Now, straight on to fact set number one, odd interpretation number one, and Andy’s confused ramblings about same. It involves, of all things, law firm profitability.
Now… I’m not a math guy. Last time I took a math class was 1983. But I’ve had lots of experience playing with marketing numbers in ways to make "good" results look "amazing!" and "bad" results look "pretty durn good." Here are the profitability numbers as reported by Hildebrandt:
- Revenue growth in 2004 up 9.6%
- Profits per equity partner up 10.1%
- Gross hours for the year up 3.2%
- Rates increased 5.7% (down from 6.1% in 2003)
- Expense growth was flat to the prior year at 7.7%, an impressive result given the large increase in associate bonuses at many firms
Emphasis mine in that last bullet. If you read a bit further, you’ll find that firms trimmed a bit more on the associate side (i.e., didn’t hire as many new ones, or fired a few more) and didn’t make as many new partners as in previous years. All in all, slower growth in terms of adding lawyers. But Hildebrandt still worries that "excess capacity remains an issue" at some firms.
"Expense growth was flat." That’s a nice way of saying that nobody improved at all in terms of controlling expenses. Hildebrandt calls that "an impressive result." I call it shameful. Maybe I’m the crazy one. After all, I don’t work for Disney. But if I was corporate counsel working in the retail sector — where cutting costs (not holding their increase to the same ridiculous level as last year) is the name of the game — I’d be pretty cheesed to be paying a 5.7% rate hike to cover 3/4 of that 7.7% expense growth.
And where did the rest of that growth in profit per equity partner come from? An increase in the number of gross hours worked. Which means that the firms are doing more work for their clients. Mostly still billed by the hour. So the clients are fueling both the quality and quantity of the rise in profits for law firms.
Let’s be clear here — lots of people in the retail sector and the rest of the business world will look at these numbers and compare them to other kinds of profit statistics. And they’ll say, "Well, 10% is a very reasonable and laudable return. That’s not an insane amount of profit. The owners of the business deserve to make money. That’s a good way of telling that their firms are healthy."
Which would be fine. If the 10.1% were net profit. But it ain’t. It’s the increase in profits per equity partner for 2004. Not the profit itself. So while the firms’ expenses increased by 7.7%, the partners’ profits increased by 10.1%. That’s a net differential of 17.8%. Which math I can do in my head, campers.
Why am I making a big deal about this? Because it is, from a marketing standpoint, atrocious PR for the entire legal industry.
If I want to make more profit, I can do three things; lower costs (by being more efficient), get more customers, or raise prices. But if I raise prices beyond the increase I paid out in costs, I’ve raised the cost-to-profit differential; i.e., I’m making more money, not being more efficient, and my customers are paying for it.
News flash: customers don’t like paying for your inefficiency.
The problem with law firms is that they can’t be more efficient; the billable hour doesn’t let them. You can’t squeeze more hours into an hour. And you can only squeeze so many hours out of a lawyer, whether an associate or partner. So all you’re left with is raising prices. And, as we see above, maintaining the rate at which you raise expenses. Because, as you try to get more work out of an inherently flawed system, costs will go up.
Ask yourself this: how would you feel if you found out that one of your service providers — your doctor, dentist, gardener, teacher, masseuse, etc. — had an increase in their costs last year, and not only hadn’t worked hard to control them…
…. and not only didn’t just pass those costs along to you….
…. and not only didn’t increase their rates to provide for a 10% increase in profits….
…. but had their efforts reported on as "an impressive result" by one of the biggest consultants in the industry?
Like I said. I’m sure I’m wrong about this. I can’t be right, after all. It’s only companies like WalMart and Dell and P&G and Kodak , etc. that try to grow their profits by decreasing expenses. Rather than keeping "expense growth flat to last year."
I sure hope "expense growth" at law firms never gets to like, 300%. ‘Cause then it can stay flat forever and still hurt like hell.
"Expense growth was flat to the prior year." As of right now, that’s my vote for the best marketing line of 2005.
Stumble it!