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September/October 2019

Editor's Note

Understanding Law Firm Revenues and Expenses

Mary Vandenack

I co-founded a law firm in 2005 for many reasons. Two significant ones were that I struggled with the lack of technology being employed by the law firms where I had worked as well as with the limitations created by billable hour structures. I set out to create a firm that used technology, offered alternative fees and compensated lawyers on true teamwork and client service rather than the lip-service versions I’d encountered.

Despite my strong background in technology, accounting and finance—and a firm co-founder who was equally skilled—the path to being serious about automation and alternative fees has been a constant challenge. To achieve a structure other than the traditional law firm business model, or simply creating an alternative fee structure within a traditional law firm, requires one to understand, to evaluate and to re-evaluate all aspects of a law firm and law firm finances.

The most important financial issue for any firm is to have revenue. When my co-founder and I started our firm, what mattered most was that there was revenue. We didn’t care where it came from, and we didn’t get too focused initially on our realization rate. We simply focused on finding work, getting it done and getting compensated for it. We were fortunate to have significant work from the day we opened.

As our firm evolved, we began to strategically examine the type of work that was coming our way, why that work was coming to us, which type of work was most profitable and what type of work attracted quality attorneys to join us. We tracked and analyzed data to help us identify how to regularly attract the type of work that made the most sense for our firm.

The expense side of the equation likewise required significant attention. It’s easy to let budgets accelerate with no positive impact on revenue. We created a process in which we routinely reviewed and re-evaluated each and every expense: personnel, technology, supplies, rent and marketing. We developed significant skills at managing our expenses. We required every expense request to be accompanied by how the payment would add value.

Early on, we sought to limit the cost of personnel—and we still do—but one thing we learned was that good personnel makes all the difference in our ability to function in accordance with our core values of cutting-edge legal services delivered with efficient and effective technology and client service. We completely restructured our personnel budget and compensation system in a way that has resulted in revenue increases that have outpaced our personnel cost increases.

The articles in this Finance issue address subjects that impact firm financial management. Timothy Corcoran, in “Optimizing the Law Firm Ecosystem,” explains why many law firms have been able to succeed historically despite not always having experienced financial leaders. He offers insight into the business drivers that are available to law firms to improve performance and modernize. Do you have nightmares about walking in one day to find that your firm administrator has just quit? Cynthia Thomas’ article, “Succession Planning for Your Next Firm Administrator,” offers guidance on the planning necessary for smooth succession for firm administrators. Ronny Loew follows up with “Remain on Firm Servers, or Leap into the Cloud?” in which he elaborates on the various ways that firms can move to the cloud and reduce the cost and frustration of having a server in their offices. In “Are Your Biggest Clients Really Your Best Clients?” Jeff Schwarz assists lawyers in rethinking how to go about recognizing (and optimizing) the clients that are best for a firm’s business. Corey Veneziano and Stephen Fuller, in “TCJA Tips for Law Firms,” summarize the key effects the new Tax Cuts and Jobs Act will have on law firms. Finally, Christopher Anderson discusses how a firm can rethink the meaning of profit and prioritize it in accordance with its collective wishes in “Putting Profit First in Your Firm and for Your Clients.”

Mary E. Vandenack is a founding and managing partner of Vandenack Weaver LLC, in Omaha, Nebraska. She is the editor-in-chief of Law Practice.