Stop Setting Revenue Goals Without Profit Goals

Law firms love revenue goals.

"We want to hit $5 million next year."

"We want to grow 20%."

"We want to reach $10 million in three years."

"We want to double."

There's nothing inherently wrong with any of those goals. Revenue matters. Growth matters. A firm that consistently grows is usually doing a number of things right.

But whenever I hear a revenue target, I want to know what economic outcome the firm expects that revenue to produce.

Because $10 million in revenue can describe two completely different businesses.

One may have strong utilization, appropriate leverage, disciplined compensation, healthy collections, good pricing, efficient operations, and enough profit to invest aggressively in its future.

Another may have the same revenue while carrying too much payroll, paying work at the wrong level, absorbing excessive write-offs, spending inefficiently on marketing, overcompensating certain roles, and distributing so much cash that the business has very little left to reinvest.

Same revenue.

Very different businesses.

That's why I think revenue growth without a profit target is an incomplete business strategy.

Revenue Tells You How Big the Firm Is. It Doesn't Tell You How Good the Economics Are.

I've worked with two law firms producing almost exactly the same annual revenue.

One produces nearly $2 million in profit.

The other barely breaks even.

The second firm has substantial partner draws, but even after accounting for those draws, they don't come close to explaining the difference between the two businesses.

That comparison has stuck with me because it makes the limitation of revenue so obvious.

If two firms with nearly identical revenue can produce dramatically different economic outcomes, revenue alone can't tell us very much about the quality of either business.

And yet revenue is often the primary number around which law firms build their annual plans.

The firm made $7 million this year, so let's target $8 million next year.

Fine.

But before we celebrate the additional million dollars, we need to understand what it will cost to produce it.

Growth Has a Cost-to-Serve

Revenue doesn't appear by itself.

A firm that wants to add $2 million in revenue may need additional attorneys to perform the work. Those attorneys may require paralegals or support staff. The firm may need to increase marketing spend to generate demand, add recruiting costs to find the talent, invest in technology, expand office space, or add management infrastructure as the team becomes larger.

Partners may spend more time supervising, reviewing, selling, or managing. You can dive deeper into this issue in our previous blog, “The Most Expensive Decision You Make Every Day is Where your Attorney’s Spend Their Time.”

Administrative complexity increases.

The firm may also need more working capital because many of those expenses occur before the additional revenue is collected.

This is the part of growth planning that gets much less attention than the revenue target itself.

Suppose a firm generates an additional $1 million in revenue next year.

If producing that revenue requires $500,000 of incremental cost, that's one economic result.

If it requires $900,000 of incremental cost, that's an entirely different result.

Both firms can announce that revenue grew by $1 million.

They did not create the same amount of value.

Growth has to pay for itself.

That doesn't mean every new initiative needs to be maximally profitable immediately. There are legitimate reasons to make investments that depress short-term profit in exchange for future growth. A firm may intentionally hire ahead of demand, enter a new market, invest heavily in technology, or build infrastructure before revenue catches up.

But that should be a conscious investment decision.

There is a significant difference between intentionally accepting lower profit while building something valuable and discovering after the fact that revenue grew while profitability quietly disappeared.

Start With the Economic Outcome

Instead of beginning annual planning with "How much revenue do we want next year?" I think firms should begin one level deeper.

What kind of business are we trying to build?

What level of profitability should this business reasonably produce?

How much capital do we need to retain for future investment?

What should owners expect to receive from the business?

What capacity will be required to support the desired growth?

From there, you can begin building the operating model that produces the revenue target.

If the firm wants to reach $10 million, what attorney capacity is required to deliver $10 million of work?

What utilization does that require?

What rates?

What realization?

What leverage?

What staffing structure?

What marketing investment?

What overhead?

What partner compensation?

What practice mix?

What collection performance?

Now "$10 million" means something.

It's no longer simply a number at the top of a spreadsheet. It is the revenue required to support a specific business model and economic outcome.

That is a much more useful target.

Not Every Dollar of Revenue Has the Same Economic Value

This is one of the reasons I think law firms need to talk more about the quality of revenue.

Consider two hypothetical clients who each generate $500,000 annually.

