Basic Law Firm Financial Reporting That All Tech Folks ... · Basic Law Firm Financial Reporting...

Basic Law Firm Financial Reporting

That All Tech Folks Should Know

SPEAKERS

Toby Brown

Chief Practice

Management Officer

Perkins Coie

Profit (THE Financial Metric to Report)

• Revenue – Cost = Profit

• Cash Basis

2017 Revenue – 2017 Cost = 2017 Profit

Income Tax Driven

• Drives Partner Thinking

A More Useful Profit Definition

• Collected Basis

Fees – Cost to Generate the Fees = Profit

• Fees = Dollars Collected

• Cost to Generate = Cost of the Hours Worked

Cost of Hours?

• Direct (Comp) + Indirect (Overhead)

– Budget / 1800

– Actual / Hours Worked Annualized

• Indirect Can Vary by Location and Practice

– This is what partners argue about the most

• Big Question: Direct Cost Rate for Partners?

– Cost or Profit?

Partner Comp Cost Rate Options

• 100% a Cost

– Contribution Margin

• 100% Profit

– Gross Margin

• Some Split

– Net Margin

Which Method is Best?

• Each One has Pros and Cons

– Note: High Comp Partners Skew Things

• Pick One:

– Then Evangelize

• Allows Measurement at the Client and Matter Level

– This will drive Behavior Changes

• More on that later

BASELINE MATTER PROFIT

RATES

Margin up 6%

Rates up 2%

REALIZATION

Margin down 23%

Extra 5% Discount

UTILIZATION

Margin down 20%

Cost Rates up 5%

LEVERAGE

Fee Down 2%

Leverage up 5%

Margin up 6%

THE MARKET – 2005 VS 2017

• Realization Dropping– 94% to 82%

• Productivity Down– 1900 to 1700

• Lower Rate Increases

• Demand Flat– 2014, 2015, 2016, …

• Profit Pressure Rising

Why Care About Profit?

• Without Change – Profit Will Go Down

• “You can’t argue with millionaires.”

• How to Drive Change?

– Actionable

– Immediate

– Simple

Traditional Profit Reports

• Crystal Reports

• SQL Pulls

• Some Dashboards

[Redwood Screenshot]

Best Uses of ‘Profit’

• Scenario Modeling

– Pricing Function

• Budget Building

– (Not a Partner Function)

• Budget Monitoring

• Partner Comp

– “Danger Will Robinson”

Some Profit Challenges

• Actual vs Budgeted Costs

• Partial FTEs

– “Stranded Overhead”

• Measure It at Which Level?

– Firm, PG, Client, Matter, Timekeeper, …

– Transparency

• Reconcile with Cash Basis?

Opportunities for IT

• Know Your Customer’s Pain

– Immediate Access to Actionable Data

• Budget Monitoring, Time Entries, Invoices, …

• Walk and Talk Profit

• Partner with Finance and Practice Management

• Focus on the Needs of the Business

THANK YOU