Ask any partner at any law firm to describe their book of business, and dollars to donuts they’ll give the same answer: a number. The number the lawyer reports will represent the amount of revenue that lawyer believes he or she is responsible for bringing into the firm. That magic “book size” is the industry standard, our shorthand for someone’s business generation success.
When headhunters reach out to lawyers, the first question they ask is, “What’s your portable book?” Generate enough revenue and you’ll make equity partner. Rake in enough revenue and you’ll be courted all over town. These are the numbers our careers rise and fall on. Revenue is the defining statistic of the private legal world.
Despite the legal industry’s obsession with revenue, the truth is revenue tells you very little about the strength of a book of business.
Not all practices are created equal, and not all books are created equal. Some practices command high rates, some low. Some practices get paid on every cent they bill, some have to expect substantial write-offs as a matter of course. Some practices collect on their invoices, others pray.
Most importantly, the amount of money a firm has to spend to get their revenue in the door varies wildly, and isn’t always simple to measure. This rabbit hole goes deep. There are countless books, CLEs, and consultants focused on the topic. But if you’re looking for the quick and dirty version, you take the gross revenue recovered as a direct result of an attorney’s business generation efforts and you subtract the labor costs, overhead, and other costs expended to produce that revenue. It sounds simple, but it’s surprisingly complicated to capture when you get into issues like calculating timekeeper cost rates, controlling for underutilized timekeepers, and fairly allocating overhead.
Another Tragedy of The Commons
I wrote a few weeks back on how law firms need to get smarter about tracking and allocating internal overhead. When firms turn a blind eye to exorbitant and anomalous uses of firm resources, partners are incentivized to rack up big expenses that benefit individuals far out of proportion to the costs the partnership bears. By ensuring partners have some financial accountability for their decisions, a firm promotes efficiency and profitability for everyone.
Smart cost tracking isn’t just crucial to keeping a firm’s costs down — it’s a necessary component of understanding the true value of a partner’s book of business.
Say you’re running a firm, and you were forced to pick one of two candidates for lateral partnership. Candidate One services a major, publicly traded client, one they’ve had a relationship with for 20 years. This client alone throws off enough work to keep that candidate, a paralegal, and three associates busy full-time. Candidate One’s book of business is a solid $1.5M a year.
Candidate Two runs a practice servicing one-off clients. They keep themselves and a paralegal busy. They’re also going to need $100,000 in marketing support to keep their book of business going, and that book of business is valued at $1M a year.
To most law firms, Candidate One is the clear winner. Their book of business is larger, they have a reliable “big firm” model client, and they’ll keep firm associates busy. They also don’t need a major capital investment to keep their book functional, unlike Candidate Two.
But let’s complicate the example with some figures. Those two associates that Candidate One needs don’t come free, nor do paralegals. If the associates cost the firm $300,000 a year in salary and overhead allocation, and the paralegal an additional $150,000, Candidate One’s book of business is actually only turning a $450K profit off their work, out of which we’ll need to pay Candidate One’s own salary and overhead. In comparison, Candidate Two is only spending $150K on a paralegal and $100K on marketing, leaving their more modest book to generate $750K in profit. Candidate Two wins the profitability fight, despite their smaller and less “impressive” book.
Firms that understand this profitability gap can go out and cherry pick high-value, underpaid partners from around town. Firms that don’t will be stuck overpaying for partners who might turn them a profit, but won’t leave much left over for the firm as a whole.
Getting Smarter
Change is hard, and I don’t expect any law firm to have an easy time shifting its constituents’ focus from a revenue model to a pure profitability model. Nor should they. The truth is that large books of business can have benefits beyond raw profit, including reputation and the fact that big books can cover a significant amount of fixed overhead expenses. So profit is part of the answer, but not the only answer.
Where I have seen firms try to make that change, I’ve often heard the counterargument that profitability models are divisive and dangerous for the partnership. They pit partners against one another in a battle of profit, dividing lawyers into alphas, betas, and don’t-need-yas. They threaten the firm’s “culture,” a trap I’ve written about before. Most of these claims are unfounded and are thrown around as a way to put the brakes on change, which lawyers notoriously loathe.
Every time I’ve seen a firm make the transition to a model that factors in profitability, it’s been for the better. My own firm made the shift several years ago, and it’s been one of the best decisions we’ve made. It’s contributed to double-digit growth in major metrics in the face of an economy where most middle-market firms are struggling to tread water. Better yet, we’ve had so many partners coming up with great, creative ideas about improving the firm’s profits, reducing its expenses, and making it a better place for everyone here. Our culture has become one that fosters innovation. Our attorneys have taken to heart the business-world mindset that’s so often lacking in Biglaw, and we’re so much stronger for it.
Nothing strengthens a sense of culture like success. Who wouldn’t want to be part of a smarter, more efficient, and wealthier business? Take the plunge, do the work, and close the book on outmoded ways of valuing our profession.
James Goodnow
James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of NLJ 250 firm Fennemore Craig. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.