Wisconsin Lawyer
Vol. 79, No. 2, February 2006

The Economics of Practicing Law:
A 2005 Snapshot - Sizing Up Your Business Practices

Sidebars:

by Dianne Molvig

In December a few attorneys received early releases of the State Bar of Wisconsin's Economics of Law Practice 2005 Survey Report, and they are already putting it to good use. (As an incentive to participate, survey respondents were offered an early release of the report.)

Thomas Schumacher was in the midst of putting together the 2006 budget for his 15-lawyer firm in Baldwin. "It's one thing to look at your own numbers and compare them from year to year," he says. "But information in the survey is critical because you get some benchmarks" for a wider comparison.

William Hess, a partner in a five-attorney Wausau firm, says the survey helps him assess his office's overhead expenses. "I look at how in line we are," he says, "and how we're doing on compensation. This is an excellent tool for hiring and setting salaries for new associates, for example. I used it for that just yesterday."

The survey report presents means, medians, and other statistical breakdowns for many aspects of the business side of practicing law. (A refresher on mathematical definitions: A mean is an average, and a median is the midpoint value in a series - that is, as many quantities lie above it as below it.) For example, the survey reports on personal income, fee billing, and overhead expenditures, including annual average salary levels and hourly billing rates for associates, legal assistants, and secretaries with varying levels of experience. The full report breaks down data by a variety of factors in addition to field of law including principal position, office location, years in practice, gender, firm size, and other factors.

Of course, there is no "average" lawyer or "average" law practice. Still, the survey provides starting points - benchmarks, as Schumacher noted - for lawyers to measure against in evaluating the economics of their own practices.

"I look at the survey numbers and my practice and see where I fit in," says Cottage Grove solo practitioner Thomas Heyn, chair of the State Bar's Law Practice section. "If I see something that's out of place, then I need to ask myself if that's advantageous, or if I'm missing the boat. If you find you're close to the mean or median, you have to ask whether that's good or bad because sometimes you can get complacent."

The new survey is the first since 2001. A survey questionnaire went out in May 2005 to a random sampling of 3,000 Wisconsin lawyers in diverse law settings across the state. Of those, 25 percent responded with completed questionnaires.

The Time Dimension

Nine of 10 responding lawyers reported they average 35 hours of billable legal work per week. Those not in private practice responded to this question by giving their weekly total hours devoted to legal work.

This average matches closely with what Alan Olson, from the Midwest office of Altman Weil in Milwaukee, sees in his consulting work with attorneys in small, medium, and large firms across the U.S. and Canada. A 35-hour-per-week average totals 1,750 billable hours for a 50-week year. In Altman Weil surveys, "Our averages tend to be in the neighborhood of 1,750 hours for partners or shareholders," Olson says, "and 1,800 hours for associates."

Respondents also were asked how many total hours they work in a typical week, including legal work, marketing, office administration, public service, and so on. Nine of 10 said they work an average of 42 hours per week, equivalent to the 42-hour-a-week average reported in the 2001 survey.

As with previous surveys, this average leaves many scratching their heads. "To me, that number is suspect," says Nerino Petro, a former Rockford, Ill. solo practitioner and technology consultant, who in January became the State Bar's new practice management advisor (see "Introducing Nerino Petro"). "And that's nothing more than experience talking," he adds, "knowing that if I call other solos at their offices at 6:15 on a weeknight, I'm going to reach them."

Other attorneys interviewed had a similar reaction to the 42-hour average. As Hess notes, "I can't believe attorneys are only working that few hours. How many take work home with them in the evenings and on weekends? If I have a slow week, it's around 50 hours."

So why the discrepancy between people's expectations and the survey's finding? Respondents who work part-time shouldn't have skewed the average, as roughly nine out of 10 respondents said they practice law full-time. That's equivalent to the proportion who said they average a 42-hour workweek.

About one-third of respondents are not in private practice. Some of them may have more standard 40-hour workweeks, which would lower the average. Still, observers note that many attorneys in government, corporate counsel, legal services, and other positions work as many, or more, hours as do private practitioners.

