Law Firm Profitability: Utilization Rate
This week and the next few weeks we will be repeating some of our favourite Advisory posts. Why? Because we are headed to the only accounting conference this year, Scaling New Heights. It is in Orlando, Florida, and just a quick 3-hour ride north of me. This conference is one that I was fortunate enough to attend last year in Salt Lake City, UT. I really enjoyed it. It is very different from QB Connect. It was less “party” and more “educational”. It is totally a ProAdvisor’s conference. Education is paramount. I am teaching 3 courses:
Why A Niche Strategy Is Your Path To The Future.
Role Play Your Way to Advisory
I just Started My Bookkeeping/Accounting Firm, Now What?
For the last two sessions, I am co-teaching with my partner-in-crime, Matthew Fulton. We have really worked hard to put together some great content to help you all learn how to add advisory services and grow your business.
The theme of this conference is The Rise of the Advisor. Here is a link to register. You can come virtually or in person. If you are coming in person, we want to meet you! Be sure to find us. Send us a message via our Facebook Group, QB Community Live!
Enjoy the article below. They are definitely areas you can add those advisory services for your clients.
When you reflect on your law firm successes, one of the places to look is your utilization rate. It is a straightforward metric where you track your hours worked divided by hours billed.
The calculation for the Utilization Rate is:
Billable hours divided by the total number of hours recorded in a particular time period (typically a work week) = utilization rate
For example, the average billable rate for an attorney here in Florida is $259.00/hr. If the attorney worked a full 40 hrs of his/her workweek and it was all billable, the attorney would generate $10,360.00 in revenue.
Let's face it, in the real world, there are administrative tasks, phone calls, research time, that may be non-billable. If the attorney only bills out the industry average of 31% of a 40 hour work week, the revenue drops to $3,211.60 Yikes! That is a significant drop.
You may be wondering what a good ratio for your practice is?
One of the things you should do is calculate how much it costs to run the firm and what you would like your profit to be at year-end. Let’s say the average labor cost at your law firm is is $200,000, per employee overhead is $20,000, and the goal is a 20% profit margin ($220,000 x .20 = $44,000). Assuming everyone has 2,080 available hours, you can calculate their billing rate like this:
(200,000 + 20,000 + 44,000) / 2,080 =
264,000 / 2,080 = 126.93
The law firm would have to charge $127/hr to realize the 20% profit. The problem with this calculation is that this assumes a 100% utilization rate. We know this is not obtainable.
Next, you would have to take all of your employee's utilization rates and divide that by the number of employees. In our example, let's use ten employees with an average utilization rate of 31%. Divide the $127.00 by 31%, and now the rate need to bill out is $410.00! Remember, the average attorney hourly rate is $259.00. That is a $151.00 difference.
Since raising the hourly billing rate is not the answer, what can you do to improve this ratio? Below you will find a list of tasks that can lead you on the right path to profitability and an improved utilization rate.
Let’s talk about Utilization Rates!
- Write down EVERYTHING you and your staff do in your work day. No task is too small.
- Review the list. What can be removed? What can be automated? What can be delegated?
- If you plan on delegating the task, do it one more time but record your efforts on a Loom video.
Set up a Slack or Teams channel for the firm specifically for this kPI. Each attorney/staff member has their own channel. Put the actual utilization rate in there and a goal for an improved utilization rate. Make sure the goals are attainable and reasonable.
Do weekly check ins. See where the rates are headed and analyze where there may be areas of improvement. Keep the historical data to see where the trends are.
If these great points aren't all measured within the firm, you'll never have the data you need to run a profitable firm. Many of the mid-market law firms we work with will study this metric to improve the firm and create that well-oiled machine.
Some of the things you may discover are that tasks need to be restructured. Review your internal processes. Are there apps that can automate some of these tasks?
Is there work being done by the lawyer that can be delegated to an Administrative Assistant or perhaps the Paralegal at the firm?
Are you doing your accounting or bookkeeping? We see this with law firms all the time. The partner may sometimes handle the recording of client payments or invoicing? Why? Let a professional handle that task. With LeanLaw, our preferred time tracking app, we can work in conjunction with you. We can also take those crucial tasks off your plate, so you can do the work you went to law school for.
Once you write up your task list, look at with fresh eyes. If there are jobs that you can offload from the list of non-billable tasks, do it! For larger firms, we recommend that Slack or Teams channel dedicated to this KPI.
Over time, you'll begin to have a "bird's eye view" of your law firm's trends and what they could mean for the company. You'll be able to see if attorneys are tracking their time correctly, who's spending too much time on administrative tasks and whether or not work is being done efficiently. The goal here is increased efficiency and improved revenue. That is a win for your firm!
"Because your law firm’s performance is directly tied its profitability, your natural thought process might sound something like, “should we be paying by the hour, a flat fee or on contingency?” And “what costs need cutting? Should we hold back on training and professional development? All good questions."
I mention one of my favorite podcast on time management, Ditch Busy. I highly recommend a listen. It is a great podcast and Kate gives you tips that you can use even in your regular daily life.
Next week I will tackle the second part of this topic and discuss realization rates (recorded time vs collected fees).
Are you a law firm using antiquated software and are interested in modernizing your firm and moving ahead with technology and automation? Check out our Data Migration service. We love to help firms become future-forward. You’ll have a friend in us, and it will save you time and money. We love analyzing data and getting your reports groomed to perfection!