Benchmarking is not even close to the answer to most small law firm low profitability and resulting poor financial health issues…

Robservation…There is a big future for small legal firms, but most will need to make some basic changes to the approach they bring to all major aspects of running their business.

This edition is a heads-up about looking for the solutions in benchmarking.

A key danger inherent in benchmarking by small legal firms is that because the vast majority of such firms do not make genuine profits** owners and managers can be looking for answers and practical steps to take to improve the financial health of the firm in one of the worst possible places!

It would be immeasurably more beneficial to compare your practice against small legal firms that are not unusual in size, location, work types, employee:Principal ratio, etc., but have exceptionally good profitability and financial health nevertheless.

As a result they:

·????? Provide owners with strong returns for their investment (well beyond the reasonable commercial salaries they could get elsewhere)…

·????? Provide employees with well-remunerated, stable, employment with stimulating work, rapid career development, and professional satisfaction…

·????? Are demonstrably able to be sold for prices that are considered highly unusual in the legal profession for small practices (they’re unusual simply because the plethora of poorly-performing firms aren’t worth much, and nor should they be)!

So what’s the secret to these unusual small legal firms’ success?

The “secret formula” ironically is not a secret…it’s fundamental common sense to anyone who truly understands the essentials of how all small law firms need to operate (and how the best actually do)!

It requires the owners to have sufficient basic financial literacy to run the practice as you would any other quality small business, making the necessary minor adjustments that are required because it is a professional small business.

Financial literacy in the small law firm goes way beyond how most consultants and ChatGPT describe it.

It also involves the critical issue I identified 36+ years ago, which is the exceptional waste occurring as a result of valueless time that has been purchased by the firm from employees but is not being utilised at all, or is being utilised very poorly.

This black hole, invisible to most, but clearly identifiable to the initiated, is what cruels profits in most small law firms.

?**Any positive difference between revenue and expenses is usually described as profit before Equity Principals Salaries.

Given that Equity Principals are very often THE major contributors to a small practice, in revenue and time/skills invested in all aspects of management, a useful calculation of the financial performance of a small law firm MUST be reviewed through the lens of some common sense, including commercially reasonable salary packages in expenses.

If we consistently do that we will never again see for example as I did recently a $20,000 difference between revenue and expenses described as a profit, of any kind.

In pretty well every small law firm in existence in the Western world the reality of that $20,000 number after Equity Principals Salaries is a loss, and a pretty big one at that…for a Sole Practitioner it would typically be about $180,000 annual loss. Clearly unsustainable and a major stressor for owners and other stakeholders.

It is also an existential threat to the legal profession as a whole because it impacts client service and experiences and drags down "the brand".