The upshot is that the lower than expected average remains befuddling to many. Schumacher conjectures that respondents may have underestimated the time they devote to nonlegal work. It may be similar, he says, to what often happens in recording billable time. If a lawyer doesn't record time spent on a file right away, but does so at the end of the day or the day after, the tendency is to record less time than actually worked. "When you look back," Schumacher says, "you discount the hours." The same phenomenon may have come into play in filling out the survey.

The survey also asked lawyers for a more subjective description of their workload. Fifty-eight percent said their work is "all they can handle." Another 30 percent said their work is "more than they preferred to handle," and 12 percent said it's "insufficient to keep busy." Among solo practitioners, 20 percent said their work was insufficient. As Heyn observes, solos need to figure out how to do a better job of attracting work - "especially from that 30 percent who say they have too much," he notes.

Tracking, Charging, Collecting

Nearly two-thirds of respondents said they track their time "always" or "always, except in contingency or other nonhourly fee cases." The average hourly rate is $171, and the median is $165 (compared to $146 and $135 in 2001).

The survey also asked: "If applicable, how long ago did you or your firm change your hourly billing rate?" Nearly 60 percent of respondents answered that question. Of those, 81 percent had changed their rate within the last two years, while 46 percent had done so within the last year.

Attorneys were asked to indicate the types of legal services for which they charge a flat fee. Roughly two-thirds of those who do simple wills, physicians' directives, powers of attorney, and deed preparation charge flat fees for these services.

The survey also showed that among those who use billing methods other than the billable hour, 37 percent use contingency fees, 31 percent use retainers, 17 percent use value billing, and 4 percent use per-diem rates.

No matter the billing method, Olson recommends tracking time. "If you track your time," he says, "you ultimately can determine your net profit and whether you're being efficient." Not tracking time invariably means lost income. If you work 1,750 billable hours per year at $175 per hour, but only record 90 percent of your time, "You're potentially writing yourself down by $31,000 a year," Olson says, "at least some of which could be billed to the client."

Using retainers is another sound business practice that can prevent lost income, advises Gwendolyn Connolly, a Milwaukee solo practitioner. "I was impressed to see that 35 percent of solos do ask for advances," she says. "One thing I regularly talk to my law school classes about is that when you request an advance, you're able to ensure your practice will be successful to some extent, because you know you're going to get paid."

Heyn notes that the proportion of attorneys who use value billing remains small - 17 percent in this survey, down from 27 percent in 2001. And yet there's much discussion that value billing is a smart strategy in the technological age, because it allows lawyers to charge for the value of their advice rather than merely for time spent, which often is less due to technology.

"My opinion is that we still don't have a handle on how to do value billing," Heyn observes. "Billable-hour billing is easier because it's a mathematical calculation. Value billing is much more involved, not only in figuring out how to do it but how to present it to the client."

Collecting fees from clients is another potentially thorny issue. Of respondents, 57 percent said that, on average, 13 percent of the fees they bill are uncollected. This has a huge impact on profitability, points out Olson. Again, he uses the example of 1,750 billable hours a year, at $175 an hour, which yields roughly $306,000.

"Each percentage point that is not realized [collected] reduces that figure by more than $3,000," he says. "So moving a realization rate from 90 percent to 95 percent in this example would yield an additional $15,000, which by definition would drop almost entirely to the bottom line."

Money In, Money Out

The mean net annual income (before taxes) among surveyed attorneys is $108,358, while the median is $88,000. The 2001 mean was $94,501; the median was $79,000. The disparity between mean and median seems to indicate that a few high-earning respondents may have skewed the average. Bear in mind that respondents' average age is 47, with a median of 48, and that 20 years is both the mean and median number of years in practice.

The survey asked lawyers to estimate their gross receipts per lawyer. Only 45 percent responded to this question. The mean gross receipts for respondents was $183,103, and the median was $168,000.

