Dear Nick and Nora,
What seem to you to be extraordinarily high attorney fees ($35,000 for Nick and $75,000 for Nora) has focused your anger on “the system” instead of each other. Furthermore, the bill for “professional services rendered” gives you a sense of the high cost of using a public forum to deal with private problems. There are other intangible costs of your choices; if quantifiable, they would be more than what you are going to pay your lawyers.
I’m using this letter and the next to explain how divorce lawyers make a living — and how attorney fees affect the “conventional practice” of family law. It’s not a pretty picture, and at the heart of the problem is the “billable hour.”
A lawyer practicing alone will earn as much as she can bill and collect, less all of her business expenses. A strong practice will generate income from 1,500 billable hours a year — that’s an average of 6.25 billable hours every working day (assuming 48 workweeks in the year).
For most lawyers, it’s not possible to bill for all the time spent in the office — and the amount of unbillable time depends largely on the type of cases handled. A lawyer who does nothing but work on the defense of a corporation in antitrust litigation will start the clock on arrival at the office and it will tick for the rest of the day. Most lawyers, however, have to work on several cases at once, and time just evaporates while going from one case to the next.
Time is also lost to various administrative tasks, reading email, getting diverted on the Internet and indulging in whatever else captures one’s attention. One of the legitimate benefits of practicing law is that the lawyer can arrange to spend time, every day or every week, not practicing law.
The larger the number of cases a lawyer deals with, the greater the leakage in converting billable hours into collected revenue. A divorce lawyer who records 1,500 billable hours may be able to collect on 1,300. Let’s assume an hourly rate of $300, which means a yearly gross income of $390,000.
From that it is necessary to subtract the cost of doing business. A lawyer earning this much income would probably need one full-time secretary-assistant and a full-time “runner.” The lawyer pays the salary, benefits, payroll tax, rent and equipment costs for these employees. The overhead of a well-run practice should be less than 50 percent of gross revenue. Let’s say the overhead here is 40 percent or $156,000, which means $234,000 is left for the lawyer.
A net income of $234,000 is good, but a lawyer who bills only her own time can never earn more than what she can produce herself; 1,500 billable hours a year requires some hard work, and 1,800 a year is probably the maximum sustainable amount for a practice handling many cases at the same time.
Here I define profit as “business income that exceeds the reasonable compensation of an owner-manager.” By this definition, it is impossible for a lawyer practicing alone to have a “profit.” A profit becomes possible when you can charge more for the work of one or more employees than it costs to employ them.
Let’s say, for example, that the practice I’ve been describing has one legal assistant and one associate attorney. (An “associate” is a salaried employee who does not share in profit or loss.) The legal assistant’s time is billed at $150 an hour and the associate’s time is billed at $200 an hour.
The associate is paid $75,000 a year and requires another $75,000 a year in overhead; this leaves $75,000 in profit. The associate is paid $100,000 a year and requires an additional $100,000 in overhead; this leaves $100,000 in profit. Our lawyer, therefore, has additional income (“profit”) of $175,000 a year.
In some big firms, the ratio of income-generating employees to the profit-taking partners exceeds five to one. That’s how lawyers with big-time cases earn lots of money.
Income-generating employees are the key to law firm profitability, but they have to be supplied with income-producing work. This is why overhead dictates the divorce lawyer’s style of practice. In the next letter I describe how this principle affects clients.
Your oldest and best friend,
Bucky
— Brian H. Burke is a certified family law specialist practicing family law and mediation in Santa Barbara. A researcher and educator in the field of divorce and family conflicts, he is also the creator of the Legal Road Map™. Click here for more information, call 805.965.2888 or e-mail .(JavaScript must be enabled to view this email address).
Comments