The first client pays reasonable rates, pays invoices promptly, allows work to be appropriately delegated, requires relatively little partner intervention, works well with the team, and produces matters that fit the firm's existing expertise and staffing model.

The second negotiates rates aggressively, requires extensive partner involvement, pushes back on invoices, generates write-offs, creates unusual administrative demands, pays slowly, and routinely requires senior attorneys to perform work that should be handled at a lower level.

Both clients generate $500,000.

Those are not economically equivalent relationships.

The same principle applies at the firm level.

Revenue produced through healthy rates, good realization, appropriate leverage, strong collections, efficient processes, and the right staffing structure is fundamentally different from revenue that requires excessive labor, discounts, write-offs, partner intervention, or overhead.

That's why "more revenue" isn't enough of a strategy.

The goal should be more of the right revenue, produced through the right operating model, at an appropriate profit.

Revenue Goals Can Drive Exactly the Behavior You Asked For

Metrics shape behavior.

If leadership tells the organization that the overriding goal is to reach $10 million, people will naturally make decisions that help the firm reach $10 million.

That sounds like a good thing until you look at some of the decisions revenue growth can encourage.

The firm may keep clients it should transition because the revenue is difficult to give up.

It may hire before it understands whether the existing team is being used efficiently.

Partners may discount rates to win work because revenue still counts regardless of margin.

Marketing may optimize for lead volume rather than profitable client acquisition.

Compensation plans may reward production without adequately considering the economics of that production.

A practice area may appear successful because it generates substantial fees even though the cost of delivering the work is disproportionately high.

Nobody involved has to be making an irrational decision.

They may simply be optimizing around the number leadership told them mattered most.

That's why financial targets need to reflect what the firm actually values.

If we care about profitable growth, the scorecard needs to include profitability.

Hiring Should Be Part of the Profit Model

One of the easiest ways for a growing firm to lose margin is through headcount.

The firm gets busy, people feel stretched, and the natural response is:

"We need another attorney."

Sometimes that's absolutely correct.

But headcount should be modeled as an investment rather than treated as an automatic response to busyness.

If the firm plans to add three attorneys next year, I want to understand the economics of those hires.

What will each attorney cost fully loaded?

How quickly should they ramp?

What work will move to them?

What utilization should we expect?

What revenue should their capacity support?

Will hiring them improve leverage by moving work away from more expensive attorneys?

Will they require additional support staff?

How much recruiting expense will the firm incur?

What happens if demand arrives three months later than expected?

And perhaps most importantly, do we actually need additional capacity, or is existing capacity being poorly allocated?

I've worked with firms where shifting work more appropriately across the attorneys already on staff increased utilization by roughly five percent firmwide and added approximately $500,000 to the bottom line without adding headcount.

That's why "everyone is busy" isn't enough information to support a hiring decision.

Growth planning should connect staffing to capacity, capacity to revenue, and revenue to profit.

Otherwise payroll can grow faster than the economics supporting it.

Leverage Changes the Economics of Growth

Two firms can produce the same amount of legal work with very different staffing models.

If partners are performing substantial amounts of work that associates could appropriately handle, the firm may generate excellent revenue while wasting some of its most expensive capacity.

If associates are doing work that could appropriately sit with paralegals or other professionals, the same problem moves down a level.

That doesn't mean every matter should be staffed as cheaply as possible. The right person for the work isn't automatically the least expensive person.

But there is an economic cost when work consistently sits at the wrong level.

Good leverage allows the firm to use expensive capacity where it creates the most value.

Partners can focus more time on sophisticated legal work, important client relationships, supervision, and business development. Associates gain experience. Support professionals operate closer to the top of their capabilities.

The firm doesn't simply become more efficient.

It creates a better economic engine for growth.

That's why I would rather see a firm improve leverage and create capacity inside the team it already has before automatically solving every growth problem with additional payroll.

Pricing Matters More as You Grow, Not Less

Another way firms can grow revenue while weakening economics is by allowing pricing discipline to lag behind the business.

Rates that worked when payroll and overhead were materially lower may no longer produce the same margin.

Flat fees that were established years ago may no longer reflect the amount or level of labor required to deliver the work.

