How Firms Should Be Measuring the Profitability of Matters
Strategist Hugh Simons looks at how firms typically track matter profitability, and what they should be doing instead—looking at margin per partner hour.
July 28, 2017 at 02:33 PM
13 minute read
Matter profitability matters. Yet most firms struggle to measure it in a manner that is accurate, focused on the levers partners control, and inclines partners to take action. Using margin per partner Hour (MPH) to measure profitability delivers on these objectives.
The MPH measure enables assessment of profitability on matters with widely varying realization and leverage in a directly comparable way. It also allows you compare profitability consistently across clients, practice groups, and partners. But, from discussing the measure with law firm leaders, I know that the reasons the measure works aren't intuitive, so let me start with some principles and then turn to the particulars of MPH.
A first principle: in management, you should align accountability with control; holding people accountable for elements they don't control yields frustration and demotivates. Thus, as we look to partners to manage matters profitably, we should only include in how we measure profitability the things partners directly control: the realized revenues and the amount of time that lawyers of different seniorities dedicate to executing the matter. As partners managing a matter don't control things like an associate's overall level of activity, office rent, etc., these should not be included. In management accounting, the term “margin” is used for profit measures like this that account for some, but not all, costs. Hence the result of subtracting the cost of the executing lawyers' time from the realized revenue of a matter is termed “matter margin.”
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