Impacting law firm profit: vanity, sanity & reality of future practice

There is a great phrase that is well used (possibly over used), but almost certainly undervalued. It states: Revenue is vanity, profit is sanity and cash is reality.

In fact, it is so widely cited that trying to determine who it should be attributed to is difficult. Google (our default trusted advisor in these matters) interestingly suggests that by adding the word “legal” it’s use is less popular. This might well change over the forthcoming years as firms progress their collective journey from “the practice” to “the business” of law.

The simple premise is that firms, management, business owners and investors can (sometimes) become too focused on revenue and, in the end, profit counts for more. The next hypothesis is that profit is also only worth having if it actually generates cash.

Law firms are (to varying degrees) still heavily focused on revenue generation. Their model (historic or present depending on the firm) is based around time and billing hourly rates. It is focused on “utilisation” of lawyers to maximise the revenue the individual (and in turn) the department or firm generates. KPIs are all around time recorded, time spent and time billed.

And to date, that model has been (mostly) sound. If you are confident each hour spent is chargeable and that for each hour the client pays you more than it costs you, ensuring utilisation is high – profit will be generated. So far, all good.

This then creates a culture of “spend more time equals good.”

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