INCREASE PROFITS... Small Changes Make a Big Difference
By Dan Wise
The complete survey reports are now available online.
Consider the tale of two lawyers, both experienced attorneys with good reputations. One of them is making a good living; she pays her staff well, does her share of pro bono work, and still can take time off for some vacations with her family. The second lawyer, down the street in the same town, has no shortage of clients, but has difficulty bringing in enough money to pay staff and cover expenses and often feels that legal practice is an insatiable gobbler of hours.
Those kinds of differences can be found all over New Hampshire and elsewhere in the legal profession, says Arthur Greene, a NH lawyer and law firm management consultant who helped the NH Bar Association plan this and earlier surveys on the economics of law practice in the Granite State. Greene says this year's survey contains many examples that back up the anecdotal evidence he's seen that lawyers, similarly situated in a small town or big city and with similar types of clients, can often have very different financial outcomes for all of the hours they put in.
Part 4 of the economic survey released this month focuses on management indicators such as collection and realization rates, fixed expenses and overhead per attorney, and provides some comparative data on support staff salaries. It also reports on various steps or business strategies lawyers and law firms intend to employ in the near future.
Going beyond measures of gross income, Greene encourages attorneys to consider metrics such as "billing realization rate" - the percentage of time worked that is billed to clients - as well as the "collections realization rate," which represents the percentage of fees billed that are collected. The survey shows that while larger firms tend to do well on such measures, perhaps through clearer goal-setting and professional management, there is usually a sizable contingent of solo practitioners who are keeping more of what they earn by keeping their costs low and closely managing their own time.
- Larger firms reported higher realization rates than smaller firms and solos; nevertheless, nearly one-quarter of solo firms reported doing very well, with realization rates of 95 percent.
- Collection realization rates (fees billed that are actually collected) tended to be the highest for the largest firms. Solos and firms of 6-14 attorneys have more trouble collecting fees - nearly one-third of the firms from this category had rates below 85 percent;
- Respondents noted that contemporaneous recording of time was the most important factor in improving billing realization;
- Clarity in communicating outcomes and careful selection of clients and cases were the most important influences on collections realization, followed by timely billing, and collecting an adequate advance fee deposit.
"Many lawyers, particularly older lawyers, may undervalue their services," Greene says. "They may think they charge $200 per hour for their services, but if you are only charging for three-quarters of the hours you are working on a matter, your effective rate is $175 per hour."
Greene encourages attorneys of firms of all sizes to look at the various measures in the survey and compare them to their own operations. Attorneys should be looking at timekeeping practices and what is spent on overhead, as well as retainer, billing and collections policies, and expenditures on technology and support staff salaries, Greene says.
"Use the survey to identify which aspects of your practice might be a good place for improvement. The results on any given chart must be evaluated in combination with other charts before concluding they provide any answers. There are no quick and easy answers, but I do think that firms with unacceptable financial results can get clues as to what aspects of management may need attention," he says.
Greene says there may be good reasons attorneys are not charging for all of the hours they work - giving a client a discount, or because the research will benefit you in future work, perhaps - but lawyers should keep track of what they are discounting and why, he says. Attorneys are, for the most part, paid for their time, so it's important to document that time - not only billable hours, but also pro bono time, client development time, and discounted time. "This is one of the best places to do better," Greene says. "Just choosing one area to improve and committing to make a 10 percent improvement there can make a real difference."
With time and money, it's key to always have a true picture of what is happening.
Many law firms lack a realistic understanding of how their businesses are doing because they have too many old, uncollected fees on their books. "If you haven't collected an unpaid fee after a year, mark it as ‘uncollectible' and remove it from your receivables," Greene advises. "Still keep trying to collect it, and don't write it off, but stop counting it."
Many lawyers will look to the survey results to see how their firm compares in terms of fixed expenses - including non-lawyer staff costs, occupancy, insurance, taxes and other costs. Computed on a per-attorney basis, overhead costs range from less than $5,000 per attorney (solo in home office) to more than $120,000 per attorney.
There are predictable patterns - large firms tended to dominate in the higher range, and the lowest costs were for small firms in rural areas - but there are more than a few outliers at both ends of the cost spectrum.
One-third of the firms with the lowest overhead were in the urban counties, and nearly 20 percent of the firms with the highest overhead rates were in the most rural counties, reinforcing Greene's point that attorneys with very similar types of practices, by practice area, geography or firm size, can have very different financial profiles.