Why Law Firms Struggle with Profitability Even When Revenue Looks Strong

Welcome to Reinventing Professionals, a podcast hosted by industry analyst Ari Kaplan, which shares ideas, guidance, and perspectives from market leaders shaping the next generation of legal and professional services. This is Ari Kaplan, and I'm speaking today with John Jakovenko, the founder of Jakovenko Group, a law firm consulting company focused on operational excellence, financial clarity, and scalable growth. Hi, John. How are you?

I'm doing well. Thanks for having me It's my privilege. I'm looking forward to this conversation. So tell us about your background and the genesis of the Jakovenko Group I spent nearly 20 years working inside law firms in an operational and a financial capacity, a lot in leadership roles of Am Law 200 firms.

And what I saw over and over was that incredibly talented lawyers were very successful in what they did, what they could do, but they weren't very good at running their fragile businesses. They know how to win cases, serve clients but the operational side, the staffing issues, the financial visibility systems is a big one we run into. They often, when they're growing fast, they improvise, and I saw there was a need out in the market for, a higher level COO to come into these smaller firms and help them out, but on a fractional basis.

So Jacovanko Group was created to solve that problem. We work with law firms as fractional legal operations partner, help them install a structure and visibility needed so partners can focus on growth and clients instead of constantly managing that internal chaos. So to help them free up their time as well. What are the biggest operational blind spots facing small and mid-size law firms?

One of the biggest operational blind spots is partner time. In many firms, partners are doing an enormous amount of operational work, managing staff issues, answering internal questions, troubleshooting workflows that they don't even know how to fix. And they don't realize how much time it's costing them and costing the firm. Also visibility.

Many firms don't know their total, they may know their total revenue, but they're not going to know their profitability specifically when it comes to the individual matters, practice areas and are their staffing models, how they're set up now, actually profitable? So they sh- they wave around the shiny revenue, but that gets lost sometimes, so you don't know your profitability, and that's what's important 'cause that's what they get to take home. Why do firms struggle with profitability even when revenue looks strong?

A lot of times revenue hides inefficiency. A firm can grow revenue for years while mar- margins are, shrinking. Partners will add lawyers, cases, increase their marketing spend, but the operational structure doesn't evolve to fit that. They don't have the systems in place for their scaling, for their growth.

And so it, it results in margin compression more work, more complexity, but not necessarily more profits. I work with firms who, they're excelling in revenue every year, but they're not bringing that, their partner draw is not increasing. Their bonuses for themselves at the end of the year aren't coming in where they think it should, and that's why they struggle with that. And if they understood profitability and how the revenue ties, it's they'll, be able to take on more at the end of the day.

What does it actually mean to work on the business instead of in the business? Working in the business, , that's doing the client work. Working on the business is designing the system that delivers the work. Things like the staffing structure, financial visibility, workflows, that decision-making process.

The challenge, and we know this, is most partners would never, they didn't go to business school, they went to law school. And they never take that time, especially, when they're focused on production and delivering to the clients, they don't step back and see how the firm should run, and it's not their fault. We are prof- there, there are professionals out there such as myself and others, countless professionals that do this for a living. And Fortune 500 companies have their suite C-suite, law firms need to have that as well.

So that, that's one of the big things is, allowing them to step back and see how it can be run. That's the key. How can law firms implement KPIs? KPIs are interesting.

It's a buzzword and a term, but they need to be used to create clarity, not control. When a, an attorney or even a staff member hears about a KPI, they think, "Great, big brother's looking over me." It makes metrics feel like surveillance, but, people resist that. But when a KPI, when it's tied to something they understand, like the success of the firm or how their role contributes to the overall profitability or the revenues we're bringing in that month it's a different scenario, So you gotta make them understand what success is.

So it's the billable expectations, the workflow milestones, the case progress reports, checking in with clients. It actually ends up reducing stress in the end. A good KPI structure removes ambiguity and it doesn't add what people might think is bureaucracy How can leaders overcome any resistance to implementing KPIs? Again, it goes back to letting people know how they fit into the grand scheme of things.

I had a firm where we sat and did a retreat with the managing partner, and we said, "Here's where we are, here's where we wanna be, and let's start with three months." So we rolled out three months of KPIs for each practice area, each attorney, each paralegal, and each staff member. And we looked at the big picture of the firm and tied each one of those together. So the attorney had both a collections KPI, but also a billing KPI.

