Maximize Law Firm Profitability with Practice Area Analysis

By Debbie Foster, CEO, Affinity Consulting Group 

Moving Beyond Billable Hours 

Law firm profitability is often viewed in simplistic terms: the more billable hours attorneys log, the more profitable the firm becomes. But the reality of assessing profitability is far more nuanced. Profitability can be sliced and diced in several ways — by practice area, client, lawyer, and matter profitability, and more — and your firm has to determine what’s appropriate to analyze. 

That can get complicated, but my goal with this article is to help make profitability analysis feel doable by looking at just one example — practice area profitability. We’ll look at how you can use practice area information to make strategic decisions about resource allocation, maximizing your profit margins, and maintaining a healthy work environment for your attorneys and staff. 

Understand Attorney Cost Rates to Set a Profitability Foundation 

Before we can begin analyzing profitability by practice area, we must understand what it costs your firm to provide its services by determining each attorney’s cost rate. 

This is essentially the hourly cost of employing them, including salary, benefits, and overhead expenses such as office space and technology. This rate forms the foundation for assessing whether your firm is pricing its services appropriately and whether each attorney is contributing to overall profitability. 

Calculating attorney cost rates involves several components: 

• Base salary and benefits: The most straightforward cost is the attorney's salary, along with additional benefits like health insurance and retirement contributions. 

• Overhead allocation: Overhead includes office space, administrative support, technology costs, and other general expenses. Allocating these expenses to each attorney is essential for a true understanding of their cost. 

• Practice group specifics: Different practice groups may require varying levels of support or incur different costs. For example, a litigation group may need additional paralegal support compared to a transactional group, affecting the cost rate of attorneys in that practice area. 
  

Calculate the cost rate for each attorney by adding their salary and benefits to their share of overhead expenses. This will give you a baseline cost per hour for each attorney, which can then be compared to their billing rate to determine their contribution to profitability. 

Practice Area Profitability: Analyzing Where the Firm Thrives 

Now that you’ve established attorney cost rates, you're ready to analyze profitability by practice area. This is often a relevant category to assess within a firm because it can reveal valuable insights that might not be apparent from a high-level overview of your firm's financials.  

For example, a firm may appear profitable overall but harbor unprofitable practice areas that are being subsidized by more successful ones. This situation can lead to resentment among partners and potentially affect staff retention.   

Not all practice areas are created equal — some may generate substantial revenue but come with high costs, while others may be highly efficient profit centers. 

You can understand practice area profitability at both a high level and a granular level. By breaking down profitability by practice area, firms can identify which areas are driving the most profit and which may be underperforming. Here are some guidelines to approach this analysis: 

• Revenue vs. costs: Start by calculating the total revenue generated by each practice area. Then, subtract the costs associated with that practice area, including attorney cost rates, paralegal support, and other direct expenses. This will give you a clearer picture of each practice area’s profitability. 

• Attorney utilization: Consider the utilization rates of attorneys within each practice area. Are higher-cost attorneys working on lower-value matters? If so, reassigning that work to lower-cost associates could improve profitability. 

• Market rates and adjustments: The cost rate analysis also helps determine if the billing rates for specific practice areas are appropriate. If a practice area isn’t profitable, you can explore adjusting the rates or targeting different types of clients. 

You want to regularly assess the profitability of each practice area by tracking revenue, costs, and utilization rates. Adjust resource allocation to ensure the right attorneys are working on the right matters to maximize profitability. 

Leverage and the Concept of 'Highest and Best Use' 

Another crucial factor that impacts profitability is how work is allocated across the firm. The concept of “highest and best use” can help ensure that the right person is doing the right work at the right time. This is particularly important for maximizing profitability in practice areas with mixed levels of complexity. 

• Partner vs. associate work: Partners typically have higher billing rates but also higher cost rates. Ensuring that partners focus on strategic, high-value tasks while associates handle routine work can help improve profit margins. The key is to avoid having high-cost attorneys working on tasks that can be done just as effectively by lower-cost attorneys. 

• Utilizing technology and support staff: Law firms should also leverage technology and support staff to handle tasks that don’t require an attorney’s expertise. Choose law practice management software for time tracking, document management, and other administrative functions to reduce the amount of time attorneys spend on non-billable activities to further enhance profitability. 

Conduct regular reviews of workload distribution to ensure that partners, associates, and support staff are all working at their highest and best use. This will help optimize profitability while maintaining a balanced workload across the firm. 

Benchmarking and Profitability Tracking 

Benchmarking plays an important role in understanding whether your firm is performing as well as it should be. You can benchmark against both internal and external standards to identify areas for improvement and set realistic goals for growth. 

• Internal benchmarking: Compare the profitability of different practice areas, clients, and attorneys within your firm. Identify which areas are excelling and which need improvement. Then, use these insights to guide strategic decisions. 

• External benchmarking: Look at industry benchmarks for profitability, revenue per attorney, and other key performance indicators. This will help you understand where your firm stands compared to your peers and identify opportunities to enhance profitability. 

Use benchmarking data to set performance targets for practice areas and individual attorneys. This will help create accountability and ensure that everyone in the firm is aligned with profitability goals. 

Turn Insights into Action 

Maximizing profitability requires moving beyond increasing billable hours to taking a holistic approach. This should include understanding attorney cost rates first, and then analyzing a category that makes sense for your firm, such as practice area performance. With this combined cost rate at practice area data, you can begin allocating resources strategically — all to identify hidden opportunities for growth, make data-driven decisions, and ensure long-term profitability for the firm.