I’m not a lawyer; I have them as clients. The attorneys that I know are some of the hardest working individuals that I know. If you are an attorney and are reading this, you may be wondering at times why you aren’t living the life you envisioned in law school or why you are working incredibly hard and not really getting to a goal of either profitability of sustainability. Recently it occurred to me while talking to an attorney who is struggling to lead a firm with rapid growth that the missing piece in his practice is something that we focused on with intensity in my 20 years with a top tier firm in consulting. We monitored the metrics described below and made key decisions based on our targeted goals and actual results.
In consulting, we had the same model as attorneys: some services are billed hourly, some are provided at a flat rate, and a few are provided on a contingency basis. With any of these models, the fundamental principles are the same. Hours go in, a case is completed, and client dollars follow (sometimes in the reverse order)! The trick is knowing which ventures are profitable and which aren’t and providing accurate direction to the firm to focus in areas that will lead to increased profitability in the future. A flat fee of $800 for a real estate closing becomes quite unattractive if the attorney ends up spending 8 hours to get the deal to close. Attorneys might have a “feel” for the numbers, just as I had when managing a consulting team working on a particular project. The real information, though, is when the hard facts back up the intuition and become a tool to proactively manage the practice.
There are a two key profitability measures that every law firm should be tracking to manage the practice:
Realization: The realization rate is quite simply, the revenue “realized”, or earned, for every chargeable hour. The realization rate comes into play in a couple of scenarios: fixed price billing and in discounted billing. For example, for easy numbers, let’s say a partner’s standard billing rate is $250 an hour. That partner agrees to take on a real estate closing for a fixed fee of $1000. He works for 5 hours on the closing, so his effective rate is $200/hour for that matter. His realization rate is 80%; ($200 / $250). In another example, the same lawyer may agree to work at a discounted rate of $225 and put in 12 hours on the case. In reviewing his bill, he may knock a couple of hours off for a billable total of 10 hours, or $2,250. His realization rate for the project is 75% (10*$225 / 12*250 = 75%). If you apply these formulas across a practice and to specific practice areas within a law firm, you can quickly accumulate valuable intelligence about profitable practice areas, and adjust pricing and/or the service mix to reach the desired profitability level.
Utilization: A related measure of staff productivity is the utilization rate. Law firms or their accountants should produce and review staff productivity measures on a regular basis since they are a key measure of capacity and another profitability indicator. Staff utilization rate is calculated based on the number of chargeable hours that billable staff work in a given period. For example, in any given week, an attorney’s goal may be to charge 25 hours during the week. The same attorney may work 60 hours to achieve 25 billable hours, for a utilization rate of 42% (25/60 = 41.6%). This number is critical for law firm practice management to monitor, as analysis of non-chargeable hours can point to tasks that can be performed by administrative staff or outsourced at a lower rate to relieve the pressure on the attorneys and allow them to focus on working chargeable hours.
Even if there were no other tools available, law firm practice leadership can use these two important indicators to budget, plan for growth, monitor results, and adjust midstream as necessary.