Best Practice: Improving law firm profitability

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing partner of a six-lawyer general practice firm in Chicago. We have four partners and two associates and have been in practice for 20 years. While we are holding our own financially we would like to do better. The partners have never earned more than $175,000 – some years not even that. What can we do to improve profitability?

A. Profitability can be increased by increasing revenue, decreasing expense, or increasing leverage – ratio of associates to partners. Most law firms do not have an expense problem – they have a revenue problem. Profitability improvement programs tend to be more successful when they concentrate on improving profits through increased revenue rather than reducing expenses. A program that focuses on increasing revenue, such as increasing billable hours, raising billing rates, and improving realization rates, will yield better results. Programs that focus on expense reduction often do not yield satisfactory results in the long-term.

Improvement in leverage usually can only be achieved as part of a long-term program. Sudden sizeable increases in the number of associates may prove counterproductive if there is not sufficient client work to keep them busy. Another option would be to reduce the number of partners through retirement. That must be carefully planned and I am sure is not an option your firm is looking for.

I suggest that you review your expenses to ensure they are in line. If they are not, make reductions that make sense. Then focus on the revenue side of the equation. Review your client base, practice areas, billing rates, flat-fee rates, billable hours being worked by your partners and associates, and realization rates. Then identify problem areas and chart out a course of action.

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.