Client Profitability: A Tether to Reality
•Descargar como PPTX, PDF•
0 recomendaciones•303 vistas
This presentation discusses the most reliable methods for computing client profitability.Also reviewed are the various uses of client profitability data in recruiting, compensation, client pricing, alternative fee agreements, workload distributions and overhead control while identifying the pitfalls to avoid.
Recomendados
Recomendados
Más contenido relacionado
La actualidad más candente
La actualidad más candente (20)
Similar a Client Profitability: A Tether to Reality
Similar a Client Profitability: A Tether to Reality (20)
Más de PerformLaw
Más de PerformLaw (12)
Último
Último (20)
Client Profitability: A Tether to Reality
- 1. Performlaw.com CALCULATING CLIENT PROFITABILITY A Tether to Reality Presented By: Brian Kennel
- 2. Calculating Client Profitability Perform Law Session Topics • Reliable methods for computing client profitability • Direct and indirect cost allocation • Client profitability data and client pricing, AFA’s workload distribution and overhead control • Opportunities, pitfalls and first time considerations • Client profitability data and compensation • Advantages of using client profitability models in lateral recruiting and merger analysis
- 3. Calculating Client Profitability Perform Law Methodology • The reporting result (samples to follow) : • Detail client net income report – Originator Sort • Client net income report – timekeeper sort • Timekeeper profitability report • Summary Net Income Reports – Client Level
- 4. Calculating Client Profitability Perform Law How is it calculated? • Data needed from time and billing system • Fees billed by working attorney (WA) by client or matter* • Hours billed by WA by client or matter • Origination credit by client or matter • AR write off by client or matter • Fees billed and received by timekeeper * If running at the matter level
- 5. Calculating Client Profitability Perform Law How is it calculated? • Other data needed • Payroll and benefit history for the period • Secretarial or direct support payroll • Income statement - direct and indirect allocations • Employee starts and terms during the period • Allocation policy defining specific and general allocations
- 6. Calculating Client Profitability Perform Law How is it calculated? • Scaling Concerns (estimates based on a sample set of 2): Data Table Estimates (#Records) * Number of Lawyers 50 100 200 300 500 Client Level 1,667 3,333 6,667 10,000 16,667 Matter Level 10,000 20,000 40,000 60,000 100,000 Factor 6 6 6 6 6 *Actual number of records may vary widely by firm and practice type
- 7. Calculating Client Profitability Perform Law How is it calculated? • Financial system profitability module • Still have to perform most of the cost calculations and load • May need enhanced reporting • Should try first • Other option is to use a 3rd party module • Create an in house utility
- 8. Calculating Client Profitability Perform Law How is it calculated? • Direct costs • Timekeeper salaries and benefits • Billable hour versus standard hour divisor • Easy to identify
- 9. Calculating Client Profitability Perform Law How is it calculated? • Specifically allocated overhead • Sometimes also referred to as direct costs • Secretarial and clerical support salaries and benefits • Business development costs
- 10. Calculating Client Profitability Perform Law How is it calculated? • Generally allocated overhead • Facility costs; • Equipment and practice aids • Practice development*; and • General and administrative costs. • Sample chart of accounts * As mentioned previously, some of this is being specifically allocated.
- 11. Calculating Client Profitability Perform Law How is it calculated? • Overhead application • Graduated level of overhead absorption recommended • Example: • Equity Partner – full share • Non Equity Partner - .75 share • Associates - .50 share • Paralegals - .25 share
- 12. Calculating Client Profitability Perform Law Why I recommend a graduated level of overhead absorption
- 13. Calculating Client Profitability Perform Law How is it calculated? • Graduated overhead absorption • Allow younger lawyers time to build value resulting in higher billed rates; • Remove disincentives to use associates for fear of high overhead rates; • Paralegals and associates don’t really need or use as much overhead as a partner; and • Waste and inefficiency defaults to the partners
- 14. Calculating Client Profitability Perform Law How is it calculated? • Billable Hours or Billed Hours for overhead application • Billable hours as the denominator • Timing differences • Overhead is applied hourly as it is billed • Computing client profitability on a billed basis • AR and Allowance reserve to reconcile to cash
- 15. Cost types Amounts Total expenses 9,000,000 Less direct timekeeper costs (4,500,000) Sub-total direct 4,500.000 Less specifically allocated overhead (1,400,000) Generally overhead for allocation 3,100,000 • Overhead allocation report • Hourly overhead report • Secretarial allocation Report Recap of overhead allocation 15
- 16. Calculating Client Profitability Perform Law Strategic Considerations • Gross Margin • Gross margin is the amount remaining after accounting for direct costs. • Negative gross margins • Partial contributions to overhead and no contribution to profit
- 17. Calculating Client Profitability Perform Law Strategic Considerations • Gross Margin Continued • Examples of marginal cost thinking • Start-up branch office, new practice area • Attracting work from certain clients • Firm growth • Short term and long term
- 18. Calculating Client Profitability Perform Law Strategic Considerations All timekeepers ultimately need to cover direct costs, absorb overhead and contribute to profits, but there are strategic components to a timekeepers contribution at a given time.
