Note: The following is a digest version of the post we published last Wednesday, November 9. On the chance that a portion of our Business of Law Blog readers may have been distracted by the day’s election news, we’ve decided to provide a second opportunity to read this valuable information on law firm economics.
Law firms ought to focus less on rate setting and focus more on understanding how much it costs to produce work for their clients if they want to be to competitive in today’s ultra-competitive and evolving legal market, suggests, Frederick J. Esposito, Jr., CLM, executive director of Long Island, New York and New Jersey based regional law firm, Rivkin Radler, LLP.
According to Mr. Esposito even if an attorney brings three million in new business into a firm, it doesn’t necessarily mean it’s a win for the law firm, especially if it takes four million to service the client’s business.
“Right now it’s a client’s market, cautions Mr. Esposito, clients want focus and value, they want their law firms to work more efficiently and they want to pay less.”
In order to navigate in this new-normal, he says law firms need to understand their financial data. He shared this insight recently in a blog post titled: Why Understanding Economics is the Key to Law Firm Profitability.
To do this, he recommends law firms consider the following profit/loss formula:
- An attorney’s total compensation. This figure not only includes how much an attorney is paid in salary, but also the attorney’s compensation benefits, taxes and any expenses allocated to the attorney such as administrative support staff. Essentially, this figure needs to include the total overall direct expense allocation to that attorney.
- Work cash versus actual direct expenses. This figure gives a profit & loss for the attorney based on the hours they’ve worked against their total overall direct expenses.
Once this information becomes realized, he says it can benefit law firms in several important ways:
- Creates value
- Covers Cost
- Assumes Risk
- Makes Money
Mr. Esposito believes those firms that proactively look at their business models, understand their economics to better address pricing issues and work more efficiently to adapt to evolving client demands, will be those poised to succeed in today’s highly competitive legal market. To learn more about his perspective, it’s worth taking a closer look at this post.