Maximizing Per Partner Profit (PPP)
As a partner of a law firm, you probably would like to make more money at the end of the day. As a managing partner, your partners will expect you to take the best and most appropriate actions to maximize per partner profit (PPP).
Some firms focus on maximizing revenue (billings), hoping that this will result in maximum PPP. These law firms often focus on one specific area of law, i.e. specialty or boutique law firms. They may be more aggressive in their business development and marketing of their practice areas and that is more affordable if you only have one or few areas of law to promote. In addition, they often trust legal support staff with the important but repetitive legal tasks – both billing paralegals and legal administrative assistants (LAAs). In this way, legal support staff can handle most of the routine file work on behalf of the lawyers. This frees up the lawyers’ time to concentrate on high-value (high billing rate) legal work as well as business development/marketing/networking to bring more of this work to the firm and to attend client meetings, discoveries and court. Some examples of these types of firms are personal injury, intellectual property law and high-end real estate law (large and/or complex business sales, purchases, reorganizations or mergers).
There are also firms that provide “commoditized” legal services, i.e. legal work that is basic and/or routine, that have a great deal of competition from other specialized firms of their kind, e.g. residential conveyancing, smaller family law files, wills and estates. These are often lower-value (lower billing rate) work. Therefore, in order to generate sufficient revenue volume, these firms need to maximize new file openings. Billing paralegals and LAAs are often utilized to process the routine file work in these types of firms. Generally, legal support staff are very smart and capable of doing more than you might expect.
Every firm should have a budget, including a forecasted revenue budget (by lawyer/practice area) based on the goals of your strategic plan. In order to maximize PPP, you should concentrate on the higher-value practice areas and/or areas that are in the highest demand (per your strategic plan, economic environment and competitive marketing analyses).
Every lawyer (including partners) should set a billings goal for the year (or, in case of associate lawyers, have one set for them by the partners) and each lawyer should create and submit a business development/marketing plan on how they intend to reach their goals. Management should meet regularly with associate lawyers to ensure they are on track to reach their goals (quarterly). They can be coached at each of these meetings on effective timekeeping and billing, marketing and business development, collection of accounts receivable, etc. Students should also receive training in these skills starting at the outset of their articles, to prepare them for expectations once they become associates.
However, this is not the whole story of maximizing PPP. You must carefully manage your expenses. The budget is also a very important tool to use in order to manage expenses. Obviously, you should exercise “hygiene” on all of your expense accounts. However, you should concentrate on your largest expenditure accounts; firstly, salaries and benefits (lawyers and staff) which is most often 60 – 65% of all of your expenses, and secondly, occupancy expenses (rent, utilities, taxes or mortgage payments, if you own your office space), which often amount to approximately 25% of your overall expenses. Leasing costs ($ per sq. ft.) can be very expensive, depending upon the geographic area you are in.
Let’s say that you concentrate on one of the smaller value expense accounts, for example, kitchen supplies, which comes in at approximately 5% of your overall expenses. Let’s say that you manage to cut this expense line by 10%, which is good, however, that would result in only a 0.5% savings in overall expenses. However, if you concentrate on salaries and benefits, say 65% of overall expenses and you cut it down by 10%; you will achieve 6.5% of overall expenses. If you are just starting out on this, I recommend you concentrate on maximizing revenues and optimizing your largest expense accounts first. In this example, if your overall expenses are, say, $1 million, your savings would be $5,000 for kitchen supplies vs. $65,000 for salaries and benefits. You should do both, but your valuable time and efforts will achieve more profit by first concentrating on your two highest dollar value expense accounts.
Notice that I write “optimizing” rather than “minimizing” expenses. Per your strategic plan, you may have decided to invest in a particular practice area. In order to do this, you will likely need to spend additional funds in some professional marketing to bring in new clients and be competitive with other firms that practice this same area of law. Or, you may have decided to grow the firm and invest in new talented and financially successful associates. Lawyers’ salaries are high as they are educated professionals. You want to hire the best, and shed any of those who have not demonstrated the required skills and/or profitability within a reasonable amount of time. Cut losses early and learn to hire better.
Salaries and benefits for lawyers usually make up approximately 2/3 of overall salaries and benefits. Staff salaries and benefits usually range around 1/3. You should analyze your lawyer to staff ratios and ensure you have the best and most efficient legal support staff members for your various practice areas. Do not keep an inefficient LAA and have to hire another inefficient LAA to be able to get the required work done. That is just a waste of money as educated and experienced legal support staff salaries are higher than ever. Carefully select your LAAs. If they cannot perform optimally, the best thing to do is to let them go sooner rather than later and hire someone who can do the work both accurately and efficiently. Some areas may need or benefit by more legal support staff and some require less. Statistics now indicate a three to four lawyers to one legal administrative support staff member. It is no longer a 1:1 ratio (one dedicated assistant for every lawyer). In our new highly competitive environment, a higher lawyer to staff ratio is required in order to be profitable. As well, ensure that you bill your paralegals (and LAAs if your practice and clientele will support this). Ensure that billing paralegals and LAAs are included at their specific rates in your engagement letters. Billing paralegals are not considered support staff, but rather timekeepers and revenue generators just like the lawyers. Make certain that you include your billing legal support staff in your revenue line.
In order to execute this financial strategy, have your management partners and appropriate senior managers work together to analyze and optimize the expense accounts for salaries/benefits and occupancy costs. Management partners and your COO and/or CFO should work together on managing the associates to create profitable and realistic marketing plans and personal budgets/goals. Assign line item expenses to the individuals who are primarily responsible for the spending for those accounts (HR manager, IT manager, marketing manager, office services coordinator, etc.). Send and review the budget vs. actual reports with these managers/coordinators on at least a quarterly basis. It is also helpful to involve these managers/coordinators in the initial budgeting process, as they know better than any partner does what their responsible individual expense line items should cost for the coming year.
If you are successful in maximizing revenues through executing your strategic plan and managing your partners and associates’ billings per goal/budget, while optimizing your expenses, you will achieve a higher net income/bottom line for the partners.
Execution of a successful financial plan to maximize per partner profits is not a one-person job. All partners need to be on board and provide top-down support. Associates need to be engaged in budgeting, goal setting, and execution of their individual annual business plans. Management must meet regularly with associates to ensure they are performing to expectations. Practice group leaders (as coaches in substantive legal work and financial management) and mentors can teach and advise associates (professional development). As well, as mentioned above, administrative managers and coordinators should be involved in the budgeting process and managing their own responsible line-item expense accounts.
This is achievable and manageable if you have partner support and the best and dedicated lawyers and staff. The result will be higher per partner profits at the end of the fiscal year. Try it and see what results you can achieve. Best of luck to you all.