Asked and Answered 

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

Q. I am the owner of a six-attorney insurance defense firm. I started the practice 12 years ago with a paralegal and have grown the firm to where it is today – six attorneys, two paralegals, and two other staff members. While I have done well and am taking home around $350,000 a year, I am not sure if we are attaining the numbers that we should be. I have a 1,500-billable hour expectation with a per-hour bonus payable for each billable hour exceeding 1,500. I do not have any attorneys who have reached this expectation. Our billing rates average around $150 per hour. I am wanting to put in place a partnership track and am not sure where to start. Your thoughts would be appreciated.

A. Let me first illustrate the profitability levers for law firms:

R­—Rate—billing rate (effective rate, realization rate, etc.)
U—Utilization—the number of billable hours
L—Leverage—the number of associates/paralegals to owners or equity partners
E—Expenses—office overhead
S—Speed—time it takes from the time work is done to when cash comes in the door

With the low billing rates that are prevalent in insurance defense firms, the primary profitability levers that can be managed are utilization, leverage, and expenses. Insurance defense firms need 1,800 to 2,000 annual billable hours from their associates, a high leverage ratio of three or four associates for every equity partner, and low expenses.

You are doing fine now with regard to compensation, but this would not be the case if you had partners (the profits would not be there to pay higher salaries). Less than 1,800 annual billable hours is not acceptable, and it sounds like there are no consequences for not attaining 1,500 hours. You need to look into the reasons why your associates are not reaching the target. Possibilities could include:

• Not enough work
• Associates not working enough
• Poor time-management habits
• Poor timekeeping habits
• All of the above

If there is enough work, you need to focus on the other factors and remind people of the consequences of not reaching the target. Start with the 1,500-hour expectation as an initial baby step, but then increase the expectation to 1,800 hours as soon as you can.

As you think about a partner track, keep in mind the issue of leverage and don’t be tempted to make too many partners. Keep an eye on your expenses.

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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.