By Ron Bockstahler
Businesses and individuals have become savvy consumers when it comes to the costs associated with legal services. Many large corporations are working directly with ALSP’s or alternative legal service providers and dictating to the law firms they contract with to work with these ALSP’s for eDiscovery and other support services. For this article we will focus on solo practice and partner practice law firms and save the discussion on how large firms are working with ALSP’s for another day.
For the 30 plus years I have been working with law firms, I have listened to attorneys explain how they were able to reduce their billable hour by leaving the large firm and either going on their own or joining a partner practice. On the surface this is a great concept and a seemingly easy sell to their clients who they hope will follow them. The one piece of the puzzle that usually goes unmentioned is that large firms have spent years perfecting their billing model, employing attorneys and staff in multiple cost tiers to deliver a cost-effective product to their clients. Let’s put some numbers into a quick example to demonstrate how this works.
Billing Breakdowns: AM250 vs. Private Practice
Lisa, a partner with an AM250 law firm bills her clients $450/hour and has a couple of associates that each bill $325/hour and access to a senior paralegal that the firm bills out at $200/hour. Lisa brings in a new client that the firm will bill 500 hours of work over a 6-month period of time. As the work develops Lisa oversees production, but is not heavily active in the research or eDiscovery or other work required. Once the project is completed the final tally comes out as follows:
|Total billing to client||$137,500|
Let’s consider this same body of work came to Lisa after she convinced the client to come with her as she left the large firm. Her successful argument to the client primarily hinged on her solid relationship and the fact that she could reduce her hourly rate from $450/hr to $325/hr, explaining to the client that with less overhead, she is able to charge the client a lower hourly rate. But less overhead, generally means no associates or senior paralegals to assist with the work load.
With Lisa taking on the entire project on her own, her billing to the client, without discounts, is $162,500, an 18% increase from what Lisa would have billed the client while at the large firm.
Added Effects of Losing a Large Firm’s Staff & Support
Now it goes without stating there are always extenuating circumstances and real-world situations have other factors involved. However, if a business coach were consulting Lisa, besides the issue that Lisa is billing her client more than she would have at the large firm, the coach would point out that by performing all the work herself, Lisa was passing on other business opportunities. At the large firm, Lisa worked 75 hours on this project and was able to invoice at her value rate of $475/hour. This left her with 425 hours to work on projects for other clients. If her time was 75% utilized, this means Lisa passed on $143,437 in other revenue during this project. These are opportunity costs, which we will address later in this writing.
Other items to note include only one set of eyes have reviewed the work, potentially leading to mistakes and since only one person worked the 500 hours it would take more time in calendars days to complete the project, potentially frustrating the client and damaging the relationship. Finally, by focusing heavily on this one project, Lisa opens herself up to the opportunity to fall prey to the roller coaster business cycle that effects many attorneys in business development. They work hard to bring in work, then while they are spending their time doing the work, they neglect new business development. Once the project is completed, they have no new work in place and have to rush back into business development. This roller coaster ride can lead to unnecessary pressure and stress for the attorney.
How Staff Helps Private Practices Maintain Lower Costs
Solo practice and partner practice law firms can address these issues and keep their lower cost promise to their clients and remain profitable. There are a few alternatives to consider and for this article we will discuss utilizing paralegals in your law practice since this is generally a lower cost option to hiring an associate attorney into the firm.
Work a Paralegal Can Perform and Bill Back
The ABA first endorsed using paralegals the year I was born, 1967, and since 1975 the ABA has been approving paralegal programs that satisfy ABA guidelines for paralegal education programs. In 2020, the ABA House of Delegates defined a paralegal as a person, qualified by education, training or work experience who is employed or retained by a lawyer, law office, corporation, governmental agency or other entity and who performs specifically delegated substantive legal work for which a lawyer is responsible. Most states have specific rules as to who may use the title “paralegal”, what the paralegals qualifications are, and continuing legal education requirements. There are national and local associations to obtain this information including NALA- The Paralegal Association, National Federation of Paralegal Associations, NALS-the association for Legal Professionals, The American Alliance of Paralegals, and The Chicago Paralegal Association.
