of these options. In firms that have a modified lockstep compensation system, there may have been an “all for one” attitude. Over time, litigation may be up when transactions are down. Real estate practice is booming but government investigations are slow. It was assumed, without transparent analysis over time, that revenues and profitability balanced out across groups.
At the other end of the spectrum, firms that place heavy emphasis on originations are more likely to reveal partner-level revenues to all. Some of those are now sharing profitability figures as well. In that culture, the knowledge of my partner’s profitability may not be a surprise. We know we are a “one for one” firm at heart.
The challenge is for leaders in the middle of the spectrum. Even in thriving firms, the profitability of some practices and partners is down and the lawyers either have to improve profit margins or get out of the practice. Do you go about this in a quiet, managed way, without opening controversy between practices, or do you share profitability numbers with all partners and place public pressure on some?
The response will depend on how leaders assess the impact on their culture. Having a strong understanding of the current culture is as important as knowing your numbers.