Wisconsin Lawyer: Solutions: How Attorneys Underearn … and What You Can Do About It:

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  • Wisconsin Lawyer
    November
    01
    2013

    Solutions: How Attorneys Underearn … and What You Can Do About It

    Ann M. Guinn

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    Lawyers’ financial problems often have less to do with the quality of their work or their clients’ circumstances than with self-imposed barriers that, with some time and effort, can readily be overcome.

    rope down a wellAfter 13 years of working for others, Molly opened her solo practice. Eighteen months in, Molly summed up her experience by saying, “I think my business model is good. I’m working hard to get known in my new community here, and I think I’m doing a good job of that. I get a lot of referrals, and we never seem to be lacking for work. I’m planning to hire an associate to help with the workload after he graduates [from] law school next year. But, somehow, I’m not making any money. I haven’t been able to take a penny out of the business.”

    Molly’s financial goals are modest. “I’d like to take a thousand dollars a month,” she says. When asked if this is enough to cover her personal and household needs, Molly pauses, then says, “I’d really love to take two thousand, but that’s just not going to happen.”

    How can Molly be in this situation? For starters, she rarely asks for an advance fee deposit because “my clients don’t have the money.” She hasn’t billed a single client in the 18 months she’s been in business because “my legal assistant refuses to do the billings.” Molly has kept the office open with whatever advance fee deposits she has collected, along with her life partner’s financial support (a major source of contention in their relationship). She accepts any and all clients who walk through the door, regardless of their ability to pay. Aside from attending bar meetings and helping to plan an annual dog show, Molly’s marketing consists of a website and a small ad in the local newspaper, which she hopes will generate a flow of good, paying clients. She set her fees by looking at what other lawyers in her community charge, with no thought as to what she must earn to cover her overhead and pay herself.

    Molly is a chronic underearner – consistently earning below her needs and below her potential – and she’s not alone.

    Doug is addicted to pro bono work and the feeling of satisfaction it gives him to help others in need. He drives a car that is more than 40 years old (he’s the original owner), became a vegetarian because he can grow his own vegetables and save money at the grocery store, and houses his family (wife and preteen daughter) in a modest home that has no electricity. Doug doesn’t live on a farm – he lives close to the heart of a major American city. His billable goal is 2.5 hours per week, which brings in enough to cover the few expenses he has and allows him to devote the rest of his time to free work. He is meeting the needs of others, but is this lifestyle his family’s choice, too?

    Then there’s Randy. He delivered his two children at home, and set his own broken arm, because his practice doesn’t make enough money for him to provide health insurance for himself or his family.

    Lizzie works for a 20-attorney firm but must find her own clients and give the firm 60 percent of her revenues. Her marketing isn’t working, and she’s on the verge of losing her condominium. As she puts it, “I’ve been practicing for seven years. I shouldn’t be living on peanut butter and soup, and begging friends to take me out to dinner so I can get a square meal once in a while.”

    So, how does this happen – and could it happen to you?

    Underearning is All About Choices

    First, it’s important to understand how you might inadvertently set yourself up to underearn. Would you be surprised to learn that underearning is not about your clients or your practice area or even the local economy? It’s about the choices you make – even choices that seem rather insignificant at the time.

    Ann M. Guinncom anngp15 aol Ann M. Guinn, principal of G&P Associates in Kent, Washington, is a practice-management consultant to solo practices and small law firms and the author of “Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice,” available through the ABA webstore.

    In his book Earn What You Deserve, Jerrold Mundis explains the two forms of underearning:

    Passive underearning is choosing not to do something, or failing to do something, that would have resulted in you making more money. Examples include choosing not to increase your rates, failing to spend money on technology that would increase efficiency or productivity, and failing to market your practice appropriately.

    Active underearning is choosing to do something that will cause you to underearn. Examples include accepting the wrong cases or clients, giving away excessive amounts of time to pro bono or volunteer activities, discounting your fees, and using your time to handle certain tasks that would better be delegated to someone else (for instance, payroll, bookkeeping, website design).

    Underearning is About Your ’Tude

    Underearning behaviors develop for a variety of reasons, including your attitudes about money. How do you feel about people who have a lot of money? How did your parents talk about money when you were growing up? How did they choose to spend their income? What do you believe you would have to give up to make money?

    Underearning can also be rooted in low self-esteem. Maybe you don’t feel deserving of money, or you undervalue yourself and your skills. Jim is a prime example of a person with poor self-worth. An attorney with a big law firm, Jim automatically shows “N/C” for precisely one-third of every line item on his client bills. When asked why, he replies, “I guess I just don’t see the value in my work.” If you don’t believe in yourself, you will have a hard time billing your clients or talking about money with them. Listen to the voice of others, not your own, when assessing your abilities. If you’re still in practice, regularly get referrals, and prevail in your clients’ behalf, then you’re doing many things right. Own it! [See Figure 1: The Effect of a Fee Discount.]

    Although you might not identify with the extreme cases described above, chances are good that you underearn in some way, too. Don’t believe it? See if any of these statements ring a bell:

    • I often give away my services (pro bono work, not billing for all of the time worked, excessive volunteerism, answering questions for free on the phone, free initial consultations, and so on).

    • My initial consultations always run over the time allotted, but I don’t charge more for the extra time.

    • Raising my fees causes me such stress and fear that I only do it every few years.

    • I regularly discount my fees to encourage prompt payment.

    • I don’t record my time contemporaneously for either hourly or flat-fee work.

