Learning the rules of law firms is critical to your success there. I have included a lot of material about how law firms work in my book, Best Friends at the Bar: The New Balance for Today’s Woman Lawyer (Wolters Kluwer/Aspen Publishers 2012), and it is important information. You cannot possibly be successful in a law firm unless you know the ropes and understand how the business works. As a cog in a much larger wheel, you need to understand what makes that wheel go around and what your role is in producing the desired result.
I was interested by another approach to this subject matter that I read on Above the Law recently. The concept is “RULES,” a simplistic approach to a complicated subject matter about law firm management and profitability, and here is how it works.
R stands for Realization. It stands for how much you are worth as a cog in the law firm machine. The formula is “fees collected divided by the value of time billed,” and the concept is how much you received as fees compared to how much you were supposed to get for the number of billable hours multiplied by the billable hour rate. Clients often are able to negotiate preferred rates, and the benefit for that negotiation is known as a discount. Attorneys also initiate discounts as ways of demonstrating good will and encouraging follow-up business from clients.
U stands for Utilization. This is all about billed hours divided by the number of billable hours targeted for individual lawyers. It is typical for law firms to project a 2000 hour per year mark for their individual lawyers, and some firms include pro bono, marketing activities, etc, in those projected hours. Some do not, however, so look out for it.
L is for Leverage. You have heard of the legendary law firm pyramid model, and that is what leverage is all about. In other words, the ratio of how many non-partner attorneys there are for every partner affects profitability. Because associates bill out at rates much lower than partners, it is possible to keep a lot of associate lawyers busy generating fees on an account. And, don’t feel sorry for the partners. There is another thing called “generation credits” that allows them to cash in on the associates hours also. See, a great big pyramid.
E is for Expenses. There is a simple formula for this: 1/3, 1/3, and 1/3. The three categories of expenses for law firms are people, rent, and everything else, as in salaries, the cost of physical space (owned or leased) and miscellaneous expenses, which includes things as insignificant as the cost of envelopes to things as significant as technology software and hardware.
Finally, S is for Speed in terms of the date charges for legal services are incurred and the date that payment for those services is received. The most “speed effective” clients are the ones that pay shortly after being billed. However, they can be few and far between, and clients usually need a little encouragement on the speed issue. Law firms can be a frenzied place at the end of the fiscal year when billing attorneys are running around like crazy to get clients to pay up before the partners close the books for the year and divide up the profits pie. That should make you better understand why all lawyers need to get their billable time recorded according to deadlines and why submission of billing logs is not just an arbitrary requirement. What has not been recorded cannot be billed. It is simple.
So, there you have it. File this away. When you are feeling overworked, used and ready to jump ship, read it again first before you act impetuously. It is much more logical than you like to think, and you may not feel as compelled to leave one firm for another one where the RULES will be the same.
RULES are important. Pay attention!