This is the next post in my series on how attorneys can build a multi-million dollar law firm. My last article gave on overview of issues which I’ll be discussing over the course of this series. I also stressed the fact that it’s no longer going be optional for attorneys to understand they’re running a business when they hang out their own shingle. Those who choose to understand this idea will wind up looking like this:
While consolidation in the legal industry will leave those who “dont’ get it” looking like this:
In this article I’ll look at the flawed attorney business model, how you can correct it, and why a corrected model is leading 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 often err by considering “big cases” or “big clients”to be 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 which work on contingency – hope to get the “big case,” and often refer out smaller matters.
- For firms which 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
This approach has been followed by law firms since lawyers dressed like this guy:
And because the legal profession loves it some 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 it’s total dollar amount as opposed to it’s “effective” hourly rate. Let’s look at each of these issues in turn.
Multi-million dollar law firms are going to consider the ability to scale their practice
Successful businesses understand the concept of doing things at “scale.” By this I mean the necessity to grow your sales and revenue in greater proportion to any growth in the resources you put out. An easy way to think of it is 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 into the business, 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.” 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 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.
Attorneys can scale their practice by focusing on activities with the highest effective hourly rate
I regularly talk with attorneys who focus on what they billed to a case, or what they collected from a verdict, as the sole measure of success. These attorneys often look at the “billable” time that went into a case (which they meticulously record) but they also have no record of non-billable/administrative time in a case. Here’s a news flash – your profitability is determined by dividing your revenue amongst all of the hours/resources you put in – not just the billable/reimbursable ones. 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. Let’s look at how focusing on that number 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) then 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. Travis previously focused his practice on litigation and then decided to transition to record expungements. Why? Simple. Again, 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. In truth, however, it is. I’ll deal with the “volume” issue in a moment.
I’ll give one more example on this issue of scale. I know of a family law attorney who devoted his practice only 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 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 six to ten such hearings a day over an eight to nine hour period. This type of business model reduced his overhead to near zero and, very importantly, he drove to Court once to handle six to ten hearings as opposed to driving to and from court six to ten 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 to just do expungements.”
- “I don’t want to just 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 then you will 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 then recognize that you need to be building up the expungement (or whatever area applies to you) part of your operation.
Multi-million dollar law firms will focus on scaleable activities
How often have you seen an attorney with a decent practice in one area and they decide to grow revenue 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) or a personal injury lawyer who starts taking worker comp cases. The problem with this is that doing so actually lowers your effective hourly rate because you’re driving to more court houses and increasing your use of resources. An attorney who wants to build a multi-million dollar law firm, instead, needs to identify the most profitable activity and do more of it! Travis, the attorney mentioned above, is a great example of this. He’s growing his expungement business through regular blogging on the topic, building up online client reviews, etc. The result of this is that he saw a jump in expungement business from May to June of this year. Instead of trying to grow revenue by “diversifying” into other areas, which will hurt your profitability, 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. This type of approach is allowing smaller attorneys to rapidly grow their practice into large operations which are going to gobble up large chunks of the available cases – like the firms discussed in this ABA article.
Want to really grow your practice? Start figuring out which activities are actually your most profitable and double down on them. If you don’t…..then don’t.
Why do you feel so many attorneys fail to focus on the areas which yield the highest amount of revenue per resource input? Please chime in through the comment form below.