The New York Times reports today on big cuts at Citigroup. The article notes that the CEO called in all business unit heads and asked them “justify the costs associated with their operations”. Consider a similar scene at a law firm: the managing partner calls in all practice group leaders to justify their costs. 

Having trouble? It’s hard to imagine. Few practice group leaders – or managing partners for that matter – know the costs of their operations. That might not matter in an old-fashioned, large firm with lockstep compensation, a tight culture, and few in- or out- laterals. But most firms today pay partners widely disparate amounts, lose and hire partners regularly, and find cross-selling a challenge.

Many firms seems stuck between “collegiality world” and ‘profit world’. Actions, however, speak louder than words: partner de-equitization and staff cuts suggest they live more in profit world. And with alternative fee arrangements (AFA), we see some move to profitability analysis.

So my 2013 prediction, offered early, is that more firms will realize they really do live in profit world. They will need to start measuring practice and business costs more carefully. More importantly, they will need to act on what the data say.