Back in 2010, The Lawyer’s annual report showed that revenues were actually above those of the 2007 pre-recession boom period, but led with a ‘Profit of Doom’ angle focusing on the fact that profits had dropped lower than the 2006 numbers. This was, they said, mainly due to the extreme measures firms had been taking to get back on track, namely cutting costs.
The latest Legal Week figures have just been published and they seem to make good reading. In 2012-2013, total revenues across the top 50 law firms grew almost 5%. Not bad considering we’ve been going through one of the toughest recessions many people have known.
But look more closely and the figures highlight dangers lurking. In the same timeframe profits per equity partner (PEP) dropped 0.5% across the group, despite broadly static equity partner numbers. More troublingly, 11 of the top 50 firms posted double-digit PEP drops, with less than half the group seeing any growth at all.
And it’s not as if this is new information. Back in 2010 The Lawyer’s annual report showed that revenues were actually above those of the 2007 pre-recession boom period but profits had dropped lower than the 2006 numbers. What’s happening? Are law firms burying their heads in the sand when it comes to revenue and profits?
The fact is that revenue growth per se is not necessarily tenable. Profitable revenue growth is the key to long-term success. As we have discussed in previous blogs (What’s law worth?), clients’ expectations are growing and they are demanding both alternative fee structures and greater value. Fees continue to be under pressure, so profitable growth is not going to be as easy to come by as it was when lawyers set their fees and customers paid them – by the hour. We are well aware from media coverage that firms will and do pay the price if they don’t focus squarely on maintaining profit levels as part of their strategy.
Increasing efficiency is a start
When profits are being squeezed the first inclination is to start scrutinising costs. And it’s not a bad place to start your journey to profitable growth, as figure 1 shows (figure 1 in blog 2). To be competitive firms need to ensure their processes and ways of working are as streamlined and cost effective as possible.
But traditionally costs have been pretty well managed by the back office folks and, if growth is the ultimate goal, beware cutting resources that will be needed in the future, in particular valuable expertise and knowledge either from an operations or legal perspective.
So, if costs are pretty much under control, where else should you look to make sure you achieve profitable growth? Find out in part 2 of this blog.