Although law firm leaders are projecting a healthy 2015, the long-term consensus is that profitability will face continued downward pressure.
As President Obama just delivered his State of the Union speech, I decided to turn this into a ‘State of Law Firm Profitability’ address. While doing some research on this topic, I found a few notable perspectives worth sharing and have curated them for your reading pleasure.
Profit Lessons from Patton Boggs
Forbes ran an interesting interview with Ed Newberry, co-global Managing Partner of Squire Patton Boggs, the 21st largest law firm in the world resulting from the 2014 merger of Patton Boggs and Squire Sanders. As Managing Partner of Washington, D.C. law firm and lobbying pioneer Patton Boggs, Newberry weathered some challenging financial storms, including a $15 million settlement with Chevron and a prior failed merger attempt with another firm.
Newberry shares some great advice for any law firm managers, not just those facing mergers:
- Build a margin of financial and operational safety. He says, “Most successful organizations do that; law firms often don’t because most pay out their earnings every year and start the next year fresh.”
- He argues that law firms must become more disciplined about controlling costs, since they operate in an industry with flat demand, making significant top-line revenue growth both unreliable and unrealistic.
Re-affirming Newberry’s advice on managing law firm expenses, legal consultant Timothy Corcoran discusses things he would do differently as a law firm CEO in his own blog post. He states: “When faced with flat or declining revenues, the sustainable way to maintain or grow profits and to defend against predatory competitors is to reduce costs at a faster rate.”
Compensation Costs Climbing
The Recorder, an ALM publication, made some predictions for 2015 — profit-making potential is shifting away from litigation to transactional and data privacy work, and profit-draining concern lies in skyrocketing compensation, reaching as high as multi-million dollar pay packages for some lateral hires. The author compares top rainmakers to free-agent athletes. Can they draw clients to a firm the way top athletes draw crowds for a sports franchise? The jury may still be out on that one!
Competition from Non-Traditional Legal Services
While Citi predicts that demand for legal services will be stronger than it was in 2013, competition from lower cost alternatives and non-traditional legal service providers will dilute some of the profit opportunities. More findings from the Citi/Hildebrandt survey as reported by The American Lawyer are available to subscribers/members, with free access to a limited number of digital articles.
Real estate is the second largest expense category at most law firms, behind compensation. According to Cushman & Wakefield’s 2013 benchmark survey, the national law firm real estate average is 6.2 percent of gross revenue, which they project to decline further. A downsizing trend in office space may be driven by cost-cutting pressure.
Otherwise, the following links to the ABA website offer excellent general advice for maximizing profits and maintaining financial health. I found one in the 2012 archives, but the advice for increasing revenue and decreasing costs holds true today.
The profitability equation is simple: Increase the amount of money that comes into the business while decreasing the amount that goes out, in the right proportions to maintain the firm’s capabilities and preserve client satisfaction.
Yet as we know, simple is not always easy. If you are looking for strategic Spend Management advice on maximizing your firm profits, I invite you to learn more about the consulting services and programs of our experts.