What Law Firm Profitability By Matter Reports Miss (and What to Check)

Profitability reports sometimes get quiet skepticism in partner meetings, and often that skepticism is justified. Accurately measuring law firm profitability by matter is far more complex than a firm-level profitability calculation. This guide shows how your firm can get it right.

How Law Firm Profitability by Matter Is Supposed to Work

The math for matter profitability is the same as attorney, department, and firm profitability:

Revenue – Cost = Profitability

Calculating profitability at the firm level is simple, because fee income and expenses are stored in the GL. It’s just a matter of doing the math. But more detailed measures of profitability are more complicated.

Where the Numbers Go Wrong

To calculate profitability at the matter level, you need details about the cost of doing the work: both direct and indirect expenses.

• Direct expenses: Everything that’s paid to an individual, like payroll, draws, health insurance, 401(k) matching, tech allowance, car allowance, etc.
• Indirect expenses: The overhead needed to support that individual, like rent, insurance, marketing, etc.

But you can’t find all of this information in your legal software. Part of it lives with your payroll provider, and the rest of it may be spread across other systems.

Overhead Allocation Is Complicated

To do an accurate profitability measurement, you’ll need to decide how overhead is allocated. You need to answer three questions:

• Who is overhead distributed to? Often this is equity partners, non-equity partners, and associates, but your firm might choose another grouping.
• What is the overhead? You designate certain accounts in the GL as overhead, and then you can do the calculation to get a dollar amount of overhead.
• What is the overhead distribution structure? There are infinite ways to do this. A common formula is that equity partners take a share of 1.0, non-equity partners take 0.9, and associates take 0.7.

If you have a large number of business rules for overhead allocation, you may spend extra resources implementing and maintaining them. Your software might also dictate some of the rules for you due to feature limits.

What to look for: Get clarity on how the overhead calculator is done and how close you can get to your actual business rules. Also, look for opportunities to make your business rules more concise (while staying consistent with your business priorities).

Timekeeper Cost Rates Are Incorrect

Getting accurate cost rates for each timekeeper is critical for an accurate profitability analysis, but that data doesn’t live in your legal software. Typically, you need to:

• Get a monthly data feed from your payroll provider.
• Transform the data into a format that your legal software can use.
• Enter the data into your legal software.

This can be a technical challenge. Depending on your payroll provider’s capabilities, you may need to write custom scripts to extract and transform the data, or rely on cumbersome manual processes. Then you’ll need to put the data into your legal software, which can also be time-consuming.

What to look for: Ask how payroll data is pulled into the legal software for the profitability calculation. Your software should handle as much of the process as possible, so profitability calculations can be done regularly without overloading staff.

Write-Downs and Unbilled Time Are Missing

A good profitability analysis will look at raw time spent on the matter, not just the fees a timekeeper recorded and collected. In general, firms should be looking at patterns of writedowns and unbillable time, because they can be a major revenue leak. If your software is pulling in the total number of hours billed instead of the total time spent, you won’t see the whole picture.

What to look for: This issue has two parts. First, ask which numbers the vendor is using in the profitability calculator. If it’s just what was billed, that’s a problem. Second, keep good time records. The system can’t analyze what isn’t there. Choosing software that makes time capture easy can boost contemporaneous time entry, and it often boosts total billed time too.

Questions to Ask Before Trusting a Profitability Report

If you’re looking for new legal software, ask these questions before you buy. You can also use them to evaluate your current software.

Can this software calculate profitability at the matter level?

For matter-level profitability, how does it calculate overhead? How does it allocate overhead?

Can we make changes to overhead allocation? What are the limits?

Can you integrate with our payroll provider?

How do you move timekeeper cost data into the system? Can we see that process live, using dummy data?

How do you account for writedowns and unbilled time in the profitability calculation?

What Reliable Profitability Reporting Requires From Your Platform

Firms that are unsatisfied with their current matter-level profitability reporting options tend to be struggling with one of the following:

• Can’t measure matter-level profitability with current software.
• Measuring matter-level profitability, but the process isn’t working. It might be too complex, too labor intensive, or not accurate enough.
• Measuring matter-level profitability, but the tools you’re using are too restrictive. They don’t capture the actual business rules.

Orion Visual Analytics, an add-on for Orion’s financial management software for large law firms, can help. Here’s what it can do for your firm:

• Expert advice and done-for-you setup, so you’re up and running quickly.
• Flexible overhead allocation that matches your business rules.
• Integrations with major payroll providers, like ADP, already in place.
• Option to import payroll data instead of entering manually.
• Full capture of hours spent on each matter, not just billed time.
• Profitability dashboards, so you can see the big picture and zoom in on details.
• Personalized, high-touch support for the life of your software.

Schedule a demo today.