Correctly examining profits will do more for the financial success of a law firm than clocking up billable hours, writes Angela Priestley.
A sensible law firm would always examine its numbers in order to make strategic decisions for driving profit. But, according to accountant Andrew Chen, examining such numbers is only useful if decision-makers can ask the right questions and view their figures in the correct way.
"Firms are taking for granted what they're looking at. Often, they're making strategic decisions when the information that's in front of them may not actually help them make the correct decision," says Chen.
He believes problems frequently emerge when firms rely on the production of monthly reports by accounting staff who give little consideration to how such information is reported.
"That means that the guys making the decisions on how to increase profits - whether it's to make redundancies, cut overheads or do a marketing campaign - don't have the right intelligence in front of them," he says.
Chen advocates that firms view practice groups as businesses and examine the nuts and bolts that drive each group's financial performance. Clocking up billable hours should not be the only strategy for driving profit. Instead, he urges firms to apply the "power of one" rule; that is, determining where a change of one per cent can best benefit the firm.
"For example, if you change your charge-out rates by one per cent, then you're going to have a bigger impact on your bottom line than changing one per cent of, say, staffing costs," he says.
In 15 years of servicing the legal profession, Chen says he has seen lawyers make significant progress in the financial management of their practices - especially through the advent of technology that can offer better analysis of profits - but he adds that old habits die hard.
"Often people who have gone from firm to firm take the same lessons learned and just apply them again and again. Sometimes, these rules of thumb of the legal profession are just repackaged," he says. "But you'd be surprised: all that people were focused on ten years ago was revenue. Now they can measure and attribute profitability to different things."
Andrew Chen is speaking at the LexisNexis Practice Management Conference, 24-25 May, in Sydney.