‘Law as a Business’ – How do law firms make money?

Those of you who have been following our Graduate Team Twitter Feed will have noticed we have been running a regular campus event using the hashtag #lawasabusiness (LaaB) but what is this all about?

The idea behind LaaB was to  give students an insight into some of the key business concepts that lawyers need to think about in order  to ensure that their firm remains profitable.  This is something that applicants for vacation placements and training contracts often know relatively little about and yet it is these concepts that determine why law firms are organised the way they are; and why many firms have been carefully looking at the number of trainee solicitors they recruit.  If you understand these concepts then your Commercial Awareness will be greatly enhanced.

Unfortunately we cannot deliver our campus presentations everywhere but we wanted to give those students who were unable to meet us on campus the benefit of this information.  You can download a set of the slides here and while you will be unable to benefit from the full commentary that accompanies them I have sought to provide a summary of  the salient points below.

Section 1 – Which Business Model?

Law firms traditionally started out as partnerships but many have now adopted the Limited Liability Partnership (LLP) model.  Some firms are now taking advantage of the Legal Services Act 2007 and are establishing themselves as Alternative Business Structures (ABS).  Different business models have their own respective advantages and disdvantages, with the firm’s own individual strategy and goals dictating which model may suit it best (see slide on ‘possible responses’).  It is important that candidates are aware how these different business models may affect their own future careers as well as the future of the firms they are applying to.

Section 2 – How do law firms make money?

Law firms are essentially like any other business they try to maximise their revenues while minimising their cost base in order to increase their profitability.  Key factors affecting law firm profitability (the RULES) can include: Realisation; Utilisation; Leverage; Expenses; and Speed of Working Capital.  If you can keep these factors under control then the firm will make a healthy margin.  Most firms tend to report their profitability in terms of Profit per Equity Partner (PEP).

Section 3 – Standing out from the crowd

What else are law firms doing to differentiate themselves from one another?  The ‘more for less’ agenda is clearly important with clients expecting firms to help them reduce their legal spend and offer certainty through fixed fee arrangements, rather than the traditional hourly rate, but is this all they want?  Price remains a key factor but there are other factors that would encourage a client to choose one law firm over another eg ‘value added services’ or sectoral expertise.  Some of Pinsent Masons recent high-profile instructions have resulted from the combination of innovative pricing structures and a deep understanding of the client organisation .  We have also looked to offer new services such as Vario and Cerico to complement existing resources such as Out-law.com and EmploymentLaw+

The legal sector is changing rapidly, I hope you find the information useful and that you can use it to enhance your application forms and performances at interview!

The Pinsent Masons Graduate Team