The single most important factor in making law firms profitable

In my time advising and helping manage law firms, I have twice been asked the question: “What is the single most important factor in making law firms profitable”?

Both times I was asked by a firm’s Managing Partner, so it was clearly important to them and equally important to me – to get the right answer!

There’s a lot of frippery talked about law firm management.  Quite often that talk is off the mark and tangential to the core issue, but the answer to the question is right in the centre of the matter: the kernel and the one thing that all firms must get right.

The answer to the question is “utilisation”, i.e., the proportion of time that fee earners are working for clients. This must be maximised if the firm is to be run at maximum profitability.  If you don’t maximise the time your fee earners work for your clients, you will not maximise the fees that can be generated from those fee earners.

That’s because “Time” is the one resource you cannot re-use and once it has gone, it is impossible to get it back.

All staff, including fee earners, usually sign a contract with their employer, guaranteeing that, in return for a salary, they will provide their skills and abilities to the firm for an agreed number of days per week for the foreseeable future.  Typically, this will be 35 or 37.5 hours per week.  If your staff are only working 30 hours, you are already down on the deal.  If they are then only working for clients for 20 hours per week, or four hours per day, then they are mediocre.  That produces, (after taking off holidays and training etc), about 750 – 800 hours per year working on clients.

If you do the maths, it should be perfectly possible for all full-time fee earners to produce 1,200 or more client hours per annum.

“So what?”, is often the retort, “My fee earners have had pricing training and can achieve their fee targets without burning themselves out by working all those hours”.  I have sympathy with that last point, we want our fee earners to be bright-eyed and quick-witted at all times and certainly never exhausted: but my point is that the calculations arriving at 1,200 hours p.a., allow for everyone to work for clients for about 5 hours per day.  That cannot be too much to ask.  It allows for some general chat with colleagues, tea breaks and team meetings etc.

If they are achieving their fee target when only recording – say – 800 hours, then the firm is missing out on what could be achieved if they were working the 1,200 hours that, I believe, is a minimum.

Law Society Law Management Section surveys over the last couple of years show the average fee earner typically generates about £120,000 of income per annum.  The table below shows that being achieved with only 800 hours being worked, and then shows how you might increase income by 10% by respectively increasing:

Firstly; Recovery Rates or

Secondly; Hourly Rates or

Thirdly; Hours worked

Finally, I show what can be achieved if your fee earner records a number of client hours in line with what ought to be achievable.  That shows that income would increase by 50%.

Which of these is the easiest to achieve?  I would contend that increasing recovery rates is toughest because it means changing the working practices of the whole firm and educating clients about the fees they should be charged.  That is a longer process and involves a lot of change, so will be something to work on over time.

Increasing charge-out rates has the added disadvantage that you are typically only going to do it once – or perhaps twice these days(?) – a year and there is a lot of administration work to advise clients etc.  That leaves you with one option – managing your people – so that they are producing the requisite number of client hours per annum.  That must be the best answer.