Tuesday, 22 February 2011

The Matter Gross Profit.

In an earlier post, I discussed the sort of measurements that most firms could be using and the different view of the firm that they provide.

So what?

Well the point of finding and using better measurements is to provide a better record for managers to be able to run the firm in a more efficient and effective manner - or just better. Most law firms tend to have fairly short term views of their own success. You will see many items in the legal press highlighting increases in either turnover and/or PEP 'compared to last year'. It is, however, trends that are important rather than one year 'blips', whether upward or downward. By looking at the trend in the firm over a five or ten year period, even turnover can become interesting and useful. By looking at that period, it becomes quickly apparent which years are anomalies  - and so which sets of results should be set to one side when deciding if the firm is successful.

So having decided that a longer term view is sensible, just what trends should you be watching? Although most law firms enjoy talking about PEP and turnover, by far the best measurement is a long term examination of 'Matter Gross Profit' - that is turnover less direct costs and staff costs (including partner remuneration). This is a measurement of profit that helps to focus fee earners on those aspects of a matter that they can most easily influence - the price and the allocation of work.

Continuing the examples form the previous blog entry, the Matter GP figures do not look good:

The Matter GP percentage is reducing:

It is possible, therefore, to conclude that the firm is less efficient than before, even though, as previously discussed, it would probably think of itself as successful.

The Matter GP measurement can be used by the firm to reverse the trend (together with sensible cost-control measures). All fee earning staff should be bonused not on hours billed or turnover - but on achieving a Matter GP target for their section, department and for the firm as a whole. In this way, every fee earner is motivated directly to consider the profitability of work and will find that it is not in their interest to simply throw resources at a matter as a deadline looms.

Much more about this subject and about firm governance is available in my new Report, available from the Ark Group (publishers of Managing Partner magazine). Follow this link for details.

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