Discounts accumulate.

Scope expands.

Write-offs become normalized.

The firm stays busy, revenue grows, and leadership assumes the model is healthy because there is plenty of work.

But more volume doesn't fix weak unit economics.

It magnifies them.

A firm doing 1,000 matters at an inadequate margin doesn't necessarily need 1,200 matters.

It may need to understand why the first 1,000 aren't producing the economic result they should.

This is why growth planning and pricing strategy can't live in separate conversations.

Partner Compensation Can Consume Growth Before the Business Benefits From It

Partner compensation deserves particular attention because it is often one of the largest economic levers in a law firm.

A compensation model can function exactly as designed and still produce the wrong economic outcome for the business.

If compensation heavily rewards origination or individual production without enough consideration for service, management, profitability, leverage, or the capital needs of the firm, the business can generate substantial revenue while retaining very little economic benefit from it.

That doesn't mean partners should simply be paid less.

It means compensation has to coexist with the business the partners say they want to build.

If the firm wants better technology, stronger administrative leadership, additional marketing, improved reporting, better recruiting, larger cash reserves, and the ability to invest ahead of growth, those things require capital.

A firm cannot distribute nearly every available dollar and simultaneously expect the business to fund every strategic priority.

There also needs to be a conceptual distinction between compensation owners receive for the work they perform and the economic return they receive because they own a profitable enterprise.

Those are related, but they aren't identical.

When they're treated as the same thing, it becomes difficult to understand whether the underlying business is actually creating value.

Profit Isn't Just About What the Owners Take Home

This is where I think conversations about profit sometimes get unnecessarily uncomfortable.

Profit can sound like a conversation about owner greed.

That's a very narrow view of what profit does.

Healthy profit gives a firm options.

It allows leadership to recruit an exceptional attorney before every dollar of that person's future work is guaranteed.

It allows the firm to invest in technology that may take time to produce a return.

It creates room for raises and bonuses.

It funds marketing.

It allows the business to withstand the loss of a major client without immediately making desperate decisions.

It creates reserves for a difficult quarter.

It allows the firm to invest in training, management, infrastructure, and opportunities that weren't included in the original budget.

A firm with strong profit can make decisions from a position of strength.

A firm operating on extremely thin margins has fewer choices, regardless of how impressive its revenue looks.

Profit isn't what is left after you build the firm. Profit is part of what allows you to build the firm.

Don't Confuse Intentional Investment With Poor Profitability

There are times when I am perfectly comfortable seeing profitability decline.

If a firm deliberately hires ahead of growth because it has strong evidence that capacity will be needed, that may be a smart investment.

If leadership decides to build a new practice area and understands that the first year will require significant investment, that's a strategic decision.

If the firm implements a major technology platform that creates significant one-time expense but should improve future operations, profit may temporarily decline.

The important part is that leadership understands why.

"We intentionally invested $500,000 this year in infrastructure we expect to support the next stage of growth" is very different from:

"We grew revenue 15%, but we're not entirely sure why there's no money left."

One is strategy.

The other is a warning.

Marketing Should Produce Economic Value, Not Just More Matters

The same thinking applies to marketing.

A firm can spend more, generate more leads, sign more clients, and increase revenue while producing a disappointing return on that investment.

That's why marketing ROI shouldn't end at lead volume.

The real chain is closer to:

Marketing Spend → Qualified Opportunity → Engaged Client → Revenue → Economic Value

If a marketing source produces large numbers of low-value matters that consume significant attorney capacity and produce poor margins, the revenue generated by that source can make the marketing look more successful than it actually is.

Likewise, if the firm's intake system is weak, increasing marketing spend may simply pour more opportunity into a system that isn't converting it effectively.

Growth decisions have to connect.

Marketing cannot be evaluated independently from intake, capacity, pricing, delivery, collections, and profitability.

The business is one system.

Overhead Isn't the Enemy Either

I also wouldn't solve this by declaring that the firm needs to minimize overhead.

I've written before about why I think that framing can be dangerous.

A good operations leader may be classified as overhead and still create enormous economic value.

The same may be true of a strong billing employee, intake professional, marketing leader, recruiter, or manager.

