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Six drivers of law firm profitability, but law departments can steer the wheel

According to Dan DiPietro of Citigroup’s Private Bank group, US law firms are on a road that has six levers that drive profitability. Hearing DiPietro’s presentation on this model, it occurred to me that as to their key law firms, inside lawyers can and should directly influence each of those levers (See my posts of June 15, 2006 about meddling in firm management; and July 5, 2006 with several forms of such intervention.). Other posts on this blog have taken up aspects of these drivers from the perspective of law departments and what departments can to do affect them; some of them follow the six drivers below.

1. Productivity, which is the number of hours billed by a lawyer, is squarely within the sights of law departments (See my post of Oct. 20, 2005 on how many total hours law firm lawyers bill.).

2. Realization is something law departments can reduce or increase because they negotiate discounts and scrutinize bills to challenge excessive charges (See my posts of Sept. 14, 2005 on the time spent on invoice review; and Aug. 8, 2006 on tiered discounts from hourly rates.).

3. Leverage, while something that law departments sometimes push for, is always an influenceable characteristic of a law firm (See my posts of Sept. 25, 2005 on firing a firm for under-staffing; Dec. 8, 2006 on core teams; and Nov. 22, 2006 about use of paralegals by firms.).

4. Expenses, what the law firm pays to operate and eventually passes through to its clients, is another cost driver that law departments can influence (See my posts of Sept. 13, 2005 on online research expenses.).

5. Hourly rates are most emphatically subject to scrutiny and approval by law departments (See my posts of Nov. 13, 2006 on rationale to grant requests for rate increases and discounts; Nov. 21, 2005 on need for law firms to show productivity; and March 12, 2006 on billing rate differentials by lawyer within the same class year.).

6. Volume, a piece of profitability that is quite obviously open to influence by law departments (See my post of Aug. 24, 2005 about Marriott and its equal division of volume by firm.).