In a November 28, 2012 post by Michael Roster in the ABA Journal, he suggests that the traditional formula for law firm profitability — profit per partner = margin x rate
x utlization x leverage — needs revamping. Instead, we share the new formula he proposes.
“A profitability model might start with this basic approach:
1) Compute the cost of a given practice group, office or attorney, which is essentially salary and benefits. Because of the way work is done and how clients think of their work, practice groups are probably the best place to start.
2) Add indirect costs (space, support staff and services, etc.). Many firms calculate indirect costs as 1½ times a partner’s salary, one times an associate’s salary and half a paralegal’s salary. Unfortunately, that formulaic approach misses the reality that some groups like litigation may use much more space and support services than others like estate planning and so-called servicing partners.
3) Compute the revenue for the practice group, office, attorney or whatever.
4) Subtract the all-in cost of the entity being considered from revenue attributed to that entity.
5) The net result is the profitability you might then attribute to the practice group, office, attorney or whatever.
6) Deduct 5 percent to 15 percent for redistribution firmwide as a way to encourage good institutional behavior such as crossover work, hiring, training, etc.”