So the billing was hourly based, the collections was money based, So those two things for each attorney tied into our overall goal for that quarter. And what we did is we had a meeting with everybody, and we sat them down, and we explained the KPIs so everybody could see it in an open forum. So they understood, "Okay, wow, if I don't perform or if I don't hit this metric, whi-which is a doable metric, we're we as a firm are not gonna reach our goals. And that in turn, I'm not gonna see a bonus potentially.

There might be no raises." For this firm specifically, billable hour is their air they breathe. That's their oxygen. And that is what we had to show them how their oxygen feeds into that whole ecosystem of the firm.

So usually j- it's getting buy-in, but making them see how they're such, an important part of it. When is the right time to hire a fractional chief operating officer or administrative leader? I saw this the other day. It says when you are the person everyone comes to with their problems, you are the biggest problem," So if you're trying to solve every problem, you are the problem, and that's usually when it comes about.

That's usually when I get the call from attorneys saying I, this is too much. I wanna run a firm, and I, it's been great, but now I'm at that point where I can't do it all. And if I wanna grow this firm and expand and do the marketing I like to do the legal work I wanna provide, I need some help." So it's when partners realize that they're the bottleneck.

If they're spending time solving those problems, the operational issues. I worked… I had a call with employment counsel for one firm where they hadn't done their handbook yet. And he's "I've been asking, the attorney for the changes to the handbook or basic stuff about the firm so I can get that out for 'em." And that was one of the things like, "John, you took his handbook off my plate."

It's simple stuff like that, but when they become that person, a fractional operator can provide leadership structure, take away a lot, 20, 30, 40% of a partner's time and allow them to reclaim their time for that higher level items. That's where they should be, and that's where the firm functions the best. If a managing partner feels overwhelmed today, what's the first system they should fix? Usually overwhelm comes from what I would say is lack of visibility.

A lot of firms are making that decision, especially in the high growth stage, early growth stage based on instinct, It's not clear financial data. Data is accurate. Numbers don't lie. So when you have a consistent rhythm, as I call it, for your firm, you've created that operating system.

You're reviewing revenue, you're looking at collections, you're predicting what cash is going to be. You should know what cash will be on day one of the next month. You're looking at how much staffing costs. You're doing a good cost analysis.

In accounting terms, we do cost accounting for law firms where we look at not the direct costs, which are salaries that someone has, but we also look at the indirect costs, the admin staffing, the rent, everything else, and we put that together and come up with an hourly rate. So if you are a bill, a firm that bills by the hour, we know exactly how much, or you should know exactly how much your attorney is costing you by the hour so that you can set those billable hours in a way where you're making money.

There's something called that wall, So that's your direct and indirect costs. Once you get up to that, you're hitting into your wall. You want to always be going past that wall. Your revenue, your collections need to be going past that wall, 'cause past that wall is your profitability.

So when they're overwhelmed, it's because they don't have that clarity of vision, and I think it comes down to that. Once they have the financial clarity and understand that everything else begins to fall in line because we create the systems around that afterwards. How do you see the practice of law in small and mid-sized firms evolving? Yeah, I'm gonna say the thing a lot of people don't like because it's new, but I love it and it's gonna, technology is finally, I believe, at the place where law firms can finally use it effectively, So Lexis and Westlaw were always there for research, but it was on the associate to research.

It was on the partner to make sure they understood the associate's research. AI is changing the game. You see it for PI firms when it's, doing their MedCrons and also helping out with responding to discovery. But there's so much, and we're at the tip of the iceberg of what AI can do.

From a marketing standpoint, I believe Google pay-per-clicks and Google Ads will eventually go away, and we're gonna start seeing more searches through the LLM. So our sites everything that has to do with the marketing for law firms, I think is slowly gonna be moving into AI-friendly space where the authority is gonna be looked at by who's being, quoted, shown up in the AI type world. It's gonna be a lot more AI-driven, so the firms who leverage that and become the early adopters are gonna be the ones who are gonna be successful.

The caveat with that is clients are pretty smart, so they know that we're using AI, and they're gonna want some discounts on the bill. So you've still got to prove how what you're doing does increase efficiency, but also you have to have some a value add where you can still bill at that point that gets you past what we spoke about, that wall. So it's gonna be AI-driven, and those early adopters are gonna be the ones who succeed. This is Ari Kaplan speaking with John Jacovenco, the founder of Jacovenco Group, a law firm consulting company focused on operational excellence, financial clarity, and scalable growth.

John, thanks so very much. I appreciate it. Thank you Thank you for listening to the Reinventing Professionals podcast. Visit reinventingprofessionals.

com or arikaplanadvisors.com to learn more.