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Profitability Analysis – Delivering Value and Obtaining Buy-in

Doug Doerfler

Stinson Morrison Hecker LLP

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What is the firm seeking to accomplish? What are the goals?• Profitability drivers

• Strategic plan

• Rate analysis

• Matter budgeting

• Practice division performance

• Client analysis

• Responsible attorney analysis

• Cross selling

• Inventory management

• Revenue budgets

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Define revenue

• Standard value is the goal

• Accrual vs. cash

• Use accrual (expected)

• Based on client/matter experience

• Changes improve expected amount

• Standard value adjustments:

– Bill and collect risk

– Write up (down) of hours or rates

– AR write offs

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Define costs

• Direct costs

– Base compensation

– Benefits

• Cost write downs and cost write offs

• Indirect costs (overhead)

• Cost of capital

• Bonus compensation

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Profit drivers

• Billed Rate

• Hours Billed

• Billed Amount

• Periodic Billed Amount

• Bill Speed (days)

• Collect Speed (days)

• Headcount

• Leverage (Index)

• Billing Realization % vs. Standard

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Balancing

• Balance to the time and billing system

– Balance worked hours and amounts

– Balance billed hours and amounts

– Balance fees collected

– Balance write downs and write offs

– Balance firm totals, client totals, and attorney totals

• Balance compensation to payroll records or the general ledger

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Goals

• Firm standards

– Billing realization

– Bill speed

– Collect speed

• Practice division goals

– Incentive for Practice Chairs

– Show only comparisons to firm

– Develop a one page monthly scorecard

– Provide detailed data quarterly

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Challenges

• Terminology

• Definitions

• Results don’t agree or balance

• Practice division assignments

• Too much data

• Political roadblocks

• Client view vs. attorney view

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Solutions

• Clearly define the purpose

– Management tool

– Not the accounting system

• Get invited to meetings

• Team up with Marketing

• Sell it to the Managing Partner, Finance Committee, Executive Committee

• Recruit a partner sponsor

• EDUCATE!

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Where to start

• Client profitability

– Prepare an 80/20 report

• Prepare a standard template

• Show at least two different periods

• Suggest areas for improvement

• Focus on the future, not the past

• Create a “what if” spreadsheet template

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Create value

• Tie profitability to rate analysis

– Use to adjust rates

– Use to suggest alternative billing options

– Create an alternative billing spreadsheet template

• Tie profitability to matter budgeting

– Use budgeting to prevent write offs

– Use budgeting to manage matters effectively

• Tie profitability to firm’s strategic plan

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SCORECARD        FY08 Goal Potential

FIRM FY06 FY07 FY08 Goal Inc/Dec Revenue

Worked Rate 250.00

275.00        

Std Rate 275.00

300.00        

Standard Amount (Std Hours x Std Rate)      

210,000,000    

Billed Rate 240.00

255.00  

280.00 7.0%

17,647,059

Hours Billed

708,333

705,882  

712,500 0.9%

1,687,500

Billed Amount

170,000,000

180,000,000  

199,500,000 10.8%  

Bill Speed

46

38  

36 -5.0%

936,986

Collect Speed

57

42  

40 -5.0%

1,035,616

Leverage Index

58

59  

61 3.0%  

Billing Realization % vs. Std 90.0% 92.0%   95.7% 4.0%

6,624,000

Total          

27,931,162

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Glossary of Terms

Billed Rate Rate at which client was actually billed

Billed Hours Number of hours billed of the hours worked

Billed Amount Total amount billed of the work performed in the period.

Hours Billed * Billed Rate

Bill Speed Dollar weighted average, weighted on the Billed Amount, of

the number of days from work date to bill date

Collect Speed

Dollar weighted average, weighted on the Collected Amount, of the number of days from bill date to collect date

Adjusted Headcount Used to indicate part-time timekeepers. FT = 1 and PT

= .50

Leverage Index From 0 to 100, an annual index of timekeeper Direct Cost

Rates (using Standard Hours)

Billing Realization % vs. Std Billed Amt as a % of Std Amt (for billed records only).

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GoalsStandard Amount (Std

Hours x Std Rate)For all timekeepers assigned to a division, their target

hours * their standard rate

Billed RateA 7% increase over FY07 is the goal. For FY07 the firm

increase was 8.2% over FY06.

Hours Billed (Billed Amt/Billed Rate)

For all timekeepers assigned to a division, their billed amount / their billed rate

Billed Amount (95% of Std Amount) 95% of the standard amount

Bill SpeedA decrease of 5%. The goal is to decrease the number of

days between worked date and billed date.

Collect SpeedA decrease of 5%. The goal is to decrease the number of

days between billed date and collected date.

Leverage Index A maximum increase of 10% up to firm goal of 61

  The goal is to provide client service a the lowest cost. The

higher the Index increases, the better.

Billing Realization % vs. Std

A minimum increase of 2% that may exceed 95% or a maximum increase of 6% up to 95%

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The end