Lawyers In The Main Start Out With Poor Business Management Skills and the Big Majority Get Worse!

In the last issue I addressed some points around leverage...why it’s an important factor in profitability in many firms, and in particular why so many small law firms find it hard to do much about it.

“Why Excellent, Effective, Leverage is Not The Privilege of Large Law Firms Only.” LINK

The CLIO 2019 Legal Trends Report indicated that only 7% of lawyers felt that law school prepared them to run a business. (A cynical observer of law school teaching might suggest that the 7% by definition are not fit to run a legal practice)!

Just 23% said that their Bar Association provided adequate business training.

The numbers in the CLIO 2021 Legal Trends Report that I set out below confirm where heading into legal practice ownership without experienced practical help leads.

For those principals who do understand that they are running a tricky small professional business the key to moving forward is to sort out the amount of their total time invested that they need to be wearing each of their two caps....Lawyer and Business Owner.

In the early phase there are a lot of things to do in set-up, including plenty of business development, and often not so much to do yet in client legal work...so things work out ok for a bit in terms of juggling how your available time is spent, but financially it isn’t sustainable.

As client legal work builds up, many principals pass into a danger zone they don’t even recognise, where their effort working?on?the business reduces, often in business development unfortunately, but also in other key areas.

They move into a phase where they’re kidding themselves that they’re a business owner, when in reality they’re very often worse off than if they were working elsewhere, reasonable hours for a reasonable remuneration package.

That’s ok if it’s fully recognised and acceptable to the principal, for whatever reasons, to be just “buying themselves a job”.

I’m writing for readers?not?in that category or not wanting to be.

As I pointed out in the last issue, 82% of legal firms in Australia are sole practices, or firms with only one principal.

Profitability statistics are hard to come by in Australia unless one is working on the inside.

Here’s some more data from the US that gives a very interesting, and concerning, insight.

According to the CLIO Legal Trends Report 2021, the average lawyer reports working 8 hours(and I suspect it's more), but just 2.48 hours a day on client files.

Having worked that minimal time per day on client files, the average lawyer reports being able to actually invoice 85% of the time they spent, or 2.10 hours a day.?

Only 89% of those invoices are collected on average! The average lawyer is receipting revenue for just 1.88 hours a day on average.

The average charge rate across the survey participants was $300, so a bit of rough and ready number crunching says that the average lawyer is invoicing around $139,000 pa. and collecting 89%...about $123,000 per annum.

From that they need to cover all expenses of the practice and pay themselves.

Here’s where we get a fundamental heads-up about lawyers and maths skills.

The US Bureau of Statistics Occupational Outlook Handbook says that the median annual wage for lawyers as at May 2020 was $126,930.

Something pretty fundamental is very wrong in the way the big majority of smaller law firms operate.

The CLIO Survey contained this pertinent observation. “Lawyers need to understand how to impact their revenues and their spending above all else”. (My emphasis).

In my Robservation awareness of how to impact spending is much less important than awareness around impacting revenues.

So, this key takeaway from the CLIO Survey of tens of thousands of lawyers is worrying. “Only around half of solo attorneys, managing partners and senior partners are very confident about their knowledge of finances in their firms”.

I note here that even in the half that professes confidence, the financial health of most practices is not great in my view, and very few really know how to go about fixing it.

The answers are not really very complicated.

They hinge around reducing the incidence of “Valueless Time” in the firm, and improving the quality of activity, and outcomes, in all time spent, starting with the low hanging fruit, and reaping the rewards there before switching aim to the next most obvious areas.

Strategically, principals need to accept that almost all changes will need to be driven by them, so being bogged down with too much valueless time of their own is not an option if they want to unlock a fully viable and thoroughly enjoyable future.

A good start is talking with an expert who can provide the right guidance, guaranteed.

For access to a KMSWorkPlan? to help plan what you should be doing with your time, here’s a?link .

For access to a guaranteed program to quickly get on the right track...here’s a?link .