Asked and Answered 

By John W. Olmstead, MBA, Ph.D, CMC

Q. I’m a second-generation attorney with about five years of experience at a small liability defense firm in Southern California. My father is the managing partner and we have three total attorneys. My father and his partner probably have five to seven years left practicing. We only do California workers’ compensation defense. I’m planning on taking over the practice but am concerned about trends in the industry that will affect profitability, such as more stringent billing guidelines/bill audits, cuts to travel time, etc. What are the characteristics of a successful liability defense firm that I should strive towards?

A. I appreciate your concerns. Both workers’ compensation defense and civil insurance defense firms have a real challenge with the performance pressures placed on them by their clients, billing guidelines and audits, and low billing rates. I have civil insurance defense firm clients across the country billing at rates averaging from $175 to $225 per hour and workers’ compensation defense firm clients billing at rates averaging from $140 to $175 per hour. Some firms are being required to take on more work on a flat fee basis.

Here are a few thoughts concerning characteristics of successful liability defense firms that you should strive towards:

1. The number of attorneys will depend upon the amount of business that you can bring into the firm. If you are a sole owner you should have an additional four associates to achieve the level of leverage that you need to be profitable. This assume that the work is there to keep them all busy.
2. You should strive for a leverage ratio of four associates to every owner. Resist the temptation to make everyone a partner.
3. Hold the line on expenses and remember that your largest expenses are salaries and office space. You do not need to hire lawyers from top tier law schools and pay the salaries that such lawyers are able to command. You also do not need to have your office in an A or B+ building. Look for B or C+ office space.
4. Revenue per lawyer should be in the $300,000 range.
5.  Profit margins (earning available to owners) should be in the 35 to 45 percent range.
6. Annual billable hours should be 2,000 or greater for each attorney.
7. Ensure that you tie lawyer compensation to performance. Pay your associates a salary but also have a variable performance bonus based upon billable hours collected or dollars collected. Keep the salary low enough that they are still hungry.
8. Diversify the practice. Actively market to more companies and organizations that you can represent directly rather than representing strictly insurance companies. Consider big box companies are target clients. Get on their panels and bid lists. Consider expanding into civil liability defense work rather than doing just workers’ compensation. Many law firms in the Midwest do both.
9. Some of our clients have found that a federal workers’ compensation is beneficial.

Here are links to two articles on defense firms that you might find interesting.

https://www.olmsteadassoc.com/resource-center/trapped-in-a-insurance-defense-practice/

https://www.olmsteadassoc.com/resource-center/insurance-defense-law-firms-strategies-and-best-practices/

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.