    • I let my accounts receivable become 90 days or more past due before I take action.

    • I continue working for clients who aren’t paying me.

    • Talking with clients about money is uncomfortable for me.

    • I waive my advance fee deposit if a potential client can’t afford it.

    • I have time-management issues.

    • I am good at self-sabotage (accepting clients who are unable or unlikely to pay my fees, not setting goals or not developing action plans to reach them, taking cases I’m not qualified to handle, billing irregularly, not doing focused marketing to attract my ideal client, and so on).

    • My debt level is high. I have very little in savings, my retirement account is underfunded, and I’m not clear on where my money goes.

    • I continually put others’ needs before my own.

    • I am often worried about money.

    [Excerpted from Minding Your Own Business: The Solo & Small Firm Lawyer’s Guide to a Profitable Practice, by Ann M. Guinn (ABA)]

    If you recognize yourself in one or more of these statements, you are certainly earning below your potential, and possibly below your needs. It’s time to take action.

    Figure 1

    The Effect of a Fee Discount

    RATE DISCOUNT
    (Percent increase in revenues needed to maintain the same gross profit after a discount)

    GROSS MARGIN

    Amount of Discount 35% 40% 45% 50% 55% 60%
    5% 16.67% 14.29% 12.50% 11.11% 10.0% 9.09%
    10% 40.0% 33.33% 28.57% 25.0% 22.22% 20.0%
    15% 75.0% 60.0% 50.0% 42.86% 37.50% 33.33%
    20% 133.33% 100.0% 80.0% 66.67% 57.14% 50.0%

    [Excerpted from Minding Your Own Business: The Solo & Small Firm Lawyer's Guide to a Profitable Practice, by Ann M. Guinn (ABA)]

    Five Practice Tips to Increase Your Earning Potential

    1) Set Goals. When I ask attorneys how much they need to make per month, the frequent response is, “Oh, I don’t know for sure, but I don’t need much. I can get by on very little.” My question back is this: “Is that what you want for your life – to just ‘get by’?” These folks are living in a money fog. Like it or not, you can’t ignore money very long without serious consequences. You’ve got to get clear about how much money you need per month to run your practice and to cover your personal needs (including household expenses, retirement, savings, investments, charitable giving, and so on). Then figure out the number of hours you must bill to hit your goal. What must you do to reach your goals consistently? Develop an action plan to ensure you have the money you need each month.

    2) Identify Your Money Leaks. Identifying the ways your practice is losing out on money is a critical step in changing your underearning behaviors. Let’s consider Karen’s story. She has worked as a part-time attorney (27.5 hours per week) for her firm for eight years. Karen is expected to bill 60 hours per month. Considering she has no administrative responsibilities other than entering her time each day, this shouldn’t present too much of a challenge, but Karen has never once hit her goal in eight years. Here’s an example of one of her problems:

    Recently, Karen was asked to draft a contract for a wedding photographer. She did a thorough job of researching the various issues that might arise and put together a solid document for her client. This required approximately eight hours of her time. She didn’t enter the time for nearly a week while she “thought over what she was going to charge.” Ultimately, she decided that 2.3 hours “sounded good.” At $250 per hour, Karen just chose to write off $1,425 because, in her words, she “didn’t think the contract was worth the full price.” Karen receives a percentage of all she bills, and the firm gets the rest. She just cost herself and her employer a significant amount of money.

    This contract was not for one-time use; the photographer would use it over and over and it would protect him and his images for years to come. Karen is an experienced attorney, and her research was both valid and diligent. In choosing to write off her time, Karen focused on her fee and not on the value of the work to her client. This is just one of Karen’s many money leaks, and it shows up almost daily.

    3) Commit to Change. Start by recognizing how your underearning behaviors cause you to live a life of deprivation, deprive your family of the lifestyle you want for them, keep your practice partners from earning more for their families, and live with constant stress about money.

    Commit to valuing yourself and your business. Start making smart choices based on sound business practices mixed with a healthy dose of self-respect. When it comes to making a business decision, ask yourself, “Will this take me closer to my goals, or away from them?”

    Review your answers to the statements listed above. Work through each of your “yes” statements and develop a new and productive behavior to replace the old practices that have held you back.

    Tempted to do something for free? Ponder how much more time you will have to put in to make up for those lost billings. Is a client balking at paying your advance fee deposit? Think about how it will go when you send your bills. Spend time aimlessly surfing the Internet? Save that for home and put the reclaimed time into billable work. Before you volunteer for a committee, or to chair your association’s annual fundraiser, determine how much time you can afford to give away. Maybe there’s a service opportunity that will require less time.

    You’ve got the power to make the changes if you want to.

    4) Be Accountable. There’s a reason 12-step groups work – they make each individual accountable for his or her behavior. Ask an attorney friend to be your accountability partner. (A spouse is a bad choice because emotional hot buttons can get in the way.) Set up weekly accountability calls during which you’ll define the behavior you want to work on, outline the steps you’ll take to correct the behavior, and report on the progress you’ve made. Give your accountability partner permission to push when necessary and to praise when you succeed. Accountability can be a remarkably effective motivator.

    5) Keep Working At It. The incidence of underearning recidivism would indicate that many people still don’t acknowledge the serious effect underearning has on their lives. You have to keep working at perfecting your new positive behaviors until they are second nature. The payoff (pun intended) is immense!

    Just remember – money won’t buy happiness but neither will poverty. The choice is yours!