Law firms and legal leaders need to move beyond traditionalism if they want to continue and expand profit growth, a recent survey by BigHand and LawVision finds – with 40% of firms reporting flat or negative profit growth and 62% noting the need to conduct profitability education and training.

Rod Wittenberg, Vice President of Financial-Productivity Solutions at BigHand.

In a survey of major legal jurisdictions across the U.S., Canada, the UK and the EU, law firm leaders largely report that they are beginning to recognize that there is much room for improvement when it comes to profitability.

On the one hand, over 80% of law firms report that they are trending either on plan or above plan for profitability in 2023. Far fewer, however, are satisfied with their recent profitability compared to last year. Only 63% of firms reported any level of satisfaction with recent profitability – representing a 24-point drop from last year's 87%. The percentage of firms reporting outright dissatisfaction more than quadrupled – from about 5% last year to more than 20% this year.

Addressing Law Firm Profitability

This dissonance comes from the combination of tough economic times and law firms' need for greater financial sophistication, says Rod Wittenberg, Vice President of Financial-Productivity Solutions at BigHand.

"There is a decline in profitability," Wittenberg says. "Law firms are working with more staff to do the work, so hours per lawyer are down."

Firms are more used to tracking revenue as a proxy for profitability, Wittenberg adds. While revenue continues to tick upward – for several reasons, including that firms have raised rates by several percentage points – the lack of substantial profit growth presents a scalability issue that needs to be addressed with firm-wide upleveling of financial acumen.

Building Profit Sophistication

Most firms seem to be coming around to this way of thinking. While the billable hour remains law firms' top profitability-performance metric, the second-most identified profitability priority in the survey was financial hygiene – with 65% identifying improving financial hygiene as a significant project they intend to address.

This second priority represents the right one, Wittenberg explains.

"The inclination, when you see profit declining or flat, is to cut costs or increase prices – but improving your financial hygiene can enable you to make changes without either of those things," Wittenberg says. "Quick wins won't yield sustainable growth."

Law firm leaders are increasing staffing; accordingly, the survey shows a large spike in the number of firms adding pricing (47%) and finance roles (41%).

Data-Driven Profitability

Wittenberg finds this rise in law firms of matter-pricing and project-management professionals heartening. Still, there is still more to be done – and that work must be buttressed by data.

As lawyers must research a client matter, they also must research business optimization to keep the firm on strong financial footing. Law firms are also tapping into technologies, such as legal business intelligence ("BI") platforms that provide additional visibility into financial data. In turn, BI can help with initiatives ranging from talent acquisition to business development strategies.

Fortunately, as law firms strive to increase profitability, legal leaders are realizing that good financial hygiene is key to growth – and that profitability-educated lawyers equipped with the right tech investments are helping to lead the way. In this year's survey, more than half of firms reported using a major legal-industry BI platform for profitability visualization.

"There has been an incredible move over the past two to three years to educate lawyers on being better collaborators with their clients and internally to drive matter and client profitability," Wittenberg says. "But financial metrics underpin all of it; if you have access to financial metrics, you can see your rates, you can give better visibility to your clients, and you can price better."

Joe Stanganelli is a writer and recovering attorney. He is managing director of content advisory Blackwood King LC.

To find out more or access the full BigHand report, click here.