- 19. Calculating Client Profitability Perform Law Interpreting Results and Action Steps • Net Profit • Ability to cover all direct costs and overhead • Acceptable profit margins • Client ranking tools • percent profit, • actual profit dollars contributed, • gross fees generated and • overhead absorbed
- 20. Calculating Client Profitability Perform Law Interpreting Results and Action Steps • Net Profit Continued • Analyzing a high-volume but underperforming account • Efficiency of the staffing mix • Competitiveness of the firm’s overhead structure • Realization performance and indicated quality issues • Billing rate increases
- 21. Calculating Client Profitability Perform Law Recommendations • Utilize client profitability data, rates, staffing mix, costs per hour and overhead structure to expand the options a firm has for improving profits. • Singular strategies are not optimal
- 22. Calculating Client Profitability Perform Law Uses of Client Profitability Data • Client pricing (Rates other pricing); • http://performlaw.com/strategically-setting-billing-rates/ • Client staffing efficiency; • Overhead efficiency; • Rate increase alternatives; and • Compensation
- 23. Calculating Client Profitability Perform Law Client Profitability Data and Pricing • When pricing client work, firms should consider the following : • Existing position in the client’s buying strategy? • Existing and foreseeable market factors? • Efficiency of client account staffing? • Efficiency of overhead; • Intangibles including fixed cost absorption , training opportunities etc.; and • Opportunity costs
- 24. Calculating Client Profitability Perform Law Client Profitability Data and Pricing • Alternative pricing approaches • Blended rate • Price at fixed point (median, low, high etc.) • Data needed • Analysis
- 25. Calculating Client Profitability Perform Law Client Profitability in Compensation • A management tool • Origination splitting policy • Methodology for equating client net income to compensation • Mechanics litigated – LOL • Powerful motivator Nobody likes losing money on clients or timekeepers
- 26. Calculating Client Profitability Perform Law How is it calculated? • Before we start, a note about originators and support partners • Origination polices • Support partner originations • Recommendations • Origination credit • Production bonuses
- 27. Calculating Client Profitability Perform Law Client Profitability & Compensation • How should we think about compensation? • Market for compensating attorneys is mature • Run compensation results / market payout • Which system gives us the best chance at a right result? • Objective with a subjective component • Pure objective • Pure subjective
- 28. Calculating Client Profitability Perform Law Client Profitability & Compensation • Distributing income using objective and subjective components • Sample income allocation • 90% objective based on 2 year rolling average client net by OA • 10% subjective component • Managing partner compensation fixed at $75,000 • Model scales to any size
- 29. Calculating Client Profitability Perform Law Client Profitability & Compensation Getting Started • Fears & Resistance • Truth in the numbers • Compensation changes • Moving from subjective to objective
- 30. Calculating Client Profitability Perform Law • Challenges • Data and resources not always available • Financial systems not fully implemented • Analysis usually sought in hard times Client Profitability & Compensation Getting Started
- 31. Calculating Client Profitability Perform Law Client Profitability & Compensation • Opportunities • Measurable results • Productive partner retention • Attract better laterals and improved likelihood of successful mergers • Increased rates of change
- 32. Calculating Client Profitability Perform Law Client Profitability & Compensation • Concerns • Large swings in compensation from one year to the next • Splitting origination credit • Incentives for working with other partners • Adjusting points of ownership
- 33. Calculating Client Profitability Perform Law Client Profitability & Compensation • Opportunities and Concerns • Linking client profitability to compensation can best be described as a process that takes time to mature. • Partners will come to understand that changes to their pricing, staffing and management approach may be necessary. • Overtime contribution to profit = market pay
- 34. Calculating Client Profitability Perform Law • What should partners expect? • Am I in the right firm? (http://performlaw.com/am-i-in-the-right-firm/) • Benefits and limitations of any compensation system • Main benefits of client compensation based on client profiabilty Final Thoughts
- 35. • What is a modern partnership? • What should partners expect? • Benefits and limitations of compensation systems • Compensation Considerations • Br b r i a n @ p e f o r m l a w . c o m
Notas del editor
- The reporting result (samples to follow) : Detail client net income report – Originator Sort Client net income report – timekeeper sort Timekeeper profitability report Summary Net Income Reports – Client Level
