Client profitability analysis is gaining popularity and is more widely used in law firms. The ability to allocate expenses and generate profitability reporting at the client or matter level has become a leading selling feature for a number of the law firm management software vendors. I think this is a good development. As firms continue to embrace profitability reporting, software vendors will have more incentive to further develop client profitability best practices.
While firms have long been able to allocate revenues on any level needed, the allocation of expenses has always been a challenge. Firms have been constrained by the inability to code non-client expenses to the various levels of accountability and by the lack of a perceptively fair method for allocating expenses that are not easily allocated to individual things. This highlights the need for a more efficient and fair system, which client profitability analysis can provide.
Having the capability to generate quality client profitability data and the ability to use these data to support meaningful change in an organization are two entirely different processes. Generating the data is relatively easy and is available from most time, billing and accounting systems. A series of repeatable processes and data handling techniques can be designed to efficiently produce a final result that is actionable.
The actionable aspect of this process requires a skillful hand. In addition to the science of producing an accurate result, it is important to remember that there are strategic and political considerations that must be considered. For example, results may show that the firm’s largest client is actually the least profitable. In addition to the obvious financial implications, this client may well be attached to a very influential partner who will not appreciate this result very much. If care is not taken, this information may never see the light of day.
In another example, results indicate that a client is very profitable, so much so that an outlier is created. In sharing these results, a compensation conversation can soon be initiated.
Moving from Analysis to Action
The right technical training and correct understanding of strategic and political factors when communicating client profitability result in move analysis to action. Explaining results in the context of potential solutions that include a range of options for improvement will likely be more palatable to the originating partners. Engaged partners who understand the drivers of profitability in their practices become an incredibly powerful force for change.
Drilling Down
The increasing interest from firms in analyzing client profitability is a positive sign for the legal industry. As more firms delve into this data-driven approach, law firm partners will enhance their core competencies and make more informed decisions. However, it is crucial for forward-thinking partners and administrative staff to actively introduce and promote these concepts within their firms.
Effective communication of client profitability results is key to fostering adoption and driving organizational change. Stay tuned for upcoming articles that explore leveraging client profitability data to shape strategic planning and inform compensation structures within law firms.
