The manner in which law firm leaders measure profitability has the potential to have a profound impact on behavior and motivation, particularly as more firms integrate this metric into their operational management and compensation systems. Yet the nuance involved in establishing profitability metrics opens the door for even the most well-intentioned to encourage and incentivize the wrong behaviors. In a competitive market, firms chasing the false profits of production will quickly be left behind. As law firms continue to embrace and deploy profit metrics, it is essential lawyer leaders—and not just their business advisers—truly understand the implications and risks involved in their decisions, every step of the way.

Pricing Pressures Open the Door

Law firms are early in their trajectory of understanding and applying profitability metrics. The relentless pressure from clients is forcing law firm leaders to better understand underlying performance. Client requirements for greater efficiency, flexible pricing options and reliable quality metrics (perhaps alongside tepid demand growth) have provided the initial impetus for exploring profitability, most often at the matter level. For the most part, this stage is where most law firms remain. Matter profitability and, relatedly, the improvement of matter management tools and techniques are today’s most common profit-measuring activity. We estimate fewer than a third of AmLaw 200 firms are actively, systematically measuring and using matter profitability firmwide.