Paralegals can be delegated any task that would normally be performed by a lawyer, provided the work is supervised by an attorney. Paralegals cannot represent clients in court, take depositions or sign pleadings. They are not licensed as an attorney and can only work under the supervision of an attorney. Further clarity on the responsibilities a lawyer maintains in utilizing a paralegal can be found in ABA Model Rule 5.3: Responsibilities Regarding Nonlawyer Assistance.
As we identified in the above example, legal work a paralegal performs can be billed to a client. This work may include conducting factual and legal research, preparing documents for legal or financial transactions, preparing operating agreements, contracts, corporate bylaws, purchase and sale agreements, assisting in responding to discovery requests, drafting pleadings, and assisting with due diligence, real estate closings, and trials. It is important to remember that only the substantive legal work, not clerical work, may be billed to clients. Similar to how lawyers often specialize in areas of the law, the best paralegals hone their skills in specific areas of the law and are most productive when working in their primary lane. This leads to our next topic of whether to hire a full-time paralegal or to utilize contract paralegals.
Paralegal Options: Full-Time Hires & Contract Work
The answer to which option is best for your law firm depends on the individual situation. When hiring a full-time paralegal, a quick test of profitability is the “Rule of Three”: the paralegal generates revenue three times his or her salary. To demonstrate this rule, let’s assume you will have to pay an experienced paralegal $70,000, plus benefits equal to 30% of salary. This paralegal will need to bill out $273,000 annually to generate profit for your law firm. If you are billing your clients $170/hr for paralegal work, the paralegal will need to be “utilizing” or billing out 1,605 hours annually or based on the average 2,080 hours worked each year, the paralegal needs to be billing 77% of their hours worked without discounts.
The alternative to expanding a law firms labor pool and fixed expenses is to partner with an organization that provides experienced paralegals on-demand. With this arrangement, law firms gain full “utilization” of the paralegals paid time. Using the retail rule of doubling cost to establish a client’s price, if a firm is paying $85/hour for a contract paralegal, the firm would bill that paralegals time at $170/hour. So, if the firm billed out 1,605 hours, as used in the above example, the firm would generate $136,425 in profits without the risk of “underutilization” of the paralegals time or the hassles often times associated with employment, including providing health insurance which is standard practice at large law firms.
Making a Prepared Transition to Private Practice
Looking back to our above example, Lisa may have been motivated to leave the AM250 law firm for several reasons. However, it is unlikely working more hours for a lower hourly rate was one of those factors. To avoid running into this issue, Lisa needs to have a plan that details how she will account for support services similar to what she received at her previous law firm. This includes differentiating between administrative duties and paralegal work.
The cost to hire an administrator to handle general office work, setting appointments with clients, filing, and other administrative duties are not billable to a client, thus should be accounted for as overhead expenses, which are paid for from revenue generated by the attorney’s hours billed. On the other hand, paralegal work can be invoiced to the client at a lower rate than the attorney’s hourly rate, saving the client money. Creating a position that combines an administrator and a paralegal is not conducive to creating an efficient law firm. Any work that can be billed back to a client should be handled by an expert paralegal, creating a source of revenue for the law practice. This also reduces unneeded stress on attorneys by freeing up time for developing new business opportunities and avoiding the ups and downs associated with the business development roller coaster ride.
By utilizing on-demand paralegals, that are experts in their area of practice, the law firm avoids the expense of “under-utilization” associated with full-time staff, allows the firm to utilize the best paralegals for the types of work they need completed, provides clients specialized legal services at cost effective rates and creates a no-risk revenue stream, while freeing up valuable time for the attorney to keep new work coming into the firm.
Ron Bockstahler | CEO & Founder of AMATA Law Office Suites
Ron spent a large portion of his career managing the back office of major law firms across the U.S.. In 2001 he founded Amata, now Chicago's premier law office space, law office staff, and back-office service provider. Home to over 700 legal professionals, Amata Law Office Suites is helping firms set the standard for the future of practicing law.
AMATA Law Office Suites provides legal support and paralegal services to law firms.
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