Post on 26-Jun-2020
May 22-25, 2016 Los Angeles Convention Center Los Angeles, California
Law Firm Profitability in the New
World
Presented by
Toby Brown
FM13
5/23/2016
1:45 PM - 2:45 PM
The handouts and presentations attached are copyright and trademark
protected and provided for individual use only.
1
Perkins Coie LLP
Law Firm Profitability in the New World
ALA 2016 Annual Conference
May 23, 2016
Toby Brown
Chief Practice Management Officer
Perkins Coie LLP | PerkinsCoie.com
Why You Should Care
Late 2008 - GC letter to outside counsel:
"If you are thinking about submitting a rate increase for 2009 ... don't. If you have already requested and been approved for a rate increase ... we changed
our minds."
Early 2016
Eight Outside Counsel Guidelines Received in Two Days
2
2
Perkins Coie LLP | PerkinsCoie.com
Foundation: Define Profit
FIRM PROFIT:
Annual Cash Basis
Revenue Minus Cost = Profit
• All Revenue is the same
• Cost focus is on Administration and Overhead
Challenge
• Revenue Trails Billing
• Billing Trails Work
• So Revenue not connected to its Cost of Generation
CLIENT PROFIT:
• Revenue = Collected Dollars
• Cost = Cost of Hours that Generated the Revenue
Challenge
• Partner Income – Cost or Profit?
3
Perkins Coie LLP | PerkinsCoie.com
Profit Methodologies
We are Assuming Cost Rates
• Most “Litigated” Aspect of Law Firm Profit
• Minor Impact
• Agree and Move On
#1 – Contribution Margin
• All Partner Comp Treated as Cost
#2 – Gross Margin
• All Partner Comp Treated as Profit
• AmLaw Stats
• Variation – PPP
#3 – Net Margin
• Split Partner Comp into Cost and Profit Components
4
3
Perkins Coie LLP | PerkinsCoie.com
What Drives Profit?
Obviously - the Difference Between Revenue and
Cost
Drivers:
• Rates
• Realization
• Rates minus Discounts, Write Downs and Write Offs
• Productivity
• Hours billed and collected per Timekeeper
• Leverage
• Ratio of non-partner Hours to Partner Hours
• Not head count
5
Perkins Coie LLP | PerkinsCoie.com
Profit Drivers
Profit Driver #1: Rates
• Higher = Better
$900 per hour versus $600 per hour
Obvious but …
• Rates have a significant impact on profit
• In the example that follows:
• 5% change in Rates results in approximately 12% change in
Profitability
6
4
Perkins Coie LLP | PerkinsCoie.com
Profit Driver #2: Realization
Realization is the percentage of revenue collected against the value
of time at standard rates
The Math:
• Rates times Hours minus Discounts, Write-downs and Write-offs
Discounts:
• Where we give a discount off of standard rates.
Write-downs:
• When we remove time from a draft bill, before it goes to the
client. Indicates we do not see value in effort – could be training
time or just too much time.
Write-offs:
• When we remove time from a bill after the client sees it, usually
at the client’s request as they did not find value in certain effort,
or feel the fee does not match the value of the overall work.
7
Perkins Coie LLP | PerkinsCoie.com
Profit Driver #2: Realization (cont.)
Example:
• $25,000 = 50 Hours X $500 (Revenue at standard rates)
• $23,750 = 5% Discount reduces it by $1,250 (95% Realization)
• $22,500 = 5% Write-down reduces it another $1,250 (90%
Realization)
• $21,250 = 5% Write-off reduces it another $1,250 = (85%
Realization)
• $21,250 is 85% of $25,000
• Realization is 85% in this example
Caveat: Some firms measure realization off of discounted rates.
“How can a partner be expected to collect any more than the
agreed rates?” This approach can hide the discount impacts.
8
5
Perkins Coie LLP | PerkinsCoie.com
Profit Driver #3: Productivity
Hours billed per time keeper per month/year
• Higher = Better (158 per month = 1900 per year)
Impact: As Productivity drops (less hours billed) – the cost per hour
per timekeeper rises
Math Example:
• $750,000 annual cost for a senior associate
• Includes both comp and overhead
• Divided by 1900 hours billed per year
• $395 total cost per hour
Productivity drops 5% to 1800 hours per year
• $417 new cost per hour ($750k ÷ 1800)
• 5.5% increase
9
Perkins Coie LLP | PerkinsCoie.com
Profit Driver #4: Leverage
Percentage of Equity Partner Hours Billed on a Matter
• Less is Better
Impact: As That Number Drops, Profits Go Up
• Non-equity partner hours generate the profits that pay equity
partners
• A tool for counteracting drops in Realization
Market Average: About 25%
• A.K.A. 3:1
Caveat: Equity Partner time still matters
• At 25% leverage, about a third of the revenue comes from
their time
10
6
Perkins Coie LLP | PerkinsCoie.com
Profits at the Timekeeper Level
11
Associate 41 $503 $478 $271 $207 $19,592 $8,481
Time Keeper Type Hours
Std
Rate
Rate at
Realization Cost Rate
Net Margin
Rate Revenue
Net
Margin
Full Standard
Rates
Hours Billed
