Although law firms have been one of the most profitable business models in existence for decades, the profitability seems to be going down due to the increasing commoditization of legal expertise. To help legal firms look beyond the current business model, Jaap Bosman highlights a simple point - law is a business like any other business.
The leading strategy consultant in the legal sector explains in ABA Journal that the business model of law firms is quite easy to understand. He draws similitude to the retailer Poundworld that has more than 350 stores in the U.K., selling most merchandise at 1 pound.
Bosman extracts the view that although buying goods and selling them at a profit is the most elementary form of business, Poundworld is focused on the return on investment in all it does. However, he points out that the business model of law firms is much simple compared to Poundworld's - revenue minus costs equals profit.
According to InHouse Blog, the only thing that needs to be essentially understood by the law firms is the costs are fixed in the short term. The cost structure that predominantly comprises of wages, rent, and information technology infrastructure, do not vary with the revenue.
Having said that, the fluctuations in revenue will have a direct and leveraged effect on profit, which will directly affect the income of lawyers since profit is divided between the partners. Business law firms will have a cost percentage of about 66 percent and a profit margin of 34 percent at a market average, indicating a 10 percent decrease in revenue will result in a 30 percent decrease in profit.
This is why legal departments should be worried about commoditization. Much courage, sense of business and entrepreneurial skills are required in the process of adapting their business model to newer changes. Bosman recommend lawyers and law firms to draw inspiration from the retailer Poundworld, where business is still practiced in its most elementary form.
