Why Law Firms Struggle with Profitability Even When Revenue Looks Strong

I spoke with John Jakovenko, the founder of Jakovenko Group, a law firm consulting company focused on operational excellence, financial clarity, and scalable growth. We discussed the biggest operational blind spots facing small and midsize law firms, why firms struggle with profitability even when revenue looks strong, how law firms can implement KPIs, and the first system managing partners should fix.

Episode Transcript

(00:01):
Welcome to Reinventing Professionals,a podcast hosted by industry analyst
Ari Kaplan, which shares ideas,guidance, and perspectives from market
leaders shaping the next generationof legal and professional services.
This is Ari Kaplan, and I'm speakingtoday with John Jakovenko, the founder

(00:21):
of Jakovenko Group, a law firm consultingcompany 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 andthe genesis of the Jakovenko Group
I spent nearly 20 years workinginside law firms in an operational

(00:43):
and a financial capacity, a lot inleadership roles of Am Law 200 firms.
And what I saw over and over was thatincredibly talented lawyers were very
successful in what they did, what theycould do, but they weren't very good
at running their fragile businesses.
They know how to win cases, serveclients but the operational side, the
staffing issues, the financial visibilitysystems is a big one we run into.

(01:06):
They often, when they're growing fast,they improvise, and I saw there was a
need out in the market for, a higher levelCOO to come into these smaller firms and
help them out, but on a fractional basis.
So Jacovanko Group wascreated to solve that problem.
We work with law firms as fractionallegal operations partner, help them
install a structure and visibilityneeded so partners can focus on growth

(01:26):
and clients instead of constantlymanaging that internal chaos.
So to help them freeup their time as well.
What are the biggest operational blindspots facing small and mid-size law firms?
One of the biggest operationalblind spots is partner time.
In many firms, partners are doing anenormous amount of operational work,
managing staff issues, answering internalquestions, troubleshooting workflows

(01:49):
that they don't even know how to fix.
And they don't realize how much timeit'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 theirprofitability specifically when it comes
to the individual matters, practiceareas and are their staffing models, how
they're set up now, actually profitable?
So they sh- they wave around the shinyrevenue, but that gets lost sometimes,

(02:13):
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 profitabilityeven when revenue looks strong?
A lot of times revenue hides inefficiency.
A firm can grow revenue for yearswhile mar- margins are, shrinking.
Partners will add lawyers, cases, increasetheir marketing spend, but the operational

(02:35):
structure doesn't evolve to fit that.
They don't have the systems in placefor their scaling, for their growth.
And so it, it results in margincompression more work, more complexity,
but not necessarily more profits.
I work with firms who, they'reexcelling in revenue every year,
but they're not bringing that, theirpartner draw is not increasing.
Their bonuses for themselves atthe end of the year aren't coming

(02:56):
in where they think it should, andthat's why they struggle with that.
And if they understood profitabilityand how the revenue ties, it's
they'll, be able to take onmore at the end of the day.
What does it actually mean to work onthe business instead of in the business?
Working in the business, , that'sdoing the client work.
Working on the business is designingthe system that delivers the work.

(03:17):
Things like the staffing structure,financial visibility, workflows,
that decision-making process.
The challenge, and we know this, is mostpartners 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, theydon't step back and see how the firm
should run, and it's not their fault.

(03:38):
We are prof- there, there areprofessionals out there such
as myself and others, countlessprofessionals that do this for a living.
And Fortune 500 companies havetheir suite C-suite, law firms
need to have that as well.
So that, that's one of the bigthings 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.

(03:59):
It's a buzzword and a term, but they needto be used to create clarity, not control.
When a, an attorney or even a staffmember hears about a KPI, they think,
"Great, big brother's looking overme." It makes metrics feel like
surveillance, but, people resist that.
But when a KPI, when it's tied tosomething they understand, like the
success of the firm or how theirrole contributes to the overall

(04:20):
profitability or the revenueswe're bringing in that month it's
a different scenario, So you gottamake them understand what success is.
So it's the billable expectations, theworkflow milestones, the case progress
reports, checking in with clients.
It actually ends upreducing stress in the end.
A good KPI structure removesambiguity and it doesn't add what
people might think is bureaucracy

(04:40):
How can leaders overcome anyresistance to implementing KPIs?
Again, it goes back to lettingpeople know how they fit into
the grand scheme of things.
I had a firm where we sat and did aretreat 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 rolledout three months of KPIs for each

(05:01):
practice area, each attorney, eachparalegal, and each staff member.
And we looked at the big picture of thefirm and tied each one of those together.
So the attorney had both a collectionsKPI, but also a billing KPI.
So the billing was hourly based, thecollections was money based, So those
two things for each attorney tied intoour overall goal for that quarter.

