If your firm's profit margin is not 40% or more, it should be. Having examined the finances of dozens of law firms in my marketing work, I've seen that successful firms make 40 cents or more on every dollar collected.
If your firm doesn't have this margin, it's time to focus on cutting expenses and boosting your realization rate. You also need a good marketing plan to upgrade your clients so you can charge higher rates.
I advised a large law firm that has annual revenues in the hundreds of millions of dollars. Their profit margin is +42%, yielding an average partner compensation of $550,000. This is a really nice income. If you're carrying all your clients problems around in your head all the time, you deserve this income. It doesn't matter what size your firm is, you can earn this much.
Here's how the firm did it over the last four years:
- Total revenues grew 46%. They have a business development plan and are pursuing it
- Full-time employees grew only 22%. This, along with office space, are the biggest expenses of law firms. At typical firms, expenses grow at the same rate income grows.
- Their realization rate is 90% and increasing. Most firms would love to take home this percentage of fees billed.
- The firm charges high rates for sophisticated work. This means they can be a "lifestyle" firm where the partners bill only 1,500 hours and associates bill 1,700 hours per year. This proves you don't have to work at a dreadful sweatshop to be prosperous.
- They have low turnover and have cracked to the code to retaining women lawyers.
Most importantly, the firm has a written vision for the future, a marketing strategy and a well-articulated brand message. Without these, the revenue would not be possible.