Rates minus
discounts,
write-downs &
write-offs
Cost Rate =
Comp and
Overhead Costs
on a per hour
basis
Net Margin Rate
= Realized Rate
minus Cost Rate
Revenue = Realized
Rate times Hours
Net Margin =
Hours times Net
Margin Rate
This associate has an annual cost of $515k, which
includes both comp and overhead. $515k ÷1900 =
$271 per hour
Perkins Coie LLP | PerkinsCoie.com
Baseline – Sample Matter
12
Rates – Averages
Realization – 92% of
Standard Rates
Leverage – Based
on averages
PPP – Calculated
using 1800 billable
hours as benchmark
25% Leverage 92%
Time Keeper Type Hours
Std
Rate
Rate at
Realization Cost Rate
Net Margin
Rate Revenue
Net
Margin
Net
Margin %
Eqt Partner 25 $858 $789 $763 $26 $19,734 $659
Inc Partner 14 $683 $628 $519 $109 $8,797 $1,531
Sr Counsel 20 $599 $551 $388 $163 $11,022 $3,262
Associate 41 $503 $463 $271 $192 $18,973 $7,862
$58,526 $13,314 23%
PPP $1,937,794100 total hours
7
Perkins Coie LLP | PerkinsCoie.com
Testing Assumptions: Rate – Lower by 5%
13
Higher = Better
Effective Rate minus Cost Rate equals Net Margin Rate
5% Rate Discount =
21% Drop in Net Margin5% Rate Discount =
12% Drop in PPP
25% Leverage 87%
Time Keeper Type Hours
Std
Rate
Rate at
Realization Cost Rate
Net Margin
Rate Revenue
Net
Margin
Net
Margin %
Eqt Partner 25 $858 $746 $763 -$17 $18,662 -$413
Inc Partner 14 $683 $594 $519 $75 $8,319 $1,053
Sr Counsel 20 $599 $521 $388 $133 $10,423 $2,663
Associate 41 $503 $438 $271 $167 $17,942 $6,831
$55,345 $10,133 18%
PPP $1,708,780A negative Net Margin
Rate for a Eqt Partner
reflects that comp is profit
Perkins Coie LLP | PerkinsCoie.com
Testing Assumptions: Realization – 82% of Standard Rates
14
5% Discount + Additional 5% Write-off from 92% Baseline
Fees Collected minus Cost of Delivery Equals Profit
82% Realization =
42% Drop in Net Margin82% Realization =
24% Drop in PPP
25% Leverage 82%
Time Keeper Type Hrs
Std
Rate
Realization
Rate
Cost
Rate
Net
Margin
Rate Revenue
Cost of
Hours
Net
Margin
Net
Margin %
Eqt Partner 25 $858 $704 $763 -$59 $17,589 $19,075 -$1,486
Inc Partner 14 $683 $560 $519 $41 $7,841 $7,266 $575
Sr Counsel 20 $599 $491 $388 $103 $9,824 $7,760 $2,064
Associate 41 $503 $412 $271 $141 $16,911 $11,111 $5,800
$52,164 $45,212 $6,952 13%
PPP $1,479,766
8
Perkins Coie LLP | PerkinsCoie.com
Testing Assumptions: Productivity Decrease
15
Higher = Better
But: Firm / Practice Group Levels Versus Client / Matter Levels
5% Cost Increase =
17% Drop in Net Margin
5% Increase in Cost
Rates due to drop in
Productivity
5% Cost Increase =
5% Drop in PPP
25% Leverage 92% +5%
Time Keeper Type Hours
Std
Rate
Rate at
Realization Cost Rate
Net Margin
Rate Revenue
Net
Margin
Net
Margin %
Eqt Partner 25 $858 $789 $801 -$12 $19,734 -$295
Inc Partner 14 $683 $628 $545 $83 $8,797 $1,168
Sr Counsel 20 $599 $551 $407 $144 $11,022 $2,874
Associate 41 $503 $463 $285 $178 $18,973 $7,307
$58,526 $11,053 19%
PPP $1,843,700
Perkins Coie LLP | PerkinsCoie.com
Testing Assumptions: Leverage
16
Less Equity Partner Time = Better
Non-equity partner time = Profits for Equity Partner comp
Leverage from 25% to 14%
= 29% Increase in PPP
Realization –
Assumes an extra
5% Write-off14% Leverage 87%
Time Keeper Type Hrs
Std
Rate
Rate at
Realization
Cost
Rate
Net
Margin
Rate Revenue
Net
Margin
Net
Margin %
Vs
Baseline
Eqt Partner 14 $858 $746 $763 -$17 $10,450 -$232
Inc Partner 16 $683 $594 $519 $75 $9,507 $1,203
Sr Counsel 24 $599 $521 $388 $133 $12,507 $3,195
Associate 46 $503 $438 $271 $167 $20,130 $7,664
$52,595 $11,831 22%
PPP $2,500,326 29%11% reduction in fee –
compared to Baseline.
The Client Goal
9
Perkins Coie LLP | PerkinsCoie.com
Behavior Changes?
Rates
• Don’t be afraid to ask for standard rates
Write downs and Write offs
• Avoid giving work away
Leverage
• Push the work down
How Can We Get Partners to Change?
We need something immediate and (unfortunately) negative
Solution: Give your lawyers grades
• The Kicker: Not all of them will get A’s
17
Perkins Coie LLP | PerkinsCoie.com
18
C-
10
Perkins Coie LLP | PerkinsCoie.com
The Real Goal: Motivate Behavior Changes
People Change When They Are Forced To Change
• Absent some immediate benefit
What Forces People?
• Negative
• Competition
• Loss of income
• Immediate or later?
• Positive
• Competitive Advantage
• Increase in income
Law Firm Culture
• Not lined up with change
• Greed – actually not a great motivator
• Unless it’s immediate
19
Perkins Coie LLP | PerkinsCoie.com
Create a Profit Culture
Educate, Educate, Educate
Approval Authority - Reporting Stats
Be a Resource
Compensation: The Holy Grail
Become the Prophet of Profit
20
11
Perkins Coie LLP | PerkinsCoie.com
Questions?
Thank You!
21
Your opinion matters!
Please take a moment
now to evaluate this
session.