- How is it calculated? Direct costs Timekeeper salaries_ Direct costs include timekeeper salaries and benefits (loaded payroll). The hourly cost is usually calculated by dividing a timekeeper's loaded payroll by his or her billable hours for the period. Standardized billable hour divisor At times, it makes sense to standardize the billable hour divisor or the payroll amount. Example: terminated timekeepers from prior periods is being billed currently, without standard costing there is no current period cost to allocate. Standardizing the cost of a new timekeeper may make sense as it not accurate to assess a client for the entire cost of a start-up timekeeper. In a compensation scenario, this may be approached differently. Application of these costs is based on hours billed Direct costs are easy to identify and I only consider timekeeper costs in this phase
- How is it calculated? Direct costs Timekeeper salaries_ Direct costs include timekeeper salaries and benefits (loaded payroll). The hourly cost is usually calculated by dividing a timekeeper's loaded payroll by his or her billable hours for the period. Standardized billable hour divisor At times, it makes sense to standardize the billable hour divisor or the payroll amount. Example: terminated timekeepers from prior periods is being billed currently, without standard costing there is no current period cost to allocate. Standardizing the cost of a new timekeeper may make sense as it not accurate to assess a client for the entire cost of a start-up timekeeper. In a compensation scenario, this may be approached differently. Application of these costs is based on hours billed Direct costs are easy to identify and I only consider timekeeper costs in this phase
- How is it calculated? Direct costs Timekeeper salaries_ Direct costs include timekeeper salaries and benefits (loaded payroll). The hourly cost is usually calculated by dividing a timekeeper's loaded payroll by his or her billable hours for the period. Standardized billable hour divisor At times, it makes sense to standardize the billable hour divisor or the payroll amount. Example: terminated timekeepers from prior periods is being billed currently, without standard costing there is no current period cost to allocate. Standardizing the cost of a new timekeeper may make sense as it not accurate to assess a client for the entire cost of a start-up timekeeper. In a compensation scenario, this may be approached differently. Application of these costs is based on hours billed Direct costs are easy to identify and I only consider timekeeper costs in this phase
- How is it calculated? Direct costs Timekeeper salaries_ Direct costs include timekeeper salaries and benefits (loaded payroll). The hourly cost is usually calculated by dividing a timekeeper's loaded payroll by his or her billable hours for the period. Standardized billable hour divisor At times, it makes sense to standardize the billable hour divisor or the payroll amount. Example: terminated timekeepers from prior periods is being billed currently, without standard costing there is no current period cost to allocate. Standardizing the cost of a new timekeeper may make sense as it not accurate to assess a client for the entire cost of a start-up timekeeper. In a compensation scenario, this may be approached differently. Application of these costs is based on hours billed Direct costs are easy to identify and I only consider timekeeper costs in this phase
- How is it calculated? Direct costs Timekeeper salaries_ Direct costs include timekeeper salaries and benefits (loaded payroll). The hourly cost is usually calculated by dividing a timekeeper's loaded payroll by his or her billable hours for the period. Standardized billable hour divisor At times, it makes sense to standardize the billable hour divisor or the payroll amount. Example: terminated timekeepers from prior periods is being billed currently, without standard costing there is no current period cost to allocate. Standardizing the cost of a new timekeeper may make sense as it not accurate to assess a client for the entire cost of a start-up timekeeper. In a compensation scenario, this may be approached differently. Application of these costs is based on hours billed Direct costs are easy to identify and I only consider timekeeper costs in this phase
- How is it calculated? Generally allocated overhead includes: Facility costs; Equipment and practice aids Practice development*; and General and administrative costs. Sample chart of accounts * As mentioned previously, some of this is being specifically allocated
- How is it calculated? Allocation of generally allocated overhead: I typically recommend that equity partners absorb the highest allocation of overhead with paralegals/legal assistants absorbing the least. For example: Equity Partner – full share Non Equity Partner - .75 share Associates - .50 share Paralegals receiving a .25 share. Usually only about 1/3 of the firms total costs are allocated on this basis The key is to ensure the application is consistent and materially correct.
