Understanding Profitability in the Age of COVID 19: Metrics for Profitability by Client and Matter

Throughout COVID-19, we at Iridium have worked to maintain our blog as a helpful, free resource for law firms to expand their knowledge of law firm profitability practices. Recently, we collaborated with our friends at LawVision to publish the second annual “Biggest Law Firm Profitability Survey Ever.” In our next two blog posts, we’ll share some of the critical findings from the survey, and what those findings mean for your firm. These insights address assumptions about demand and pricing, as well as conducting profitability analysis for greater transparency. As this survey was in the field in February – before the dramatic changes brought on by COVID-19 – we’ve also included some analysis of what the results mean in context of the pandemic.  We hope to stress the importance of looking at the events of this year as an opportunity to shift towards more sustainable, data-driven practices. 

Switching the Track is Not Derailing 

It’s no surprise that, pre-COVID-19, law firms were expecting to have a huge year. Post-outbreak, we all expect revenue to move slowly alongside the economy. Many clients are reaching out to their firms to renegotiate rates and, in most cases, work on M&A deals and disputes have slowed to a grinding halt as no one is buying and courts are closed. This has led many law firms to move into cost-cutting mode. While cost cuts are important for mitigating short-term losses, little is gained in the long-term if firms don’t use this opportunity to employ more data-driven process improvements and decisions. 

Firms must also make more concerted efforts to conduct thorough profitability analysis. That analysis is crucial for exploring all available options when it is time to negotiate (or renegotiate) for your firm’s rates. According to the survey results, approximately two-thirds of respondents do not assess profitability risks upon matter and client intake. An analysis-driven practice can decrease the possibility of taking on risky commitments that may be manageable in flush times, but cause trouble when times are tough.  

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Profitability Timing 

Cost-to-revenue calculations and partner compensation models, both foundational for firm management, may also need reevaluating. More than 30% of firms load actual draws as they occur rather than using notional salaries, which can significantly skew the timing of profit calculations. Making matters worse, only about one out of every five firms is tying costs to revenue as the work is performed. If the pandemic has taught us anything, it’s that things can change very quickly, so we recommend a profitability model that can track closer to real-time. 

We Have the Technology 

To learn more about law firm best practices, and how to improve profitability post-COVID-19, download our Profitability Survey Snapshot. This report offers the most crucial insights from the 100+ law firms surveyed in February. 

For firms looking for the right technology for understanding, projecting, and distributing profitability data, we can of course help there, too.  If you have questions about how to effectively manage your firm’s profitability, we’re happy to provide guidance and offer our knowledge. Reach out to us online, or call us at (610) 981-2199, we’re here to support you. 

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