(05:23):
And what we did is we had a meetingwith everybody, and we sat them down,
and we explained the KPIs so everybodycould see it in an open forum.
So they understood, "Okay, wow, if I don'tperform or if I don't hit this metric,
whi-which is a doable metric, we're weas a firm are not gonna reach our goals.
And that in turn, I'm notgonna see a bonus potentially.
There might be no raises." Forthis firm specifically, billable

(05:46):
hour is their air they breathe.
That's their oxygen.
And that is what we had to showthem 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 hirea fractional chief operating
officer or administrative leader?

(06:07):
I saw this the other day.
It says when you are the person everyonecomes to with their problems, you are the
biggest problem," So if you're trying tosolve every problem, you are the problem,
and that's usually when it comes about.
That's usually when I get the call fromattorneys saying I, this is too much.
I wanna run a firm, and I, it'sbeen great, but now I'm at that
point where I can't do it all.

(06:28):
And if I wanna grow this firm andexpand and do the marketing I like to
do the legal work I wanna provide, Ineed some help." So it's when partners
realize that they're the bottleneck.
If they're spending time solving thoseproblems, the operational issues.
I worked… I had a call withemployment counsel for one firm where
they hadn't done their handbook yet.
And he's "I've been asking, the attorneyfor the changes to the handbook or

(06:49):
basic stuff about the firm so I canget that out for 'em." And that was
one of the things like, "John, youtook his handbook off my plate."
It's simple stuff like that, but whenthey 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 reclaimtheir time for that higher level items.
That's where they should be, and that'swhere the firm functions the best.

(07:10):
If a managing partner feelsoverwhelmed today, what's the
first system they should fix?
Usually overwhelm comes from whatI 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.

(07:30):
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'relooking at collections, you're
predicting what cash is going to be.
You should know what cash willbe 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 accountingfor law firms where we look at not the

(07:52):
direct costs, which are salaries thatsomeone has, but we also look at the
indirect costs, the admin staffing, therent, everything else, and we put that
together and come up with an hourly rate.
So if you are a bill, a firm that billsby the hour, we know exactly how much,
or you should know exactly how much yourattorney is costing you by the hour so

(08:13):
that you can set those billable hoursin a way where you're making money.
There's something called that wall, Sothat's your direct and indirect costs.
Once you get up to that,you're hitting into your wall.
You want to always begoing past that wall.
Your revenue, your collections needto be going past that wall, 'cause
past that wall is your profitability.
So when they're overwhelmed, it's becausethey don't have that clarity of vision,

(08:34):
and I think it comes down to that.
Once they have the financial clarityand understand that everything else
begins to fall in line because we createthe systems around that afterwards.
How do you see the practice of law insmall and mid-sized firms evolving?
Yeah, I'm gonna say the thing a lot ofpeople don't like because it's new, but
I love it and it's gonna, technologyis finally, I believe, at the place

(08:56):
where law firms can finally use iteffectively, So Lexis and Westlaw
were always there for research, butit was on the associate to research.
It was on the partner to make sure theyunderstood 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.

(09:18):
But there's so much, and we're at thetip of the iceberg of what AI can do.
From a marketing standpoint, I believeGoogle pay-per-clicks and Google Ads will
eventually go away, and we're gonna startseeing more searches through the LLM.
So our sites everything that has todo with the marketing for law firms,
I think is slowly gonna be moving intoAI-friendly space where the authority
is gonna be looked at by who's being,quoted, shown up in the AI type world.

(09:44):
It's gonna be a lot more AI-driven,so the firms who leverage that and
become the early adopters are gonna bethe ones who are gonna be successful.
The caveat with that is clientsare pretty smart, so they know that
we're using AI, and they're gonnawant some discounts on the bill.
So you've still got to prove howwhat you're doing does increase
efficiency, but also you have to havesome a value add where you can still

(10:08):
bill at that point that gets youpast 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 JohnJacovenco, the founder of Jacovenco
Group, a law firm consulting companyfocused on operational excellence,
financial clarity, and scalable growth.

(10:29):
John, thanks so very much.
I appreciate it.
Thank you
Thank you for listening to theReinventing Professionals podcast.
Visit reinventingprofessionals.com orarikaplanadvisors.com to learn more.