Dynamic Law Firms: Productivity is King!

January 16, 2019

Article by: Bill Josten - http://www.legalexecutiveinstitute.com/dynamic-law-firms-study-2018/ 

The key takeaway from the Legal Executive Institute’s latest examination of what’s driving growth for law firms that are leading the market in improving their financial performance, is that productivity, for lack of a better word, is good.

The Dynamic Law Firms study has become one of our most well-received analyses in recent years as last year’s inaugural edition quickly gained traction and imparted key lessons for law firms looking for effective strategies. This year is no different.

Once again, the study divided the Peer Monitor universe of law firms into two distinct populations: Dynamic law firms and Static law firms. The distinction is based on a calculation of a three-year compound annual growth rate for three key financial metrics: revenue per lawyer; overall firm profits; and overall average firm profit margin.

Based upon their average performance across all three metrics, firms were placed into quartiles. The top 25% of firms examined, those with the best average performance across the three examined metrics, became the Dynamic firms. Those firms that struggled to find growth, or in some cases even saw contraction in those metrics, became the Static firms.

We then examined a series of both quantitative and qualitative factors for both populations. The lessons we learned were fascinating.

A few key takeaways from this year’s grouping of Dynamic and Static firms:

1. Productivity is king — Dynamic firms saw, on average, an additional 96 billable hours per lawyer placed into work-in-progress in 2017. This was the culmination of a widening gap over the three years we examined. This trickled down to other aspects of the firms’ performance.
2. When productivity suffers, investment isn’t far behind — Hours don’t necessarily equal revenue; but it is awfully hard to generate revenue without booking the hours. For Static firms, much of their investment strategy for the examined period was likely based on 2014 and 2015 performance, a period where many of these firms did relatively well. But 2016 was not a kind year to these firms. Average productivity started to decline quickly, putting a pinch on available funds for investment.
3. Lack of investment hurts profit potential — Dynamic law firms vastly outpaced their Static counterparts in terms of investment in technology improvements and marketing/business development growth. Static firms saw dramatic reductions in both of these investment areas in 2017 compared to 2016. Not only are the Static firms unable to invest in tech that could help them improve their client service delivery and internal operations, they’ve cut way back on the money they spend to reach out to their current and prospective clients. If your firm isn’t improving in these areas, it will undoubtedly impact your ability to find additional profit.