A Closer Look

Author: Richard G. Stock, January/February 2004 issue of National

Few lawyers, and too few clients, understand the economics of their practice and firm beyond the simple formula hours ´ rate = billings. Production-based models are a treadmill that average out the value of legal services, because every hour has the same price (except the discounted ones).

Firms downplay business origination because it's too divisive. Partners and practice leaders take little responsibility for the effective and profitable use of associates, students and paralegal employees. And finally, costs in the firm are almost always assessed across the board as “overhead” -- and then too often assigned on a per-lawyer basis.

But if you follow these five steps, you can harvest the best value from the legal services your firm is providing in 2004. Most steps can apply to individual practices as well.

1. Identify the firm’s top 25 clients  and prospects, along with the type of work the firm realistically expects them to supply in the next two years. Then identify the top five for each partner. This constitutes the beginning of a business plan for the firm.
   
   

2. Go one step further and quantify the billable time for each category of work for the next 2 years. Express this work according to levels of experience -- senior and junior partner; entry, mid-level and senior associates; paralegals and students -- required to complete it. Then carefully examine who's actually doing the work (usually, it is under-delegated by one or two levels). Develop work intake and allocation standards and protocols for each practice area.





3. Ensure that cash in is at least 90 % of standard rate for every fee-earner in the firm. There has been noticeable slippage in firm targets in recent years. It's not enough simply to set billing targets; they have to be at the current effective rate for the right number of hours. With the exception of highly leveraged practices, few firms should be satisfied with less than 1 600 hours.
   
   

4. Perhaps as much as 20 % of every billable hour goes to pay for staff, space and other operating costs. Firms are long overdue in re-examining their infrastructure and production support requirements. These could be cut in half, not because there is waste, but because the support functions (document production & storage, arranging meetings with clients and colleagues, etc.) are part of an outdated business model
   
   

   Few firms have set up documented expense reduction plans, other than perhaps reviewing lease issues every 10 to 15 years. For the most part, partners stand in the way of real change, or they agree to subsidize inefficient practices in other parts of the firm. The available savings represent 10% of every billed hour, which can amount to a 20% improvement in profits per partner.
   
   

5. The final step is to price the work properly. Yes, the rates are higher than ever, but they're still chaotic and illogical in many respects. Individual partners are left to control their standard rates, arguing that they will lose the work or that they are prepared to make less money within the firm’s compensation system.
   
   

   Associate rates are copied from other firms using surveys and benchmarks that bear little relationship to the costs of the associates. Rates of senior associates and junior partners overlap or are severely compressed. Rates for partners proliferate, with the firm having more interest in its budget requirements than in proper work allocation. And, most importantly, rates do not always reflect the relative complexity of the work. Institutional clients in particular want to see some correlation between the two.