Law firm doubles partner profitability after client matter profitability analysis

Our client’s need

A regional law firm in operation for more than 75 years had a successful reputation and enjoyed thousands of legacy clients.

With the changing competitive legal landscape, the new chairman recognized a need to re-evaluate their existing business model to improve profits and the profits-per-partner to better position the firm to retain top talent, attract strategic lateral candidates and make the firm more attractive to the top law school graduates.

Baker Tilly’s solution

Baker Tilly started on an exercise to determine the relative profitability of every client matter that had been worked on in the past year. The firm wanted to know what client matters had contributed the most to the firm’s profitability and what client matters were completed at a loss or diminished level of profit contribution.

The profitability of an individual client matter was determined by comparing the working attorney fees with that of the direct and indirect working attorney costs associated with the client matter.

The results were studied by senior management and they determined in general that leverage, where the work was being performed and the level/experience of the attorney assigned to the task had the most impact on the profitability of the individual client matters. Specifically:

• It was noted that the profit from the same commodity legal work varied greatly between geographic locations. As a result the firm determined that all real estate work was to be assigned to the city with the lowest cost per attorney.
• It was noted that litigation, which employed greater leverage, provided the highest margins for the firm. As a result the firm made a concerted effort to allocate more resources to this type of litigation and began to actively market the firm in this area.
• It was noted that certain client matters serviced primarily by partners were extremely unprofitable. As a result the staffing models for these types of client matters were modified. 
• It was noted that some practice areas could not command the fees necessary to support the salaries of the practice area. Because the salaries of these practice areas were being subsidized by others, it was determined that practice areas with lower billing rates would be spun off as a subsidiary while others were eliminated.

Results achieved

Baker Tilly’s strategy, plan and execution of the client matter profitability analysis took approximately six months to complete. The result of the exercise had an immediate impact on profits-per-partner and individual partner compensation. Profits-per-partner increased 50 percent in year one and doubled by the end of year two. Law firms vary in size, practice areas, location, reputation and other factors so the significant improvements noted in this case study may not be achievable at each firm. However, recent studies indicate that law firms making strategic changes to proactively address the changing legal economic pressures are more likely to generate revenue and profit increases.

For more information on this topic, or to learn how Baker Tilly professional services specialists can help, contact our team.