Time for the next post in my series on how attorneys can build a multi-million dollar law firm
My last article gave an overview of the issues I’ll be discussing over the course of this series.
I also stressed the fact that it’s no longer going to be optional for attorneys to understand they’re running a business when they hang out their shingle.
The ones who understand this idea will wind up looking like this:
While consolidation in the legal industry will leave those who “don’t get it” looking a bit more like this:
In this article, I’ll look at the flawed attorney business model, how you can correct it, and why a corrected model leads to large scale firms that will put many solos and small shops out of business.
The good news is that you can choose to change your practice – today.
Let’s get to it.
Attorneys Mess up By Considering Big Clients as High-Value Work
The typical law firm business approach usually falls into one of these camps:
- For firms which bill by the hour: Get as many “big clients” as possible who will require lots of hourly work. A big focus is put on these types of clients.
- For firms that work on contingency: Hope to get the “big case,” and often refer out smaller matters.
- For firms that work on a flat fee (such as those in criminal defense): Get the “higher-end” crime cases (such as those involving federal charges), which require a large fee.
Law firms have followed this approach since lawyers dressed like this guy:
And because the legal profession loves precedent, it hasn’t changed this approach for the most part.
There are two problems with this approach.
First, most firms don’t adequately consider the impact that large cases have on their ability to scale a practice.
Second, attorneys often determine how “lucrative” a case is by its total dollar amount instead of its “effective” hourly rate.
Let’s look at each of these issues in turn.
Considering The Ability To Scale Your Law Practice
According to a study done in 2019, 87% of law firms said that scaling legal processes was one of their biggest growth priorities.
Successful businesses understand the concept of doing things at “scale.”
By this, I mean the necessity to grow your sales and revenue in proportion to any of the resources you put out. An easy way to think of this: Say a company can handle 100 customers with one employee. Adding a second employee then allows the company to handle a total of 500 customers. A third employee increases customer capacity to 10,000.
As a company scales up, the hourly production of each employee increases. In other words, the amount of money an employee brings per hour increases as the company grows.
This is the exact opposite of what happens in most law firms — where the profit margin per hour of work declines as revenue increases.
The reason why handling larger matters hurts a firm’s ability to scale is simple: It focuses on “getting more work” as opposed to “making as much as possible per hour.”
Here’s another example:
Say an attorney’s hourly rate is $300.
Now say that Average Joe’s divorce takes twenty hours for a total of $6,000.
Now, let’s also say that Rich Joe’s divorce takes 200 hours for a total of $60,000.
These cases are no different! In both cases, the attorney billed $300 per hour for their time.
In the latter, they simply had the opportunity to work more hours. Add in the fact that a “work more hours” approach usually requires more support staff, administrative time, and administrative costs, and the profitability of each of those hours actually goes down.
Working more hours at the same rate isn’t a way to increase your profits rapidly – it’s just a way to work more.
In other words, it’s no different than being the person who works forty hours a week for “x” dollars per hour and, instead of finding a better job, chooses to increase their income by finding a second full-time job that also pays “x” per hour.
Now, they’re making twice as much for twice the effort.
Instead, attorneys need to take a breath and understand what their “effective hourly rate” is.
Scaling Your Law Practice By Focusing on Activities With the Highest Hourly Rate
Attorneys will often focus on what they billed for a case as the sole measure of success.
They’ll look at the “billable” time that went into the case but have no records of the non-billable and administrative time that went into it.
But, sorry to say — here’s a news flash:
Your profitability is determined by all of the hours and resources you put in, not just your “billable” ones.
Let’s use an example to illustrate:
Say an attorney bills 30 hours in a week, at $300 per hour, for a total of $9,000. Now say that the attorney also puts in 15 administrative/non-billable hours. Their effective hourly rate is actually $200 ($9,000/45 total hours). That $200 number is what an attorney should focus on instead.
Let’s look at how focusing on the effective hourly rate can increase profits.
If you look at all the activities/cases your firm handles, and track all of the inputs that go into those activities/cases (billable and non-billable hours, staff time, other resources), you can figure out which type of case yields the most per unit of input.
You may be surprised and that the cases with the largest final bill are, in fact, not the most profitable activity.
I recently discussed this idea with Travis Smith, an Oklahoma City expungement lawyer.
Previously, Travis focused his practice on litigation — then he decided to transition to record expungements.
If you bill $300 per hour, and each billable hour also includes a half-hour of non-billable time, then your “real” rate is only $200 per hour.
Travis is currently handling expungements for roughly $500 plus associated fees. He estimates that he puts a total of roughly 1.25 hours into each expungement.
This means his real rate on an expungement is roughly $400 per hour. Does a record expungement sound more lucrative than litigation?
Not to most, but in reality, it is.
I’ll deal with the “volume” issue in a moment. But first, let’s cover one more example on the issue of scale.
Another Example: “The Guy Who Shows Up For Hearings”
I know of a family law attorney who devoted his practice to handling unbundled, one-time appearances on Motions.
He charged $500 per appearance for the arguing of Motions/Oppositions that the client had filed in the proper person. He would meet with the client and review the paperwork before the hearing and withdraw at the completion of the hearing.
Here’s the thing: He typically handled 6 to 10 such hearings a day, over an 8-9 hour period.
This type of business model reduced his overhead to near zero and, very importantly, he drove to Court once to handle 6 to 10 hearings as opposed to driving to and from court six to 10 separate times.
While many other attorneys saw him as “the guy who shows up for a hearing,” the fact of the matter is that he likely had a higher annual net income than the overwhelming majority of attorneys who practiced at the Family Court.
He maximized his time and scaled his ability to handle hearings.
Now, I know what you’re saying. It’s probably something like:
- “I want to practice substantive criminal law. I don’t want just to do expungements.”
- “I don’t want just to do uncontested divorces all day.”
- “I want to litigate and not just process simple accidents in and out of my office.”
Here’s the point that these responses miss: You’re a business owner.
It’s not that you can’t handle the other cases, but if you want your practice to truly make it, you’ll have to focus on the highest value activities first and the lower value activities second, or tenth.
In other words, you need to be constantly growing your profit centers while also doing those other activities.
If you’re hell-bent on not doing expungements because you want to “practice law,” then go work at the public defender’s office.
If you want to run a business, recognize that you need to be building up the expungement (or whatever area applies to you) part of your operation.
Multi-Million Attorneys Focus on Scaleable Activities
How often have you seen an attorney with a decent practice in one area decide to grow by expanding into a second area?
An example of this might be a family law attorney who decided to start handling criminal cases (or vice versa).
The problem with this is that doing so actually lowers your effective hourly rate because you’re driving to more courthouses and increasing your use of resources.
An attorney who wants to build a multi-million dollar law firm needs to identify the most profitable activity and do more of it.
Travis, the attorney, mentioned above, is a great example of this.
The result of this is a jump in the expungement business from May to June of this year.
Instead of trying to grow revenue by “diversifying” into other areas, you should be growing by doubling down on your most profitable activities.
Focusing on high-value activities and doing more of them will allow you to scale your practice.
As you develop systems, you’ll be able to do more with less.
This, in turn, will increase the bottom line of your law firm business model. This type of approach allows smaller attorneys to rapidly grow their practice into large operations that will gobble up large chunks of the available cases.
Want to really grow your practice? Start figuring out which activities are actually your most profitable and double down on them.
Why do you feel so many attorneys fail to focus on the areas with the highest amount of return? Please chime in through the comment form below.