RETURN TO MAIN Profitability Analysis – Delivering Value and Obtaining Buy-in Doug Doerfler Stinson Morrison Hecker LLP

RETURN TO MAIN What is the firm seeking to accomplish? What are the goals? Profitability drivers Strategic plan Rate analysis Matter budgeting Practice division performance Client analysis Responsible attorney analysis Cross selling Inventory management Revenue budgets

RETURN TO MAIN Define revenue Standard value is the goal Accrual vs. cash Use accrual (expected) Based on client/matter experience Changes improve expected amount Standard value adjustments: –Bill and collect risk –Write up (down) of hours or rates –AR write offs

RETURN TO MAIN Define costs Direct costs –Base compensation –Benefits Cost write downs and cost write offs Indirect costs (overhead) Cost of capital Bonus compensation

RETURN TO MAIN Profit drivers Billed Rate Hours Billed Billed Amount Periodic Billed Amount Bill Speed (days) Collect Speed (days) Headcount Leverage (Index) Billing Realization % vs. Standard

RETURN TO MAIN Balancing Balance to the time and billing system –Balance worked hours and amounts –Balance billed hours and amounts –Balance fees collected –Balance write downs and write offs –Balance firm totals, client totals, and attorney totals Balance compensation to payroll records or the general ledger

RETURN TO MAIN Goals Firm standards –Billing realization –Bill speed –Collect speed Practice division goals –Incentive for Practice Chairs –Show only comparisons to firm –Develop a one page monthly scorecard –Provide detailed data quarterly

RETURN TO MAIN Challenges Terminology Definitions Results dont agree or balance Practice division assignments Too much data Political roadblocks Client view vs. attorney view

RETURN TO MAIN Solutions Clearly define the purpose –Management tool –Not the accounting system Get invited to meetings Team up with Marketing Sell it to the Managing Partner, Finance Committee, Executive Committee Recruit a partner sponsor EDUCATE!

RETURN TO MAIN Where to start Client profitability –Prepare an 80/20 report Prepare a standard template Show at least two different periods Suggest areas for improvement Focus on the future, not the past Create a what if spreadsheet template

RETURN TO MAIN Create value Tie profitability to rate analysis –Use to adjust rates –Use to suggest alternative billing options –Create an alternative billing spreadsheet template Tie profitability to matter budgeting –Use budgeting to prevent write offs –Use budgeting to manage matters effectively Tie profitability to firms strategic plan

RETURN TO MAIN SCORECARD FY08 GoalPotential FIRM FY06 FY07 FY08GoalInc/DecRevenue Worked Rate Std Rate Standard Amount (Std Hours x Std Rate) 210,000,000 Billed Rate % 17,647,059 Hours Billed 708, , ,5000.9% 1,687,500 Billed Amount 170,000, ,000, ,500, % Bill Speed % 936,986 Collect Speed % 1,035,616 Leverage Index % Billing Realization % vs. Std90.0%92.0% 95.7%4.0% 6,624,000 Total 27,931,162

RETURN TO MAIN Glossary of Terms Billed Rate Rate at which client was actually billed Billed Hours Number of hours billed of the hours worked Billed Amount Total amount billed of the work performed in the period. Hours Billed * Billed Rate Bill Speed Dollar weighted average, weighted on the Billed Amount, of the number of days from work date to bill date Collect Speed Dollar weighted average, weighted on the Collected Amount, of the number of days from bill date to collect date Adjusted Headcount Used to indicate part-time timekeepers. FT = 1 and PT =.50 Leverage Index From 0 to 100, an annual index of timekeeper Direct Cost Rates (using Standard Hours) Billing Realization % vs. Std Billed Amt as a % of Std Amt (for billed records only).

RETURN TO MAIN Goals Standard Amount (Std Hours x Std Rate) For all timekeepers assigned to a division, their target hours * their standard rate Billed Rate A 7% increase over FY07 is the goal. For FY07 the firm increase was 8.2% over FY06. Hours Billed (Billed Amt/Billed Rate) For all timekeepers assigned to a division, their billed amount / their billed rate Billed Amount (95% of Std Amount)95% of the standard amount Bill Speed A decrease of 5%. The goal is to decrease the number of days between worked date and billed date. Collect Speed A decrease of 5%. The goal is to decrease the number of days between billed date and collected date. Leverage Index A maximum increase of 10% up to firm goal of 61 The goal is to provide client service a the lowest cost. The higher the Index increases, the better. Billing Realization % vs. Std A minimum increase of 2% that may exceed 95% or a maximum increase of 6% up to 95%

RETURN TO MAIN The end