- Overhead application continued billing aI recommend a graduated level of overhead absorption for the following reasons: To allow a young lawyer the time it takes to build value resulting in higher nd realization rates; Remove any disincentives to use associates with high overhead allocations and lower billing and realization rates; Avoid creating a perception that an associate is unprofitable due to an unrealistic overhead allocation; and To reflect the reality that paralegals and associates simply do not need or use as much overhead as a partner; and Recognize that a portion of a firm's overhead does not contribute to the ability to produce client work- waste and inefficiency defaults to the partners
- How is it calculated? Billable Hours or Billed Hours for overhead application Another item to consider is the timing and application of overhead. I normally use billable hours as the denominator. Timing differences occur when a firm is slow to bill files causing a large inventory of unbilled hours. In these instances, an adjustment for the timing difference may be required. Overhead is applied hourly as it is billed I also recommend computing client profitability on a billed basis. Uncollectible amounts or the risk of uncollectible accounts, are managed by an allowance/write-off and recoveries component of the process.
- How is it calculated? Billable Hours or Billed Hours for overhead application Another item to consider is the timing and application of overhead. I normally use billable hours as the denominator. Timing differences occur when a firm is slow to bill files causing a large inventory of unbilled hours. In these instances, an adjustment for the timing difference may be required. Overhead is applied hourly as it is billed I also recommend computing client profitability on a billed basis. Uncollectible amounts or the risk of uncollectible accounts, are managed by an allowance/write-off and recoveries component of the process.
- Strategic Considerations Gross Margin Gross margin is the amount remaining after accounting for direct costs. Another way of looking at gross margin is to view it as a contribution to overhead and profit. Timekeepers that do not generate enough revenue to cover their direct costs have a negative gross margin. Partial contributions to overhead and no contribution to profit. New lawyers typically don't have enough of a workload initially to cover all of their allocated overhead. All amounts realized over direct costs reduces the amount of overhead for the remainder of the timekeepers. A short term strategy as too much of this kind of thinking will lead nowhere good
- Strategic Considerations Gross Margin Continued Other instances may include a start-up branch office or expansion into a new practice area. From a client perspective, a firm may be willing to accept a lower margin given similar strategic considerations. At times, a firm needs to maintain a certain capability or a certain size to attract work from certain clients. It also may be very difficult grow with everyone fully employed and profitable.
- Strategic considerations Gross Margin Continued Clearly, all timekeepers need to cover direct costs and overhead and contribute to profits, but there is value in thinking strategically when considering a timekeeper's contribution.
- Interpreting results Net Profit Timekeepers that are able cover all of their direct costs and overhead contribute to net profit. Acceptable profit margins differ by firm and situation The average law firm with multiple practice areas will have a number of different profit ranges. Ranking clients in a number of different ways including percent profit, actual profit dollars contributed, gross fees generated and overhead absorbed all provide insight into the value of a relationship.
- Interpreting results and action steps Net Profit Continued Analyze a high-volume but underperforming account to determine: Efficiency of the staffing mix assigned to the account The competitiveness of the firm’s overhead structure Realization performance and indicated quality issues (timekeeper and management) Being able to perform efficiently in highly competitive markets may not be attractive to some, but for many it is a matter of survival. Billing rate increases are always a tool for law firms to increase profits, assuming clients are willing participants in this strategy. Law firms are reporting mixed results with billing rate increases, and there is a plethora of market data supporting these reports.
- Interpreting results and action steps Net Profit Continued What I am advocating is that client profitability data, rates, staffing mix, costs per hour and overhead structure be used to expand the options a firm has for improving profits. By thoughtfully considering all of the elements of profitability, law firms have a better chance at operating in step with the market. Relying heavily on of a single strategy of raising rates or cost cutting will produce limited results and likely hurt profitability.
