Basic Law Firm Financial Reporting

That All Tech Folks Should Know

SPEAKERS

Toby Brown

Chief Practice

Management Officer

Perkins Coie

Profit (THE Financial Metric to Report)

• Revenue – Cost = Profit

• Cash Basis

2017 Revenue – 2017 Cost = 2017 Profit

Income Tax Driven

• Drives Partner Thinking

A More Useful Profit Definition

• Collected Basis

Fees – Cost to Generate the Fees = Profit

• Fees = Dollars Collected

• Cost to Generate = Cost of the Hours Worked

Cost of Hours?

• Direct (Comp) + Indirect (Overhead)

– Budget / 1800

– Actual / Hours Worked Annualized

• Indirect Can Vary by Location and Practice

– This is what partners argue about the most

• Big Question: Direct Cost Rate for Partners?

– Cost or Profit?

Partner Comp Cost Rate Options

• 100% a Cost

– Contribution Margin

• 100% Profit

– Gross Margin

• Some Split

– Net Margin

Which Method is Best?

• Each One has Pros and Cons

– Note: High Comp Partners Skew Things

• Pick One:

– Then Evangelize

• Allows Measurement at the Client and Matter Level

– This will drive Behavior Changes

• More on that later

BASELINE MATTER PROFIT

RATES

Margin up 6%

Rates up 2%

REALIZATION

Margin down 23%

Extra 5% Discount

UTILIZATION

Margin down 20%

Cost Rates up 5%

LEVERAGE

Fee Down 2%

Leverage up 5%

Margin up 6%

THE MARKET – 2005 VS 2017

• Realization Dropping– 94% to 82%

• Productivity Down– 1900 to 1700

• Lower Rate Increases

• Demand Flat– 2014, 2015, 2016, …

• Profit Pressure Rising

Why Care About Profit?

• Without Change – Profit Will Go Down

• “You can’t argue with millionaires.”

• How to Drive Change?

– Actionable

– Immediate

– Simple

Traditional Profit Reports

• Crystal Reports

• SQL Pulls

• Some Dashboards

[Redwood Screenshot]

Best Uses of ‘Profit’

• Scenario Modeling

– Pricing Function

• Budget Building

– (Not a Partner Function)

• Budget Monitoring

• Partner Comp

– “Danger Will Robinson”

Some Profit Challenges

• Actual vs Budgeted Costs

• Partial FTEs

– “Stranded Overhead”

• Measure It at Which Level?

– Firm, PG, Client, Matter, Timekeeper, …

– Transparency

• Reconcile with Cash Basis?

Opportunities for IT

• Know Your Customer’s Pain

– Immediate Access to Actionable Data

• Budget Monitoring, Time Entries, Invoices, …

• Walk and Talk Profit

• Partner with Finance and Practice Management

• Focus on the Needs of the Business

THANK YOU