Client size and profitability--do they go hand in hand?

• Author: Satkunas, Kris

Concentrate on your key clients--a familiar mantra to many a law firm manager looking to boost the bottom line. But which clients should a firm designate as key? Where do you draw the line?

Firms derive the vast majority of their work from their largest clients. But an ironic--and sometimes overlooked--reality is that if a firm aims its focus too narrowly at only the very largest of its clients, it may miss opportunities to target clients that actually tend to be the firm's most profitable, if not the biggest. This premise may sound contrary to the conventional wisdom. The answer to this conundrumlies in a careful analysis of client profitability by client size--in other words, the amount of work a client delivers to the firm. A recent study Redwood Think Tank undertookunderscores the analytic value of tracking profitability by ranking clients according to size. We looked at 25 law firms, using data concerning client size and profitability.

We know from prior studies that at most law firms, 90 percent of firm revenue comes from the top 20 percent of firm clients. While most call this the 80/20 rule, we previously have discovered that at large firms , i.e., those with several thousand clients or more , closer to 90 percent of their revenue comes from 20 percent of their clients. (See Fig. 1: Cumulative Revenue by Client Decile.) But given that at most large firms, 90 percent of their work comes from 20 percent of their clients, does 90 percent of their profit come from that same 20 percent of their client base? In other words, by focusing solely on client size, can a firm proportionately increase its bottom line?

[FIGURE 1 OMITTED]

Concentration at the Top

To gain a better understanding of just how much work was concentrated among the top clients of the firms in our study, we turned to a tool we often employ: client decile rankings. We break a firm's client base into ten deciles, so that Decile 1 contains the top 10 percent of the firm's largest clients, Decile 2 the next 10 percent, etc.

This simple approach is a powerful way to hone in on a firm's most crucial relationships. Decile 1 alone accounts for the vast majority of a firm's billable hours--nearly 80 percent. By contrast, the clients in Decile 10 typically bring in less than an hour of work a year. We further broke down the clients within Decile 1, i.e., the clients that account for the vast majority of billable work. For the 25 Redwood benchmarking firms, we learned that the top...