- Client profitability information has a number of strategic uses including: Resource for determining billing rates. Determining the efficiency of client staffing; Gauging the efficiency of overhead; Identifying alternatives to increasing rates in high volume and highly competitive situations Aligning compensation with profitable behavior Ensuring compensation is competitive in the market
- Client competitiveness realities When pricing client work, firms should consider the following: Firms must understand how they fit into a client's overall legal spend. If a firm is at the top of a client's list, then raising rates may provoke or incent a client to consider alternatives. Firms that raise rates to cover inefficiencies are at risk Clients may even consider shifting volume to higher priced competitors who perform well but were previously at a cost disadvantage. The market for legal services is becoming increasingly, but not totally, intolerant to rate increases. I recommend that firms discern where they fit a client's legal spend, the role they play for a client, and whether the contemplated rate structure is aligned with these factors. Client profitability information and strategic interpretation of results allows a firm to price client work more competitively.
- Client profitability information has a number of strategic uses including: Resource for determining billing rates. Determining the efficiency of client staffing; Gauging the efficiency of overhead; Identifying alternatives to increasing rates in high volume and highly competitive situations Aligning compensation with profitable behavior Ensuring compensation is competitive in the market
- Client profitability in compensation Somewhat different, although not completely, from a management tool Compensation requires an origination splitting policy A methodology for equating client net income to compensation The mechanics are often litigated – LOL It is a tremendous motivator and very powerful when understood No one likes loosing money on clients or timekeepers
- How is it calculated? Before we start, a note about originators and support partners Origination polices range from agreements at the lawyer level to a firm policy governing origination sharing Support partner originations often result in unmet expectations I normally recommend a nominal support partner origination sharing agreement Origination credit is for origination Production bonuses are for hard work as a timekeeper Production bonuses are direct costs to originators
- How should we think about compensation? Recognize that the market for compensating attorneys is very mature and the formulas are readily available. An average lateral deal can be conceptualized on the back of a napkin I recommend that firms run their compensation results against market payout ranges readily available in the market How a firm gets to a compensation result is important but not nearly as important as the result itself.
- How should we think about compensation? Recognize that the market for compensating attorneys is very mature and the formulas are readily available. An average lateral deal can be conceptualized on the back of a napkin I recommend that firms run their compensation results against market payout ranges readily available in the market How a firm gets to a compensation result is important but not nearly as important as the result itself.
- Client Profitability and Compensation – Getting Started Part of the struggle in implementing these systems is that there is fear on the part of some that their book of business is not as profitable as believed. Often times partners with large books of business are concerned that the client profitability information may hurt compensation Resistance to implementing client profitability may be especially strong in cases where compensation has been largely subjective or based on a few basic criteria.
- Client Profitability and Getting Started: Challenges Often times a firm lacks the data and resources needed Financial systems are getting better but often times are not fully implemented A tendency to only want this type of analysis when a firm is struggling
- Compensation opportunities Once implemented, however, the system will mature and produce measurable results. More importantly, it will act as a tether to reality. A firm should never lose a productive partner over a poor income allocation system. Firms will attract better laterals and increase the likelihood of successful mergers if the resulting compensation is sustainable and market competitive Law firms tend to move slowly, and an environment that empowers and encourages partners to act profitably helps to overcome this disadvantage.
- Client Profitability and Compensation: Opportunities and Concerns One of the concerns that partners have about using client profitability as a large driver in compensation is that it may produce large swings in compensation from one year to the next. Other concerns include splitting origination credit, incentives for working with other partners and adjusting points of ownership.
- Client Profitability and Compensation: Opportunities and Concerns A solid design process will address all of these concerns. Linking client profitability to compensation can best be described as a process that takes time to mature. Partners must first learn to understand the various drivers of profitability, and they need time consider the possible changes to their pricing, staffing and management approach that may be necessary.
- What is a modern partnership? What should partners expect? A fair (market) return for their efforts; With a successful track record, the ability to impact the priorities of the firm; Access to capital to build a profitable practice? Access to billable work in early stages of career that helped launch practice Short run billable opportunities in slow periods (as available) An enhanced ability to succeed owing to the firm's reputation, members and considerable resources Benefits & limitations of compensation systems A compensation system is useful management tool, but limited in what it can achieve Most systems have serious flaws in their design, or are too ambiguous to produce meaningful constructive behavior Compensation systems that are in sync with the profitability needs of the firm are the most effective for management and compensation Compensation systems that also assist is rate setting and staffing efficiency Compensation considerations Client profitability as a factor in some or all of a partner's compensation helps to ensure that the firm will operate competitively in the market. Creating an environment where overhead is in check and where partners can reap the benefits of the profitability of their practice is the best antidote against defections and poor performance.