Cutting those positions can improve an expense ratio on paper while making the business worse.

The objective isn't the lowest possible cost.

It's the most productive cost structure.

I want to know what each major expense allows the firm to do.

Does it create revenue?

Protect revenue?

Improve collections?

Increase attorney capacity?

Reduce risk?

Improve leverage?

Strengthen client retention?

Allow higher-value employees to spend more time on higher-value work?

Growth requires investment.

The question is whether the investment produces an appropriate return.

Profitability Should Influence Which Growth You Pursue

Once a firm understands its economics, business development gets more intelligent.

Instead of saying, "We need more clients," leadership can identify what kinds of clients and matters it actually wants more of.

Which practice areas produce attractive economics?

Which client profiles fit the firm's staffing model?

Which matters can be delivered efficiently?

Which relationships generate repeat work without disproportionate administrative burden?

Where does the firm have strong expertise and leverage?

Which work creates opportunities for associates to develop while freeing partners for higher-value activity?

Which revenue is actually worth pursuing?

This connects directly to client portfolio management.

One of the firms I'm currently working with discovered that roughly 90% of its revenue came from its top 50 clients, while the remaining 10% came from hundreds of clients. When we analyzed the economics, that long tail of revenue was estimated to be costing the firm more than $1 million annually.

Those clients produced revenue.

That didn't make them economically valuable.

Once you understand that distinction, "grow revenue" becomes far too simplistic as a business development strategy.

A Revenue Goal Should Be the Output of a Business Model

This is the shift I would encourage firms to make during annual planning.

Instead of building the plan like this:

Revenue Target → Hiring → Spending → See What's Left

build it from the economics backward.

Start with the business you're trying to create.

What economic result should it produce?

What level of investment and reserves does it need?

What revenue is required to support that?

What capacity will produce the revenue?

What staffing and leverage structure creates that capacity?

What rates and realization are necessary?

What marketing investment supports the required demand?

What overhead supports the organization?

What compensation structure aligns people with the desired outcome?

Now the revenue target is connected to the operating model.

It becomes a financial plan instead of a wish.

Profit Targets Create Better Management Conversations

Once leadership has an actual profitability expectation, monthly financial reviews become more useful too.

If revenue is on target but profit isn't, the conversation changes.

Where is the variance?

Payroll?

Marketing?

Write-offs?

Collections?

Partner compensation?

Pricing?

Overhead?

Practice mix?

Utilization?

Leverage?

The goal isn't to panic every time one expense category runs above budget. Businesses are dynamic, and there will always be variance.

The value is understanding what changed and why.

That is much more useful than getting to the end of the year, seeing that revenue grew, and wondering why the firm's financial position doesn't feel materially stronger.

Bigger and Better Aren't the Same Thing

There is nothing wrong with wanting a bigger law firm.

Growth can create tremendous opportunities for owners, employees, and clients.

It can allow a firm to attract better talent, serve larger clients, enter new markets, build deeper expertise, and create meaningful career paths for its people.

But growth is not inherently evidence of a healthier business.

A firm that grows 20% while adding disproportionate payroll, weakening leverage, increasing write-offs, taking on low-quality revenue, and compressing margin hasn't necessarily moved forward.

Meanwhile, a firm that grows 10% while improving utilization, strengthening pricing, increasing leverage, retaining more capital, and creating significantly more profit may have built a much stronger business.

That's why the question at the annual planning meeting shouldn't only be:

How big do we want to be next year?

It should be:

What kind of business do we want to have when we get there?

Set the revenue goal.

But set the profit goal first.

How ING Collaborations Helps Law Firms Build Profitable Growth

Revenue growth is exciting. But when a law firm grows without understanding the economics underneath that growth, more revenue can simply create a larger, more complicated version of the same business.

At ING Collaborations, I help law firms connect their growth goals to the operating model required to support them. That includes evaluating profitability, compensation, staffing, utilization, leverage, pricing, marketing ROI, overhead, client economics, and the financial reporting leadership needs to make better decisions.

The goal isn't simply to build a bigger law firm.

It's to build a better business—and make sure the growth you're working so hard to create is actually worth having.