How Profitable Is Our Group? Who Cares!

Now that we all have religion about organizing firms by practice groups (well, most of us, anyway), the next logical question is, to paraphrase Ed Koch, "How are we doin'?"  In other words, which practice groups are the strong economic engines driving profitability of the firm as a whole, and which are the laggards which are calling out for a strategic re-think, a tactical readjustment, or both?

Getting the numbers on profitability by practice group has become almost trivial given today's financial management software suites:  The question is what to do with it, and a devilish question it is. 

To be sure, one may debate methodology ad infinitum.  Should all revenue from a given matter be credited to the practice group where the billing or originating partner resides?  Should it be allocated among groups in proportion to the hours actually worked on the matter by members of various practice groups?  Meanwhile, on the expense side, it's easy enough to simply allocate overhead "per capita," but some practice areas do in fact demand greater infrastructure resources than others.  Should that be reflected accordingly?  Whatever choices are made, the mantra should be, "Transparency!"  Articulate your assumptions, describe why they were chosen over alternatives, and—hey, go crazy!—even think about doing the profitability calculation more than one way.

Meanwhile, what's happening in the real world?  The consultancy Edge International conducted an online survey last month of 341 COO's and Executive Directors of "large U.S. law firms" (no further specificity provided), and garnered a response rate of 46% which I will stipulate for purposes of discussion amounts to a representative sample.  (Without access to the underlying questionnaire I'm not in a position to judge whether it was well-designed to defend against self-selection among respondents.)

According to them, the truly fascinating aspect is not the green-eyeshade debate over debits and credits, but what use firms actually make of the results—if any:

• 21% use it as a factor in partner compensation;
• 15% in setting rates;
• 12% in allocating marketing expenditures;
• 1% in setting recruiting priorities (One percent!  Think about that, unless it makes your head hurt, as it does mine); and
• an overwhelming 78% consider it simply "general information."

Ironically, the one significant trend Edge espies is that some firms are moving from analyzing practice-group profitability to analyzing the profitabililty of specific lawyer/client relationships.  Aside from playing with kryptonite, does this risk regressing from the sine qua non of collaborative practice groups to the bad old days of super-star silos?

This leaves me almost at a loss for words about the backward status of practice group profitability analysis.   Can you imagine a single Fortune 1000 that considered the profitability of its various brands or services merely "generally informative?"  No, not a single one.  But we evidently have 78 of the AmLaw 100 (by extrapolation) taking that head-in-the-sand position.  Perhaps it's best if I conclude by simply citing the title of the most recent book by the Edge consultant who authored the survey summary:  "The First Great Myth of Legal Management is that it Exists."