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