Friday, October 12, 2007

Why You Are In Business: Maximize Profit or Hourly Rate?

So many lawyers simply lack the business sense to understand the purpose of a business. It is widely known that the reason for a business to exist is to maximize shareholder value. In a professional services firm the shareholders are the Partners. All of this sounds logical, right? Well, you would think so until you talk to some attorneys about changing to a fixed price model and hearing them complain, with great business ignorance, about what it might do to their effective hourly rate. Again, they confuse the true goal of business with the "illusion" of profitability, the "effective hourly rate". By this I mean that lawyers seem to obsess about backwards calculating their time to figue out their effective hourly rate based on the fixed price they charge as if it is ANY indication of profitbaility at all! You see, most law firms do not understant the difference between revenues and profit and do not really understand their true profit margins. This lack of business savvy causes attorneys to wrongfully focus on metrics that sometimes run counter to profitability. For instance, top line revnue growth does no equate to increased profitability. Often, in fact, attempts to increase top-line revenues are at the expense of a firm's profit margins. However, because law firms do not truly understand profitability, they have put into place metrics and incentives for their people to increase top-line revenues without regard for profitability: Need an explanation:

Attorneys get paid more when they:
1 - Bill more hours (increases revenues and encourages quantity over quality, pisses clients off, reduces loyalty, increases attrition and burns out your people}
2 - Hoard Work at the Top {increases revenue because Partners bill at higher rates, creates intellectual atrophy by having a work force that is doing work that is well below their competence level at the expense of the client, ultimately compromises the ethics of the profession, and produces low professional satisfaction}
3 - Originate more business - - - SALES COMMISSION! How do you feel about salespeople? So do I!! This promotes a "sell it at any cost" mentatlity. . . . raising revenues, but lowering profit by bringing in clients that are not a fit, will not pay the bill, and are destined to be disappointed and tell everyone they know how much you suck. Your people will hate serving them, will not return heir phone calls, and will resent you for making them serve these clients. The work will be produced slower and ultimately they only create the "illusion" of having more business.

Attorneys also have serious self-esteem problems that lead to a misunderstanding between revenues and profit. What, you ask? Well, attorneys absolutely hate it when they are not busy. . . they feel unwanted and unvalued. Attorneys generally do not think to work ON the business instead of IN the business when they have free time, so they look frantically for ways to fill their time, including lowering their prices to keep busy, or bringing in the wrong clients just to say you have them. Instead, it would be far better to be selective, stand up for your true value, and only work for clients who value you highly and spend the rest of your time working ON the business rather than IN the business. This will significantly improve your operating margin and will make your people much happier.

1 comment:

zang said...

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