Law firms are entirely revenue driven. That is the key take-away from this session describing the economic model and levers of law firms for CIOs and IT directors. The challenge posed is how a given technology project is going to help the bottom line.

Profits per Partner (PPP) was described as an “arms race” among the large firms, and key to acquiring and retaining the best talent. So initiatives that affect this model will be at the top of the list for attorneys and the financial side of the firm.

There was some discussion of moving to fixed-fee pricing as an alternative to the hourly model. The challenge here is tracking the profitability of the engagement, so tracking the hours is still very important. (Other costs being limited and pretty small in comparison to the hours, see the cost breakdown below).

The revenue of a law firm is determined by three factors:

• Rates (Dollars per hour)
• Hours billed
• Realization (% of bills collected)

The average Amlaw 100 profit margin is 37.6%. On the one hand this seems high, but it also means there is revenue pressure. Since costs are pretty fixed, even a 10% loss of “realization” would cause a 10% loss in revenue. This makes minimizing slippage a serious priority for law firms – you must bill, you must collect to drive the business.

On the other hand, expenses at the firm are relatively fixed, and IT investments are limited.

• 65% - personnel (excluding IT)
• 26% - Rent
• 6-7% - Other administrative costs (Apparently including voice phone, excluding data)
• 2-3% - IT.

Law firms cannot compromise on talent, or on AA downtown space in major financial capitals, which makes the discretionary budget limited. Of this, new IT initiatives are only a part. The Executive Director of Paul Weiss was quoted as saying, “If I can’t predict our expenses next year within a percentage point, I am not doing my job”

Equity partners wear three “hats” which drive how they perceive their own value and appropriate compensation.

• Worker - Comparing their income with an equally-talented non-partner to produce the work product.
• Manager – Compare with what a firm would pay a “CXO”-type.
• Owner – Claimant on profits after what everyone is paid.

The concept of PPP conflates all these roles, so one needs to think about how they fit into all three.

In the corporate world, IT and other asset development initiatives are funded out of retained earnings, with an eye toward long-term profits. However, at a law firm, profits are current income for the firm.

“My partners want to strip-mine the firm at the end of every year” – managing partner, AmLaw 30 firm.

Even working capital is a sticky wicket. It is necessary “just to keep the lights on.” Consider that collections are 60-120 days in arrears, while associate compensation and rent, which together are 91% of the cost base, is current. Covering that additional 9% for running the operation, let alone anything beyond that, requires a hit for the partners that they can feel immediately, and so they are going to ask how it will affect PPP in the very short term.

So there is no set R&D budget, and initiatives are judged case-by-case. As one presenter put it, in many cases, “There is no long term strategic plan beyond generating more billable hours.”

It is important to help promulgate a strategy around IT, and into the business. “Strategy means saying no.” The attitude of “We never saw a billable hour we didn’t like” is dangerous.

So “high-value” is defined by those that can drive up revenue, and strategic items are going to be those that drive profitable revenue on a longer-term basis. Those initiatives that will face clients, and those that help their work will have the highest priority. (This is consistent with what I heard yesterday about extranets).

So ask: Have you structured and named (emphasis on naming) your technology in a way that is beneficial to the bottom line?

A lot of major investments don’t, and so will be harder to get through. For example, document management is not revenue-facing (it doesn’t affect any of the three revenue drivers above) and so will be harder to get through, even though they may be long-term important for infrastructural reasons.

The closing theme was that law firms are entirely revenue driven. Try to tie the initiative to a business goal. Efficiency (cost-reduction on a per-capita basis) is not a good selling point, rather one should be looking at improving the revenue through increasing billable hours (in strategic way) or improving realization. Naming and describing the initiative in a way that is tied to top-line goals can be critical to getting the initiative approved.

The example was given of a centralization/templatization initiative that was sold on helping facilitate rapid expansion.

“Your challenge: persuade your partners that IT is filling, not picking their pockets.”