A considerable gap also exists between the means and medians for total overhead expenses per attorney in the office. The mean is $87,191 per attorney, and the median is $66,950 per attorney. These compare to a 2001 mean of $68,654, and a median of $60,000. The survey also breaks down these numbers into salary and fringe benefits; rent, phone, and utilities; and other nonsalary expenses - and further breaks these down by size of firm and community.

These various numbers feed into Schumacher's analysis of his firm's overhead. When he finds his numbers are noticeably off in some areas, "I look hard at our financials to see what's causing that," he says. "Are we overhead-heavy in some areas where we don't need to be? Are we not leveraging our technology as well as we should be? I try to see where the differences are and figure out why."

Another subject the survey examined is law offices' practices in charging clients for expenses. (See table on page 59.) Respondents ranked from "always" to "never" how often they charge clients for time spent on telephone calls, travel time, travel costs, duplicating, postage, paralegal or legal assistant time, computerized legal research, and so on.

"I'm happy to see that the swing seems to be away from charging for things lawyers used to charge for in the past," Petro says, "such as computerized legal research or telephone costs. There's nothing more irritating to clients, for instance, than getting a bill that shows it cost $85 for time the lawyer spent on the phone with the client, and then getting charged $2 more for the phone call."

Such practices make clients feel they're being nickeled-and-dimed and hurt client relations, in Petro's view. It's also important to make sure the client understands up front exactly what the charges will be, he advises. For instance, does your office cover the costs of regular postage, but bill for certified mail? Is there a charge for photocopying only if it exceeds a set number of pages? "Spell all those charges out in your fee agreement," Petro says, "so clients know what to expect."

Parting Thoughts on the Bigger Picture

The survey presents a wealth of data about the economics of law practice. It's important to put this information into perspective, however, in light of your own situation and priorities, Hess suggests. For instance, "I happen to like to practice with up-to-date technology," he says, "which costs money and increases overhead. But it leads to greater revenue and more satisfied clients."

All lawyers make choices, not only in how they practice, but also where they practice. Those choices translate into economic differences. "Your philosophy and priorities will have an impact on your numbers," Hess says. "You have to keep that in mind when you look at the survey report. The most important thing is that you have a practice that you enjoy and feel is fulfilling."

As Connolly sees it, the key value of the survey is that it portrays "the nitty-gritty business aspects," she says, "that lawyers live with on a day-to-day basis: making your payroll, paying your rent, the time obligations you have."

But the survey report does more than provide benchmarks for individual lawyers to use in sizing up their practices, according to Connolly. The various bits and pieces of statistical data blend together to create a picture that she feels the profession as a whole needs to examine. "There may be a disconnect," she says, "between the business model that lawyers must operate under and the overlay of professionalism that's expected of them."

For instance, Connolly explains, consider some of the issues the Board of Governors, of which she's a member, has dealt with in the last year: the WisTAF petition, Ethics 2000, and new trust account rules. Against that weigh the business realities the survey portrays: the hours spent on unbillable work, the substantial overhead costs, and the fact that many lawyers lose $1 out of every $10 to uncollected fees.

Then suppose you're a solo practitioner or small-firm attorney, Connolly suggests, who serves as a volunteer board member for a local nonprofit group. This allows you to achieve several goals at once: do something good for your community, complete pro bono service, and market your practice. But if pro bono were to become mandatory and be defined to include only legal services to poor people, your volunteer work no longer would count as pro bono. You'd have to devote other time to pro bono and do your marketing separately. (Survey results show that six out of 10 lawyers donate approximately 55 hours of pro bono annually.)

That's just one example of how business realities and professional obligations sometimes clash, Connolly contends. "You can see why many lawyers feel stressed, or some even under siege," she says. "I'm not saying lawyers aren't compensated for what they do. But there are a lot of business pressures, particularly given the number of lawyers who are in solo or small-firm practices, that make for a stressful business model. I think the survey helps to give clarity to what it is that we as a profession are asking of ourselves."

Wisconsin Lawyer