It is always fascinating to hear partners talk about firm finances – usually it involves a focus on fee income, very selected expenses and 100% equity partner profit. The expense focus usually hones in on areas where they feel management is wasting money, maybe on marketing, the library, IT or support staff.
Mysteriously, there is seldom mention of the firm’s biggest opportunity cost, and one which individual partners directly control – the cost incurred by not fully utilising one of the largest recurring expenses in any law firm – the direct and indirect cost of fee earners. Remember when considering this expense item that you are not just looking at direct staff costs but also overhead costs associated with that expense.
A quick rough and ready calculation brings home the seriousness of the issue! For instance one partner with 3 lawyers (say earning $100k p.a.each and whose overhead allocation is say $110k p.a. each) utilised on average to a level of 75%, will be burning nearly $160k p.a. It is even more if one also takes into a account the opportunity cost of the fees they would otherwise have earned.
It is the one expense item which all partners should be responsible for managing, almost to the exclusion of all else on the financial side. Many decades ago David Maister highlighted the importance of this variable in his well-known profit formula (Profit per Equity Partner=margin x rate x utilisation x leverage) including utilisation as a key variable.
Again and again I come across firms who are bemoaning one or more rising expenses (including payments to external consultants!) or firms which have undertaken wide-spread analyses of expenses, sometimes with the help of their financial advisers, but seldom given proper attention to this crucial item. If there is, it is merely listed and no real steps are put in place to manage it and get results around it.