The economics of law practice has as its foundation a simple guiding principle, points out Gretchen Viney, a Baraboo attorney and a clinical professor at the U.W. Law School. “Lawyers can only charge,” she says, “what their clients can afford.”
Therein lies the dilemma almost all lawyers face: how to strike a balance between providing affordability to your clients – who also may be your neighbors – and making a living that’s commensurate with your education and experience and the value your services bring to your clients’ lives.
Complicating the matter further are the spiraling costs attorneys must pay for insurance, utilities, staff salaries and benefits, and other overhead expenses. As Viney notes, for many lawyers, “The rate of return is not keeping up with the increases in costs.”
The State Bar’s 2008 Economics of Law Practice Survey brings together information that individual attorneys might find helpful in making their independent business decisions. The survey collected data on time-use patterns, billing methods, net incomes, overhead expenses, marketing practices, and more.
“Our committee is always looking at how we can help lawyers to practice better and enjoy their lives more,” says Nancy Trueblood, a Wauwatosa solo practitioner and chair of the State Bar’s Solo and Small Firm Practice Committee. “I hope attorneys will look at the survey results and ask, ‘Where do I fit?’”
The new survey, the first since 2005, had a significant change in questionnaire format from previous surveys. The new questionnaire had separate sections for private practitioners, government lawyers, and in-house counsel.
In May 2008, the State Bar mailed questionnaires to 6,160 active Bar members. Of those, 17 percent (1,024) responded, including 618 private practitioners, 257 government or public service attorneys, and 102 in-house counsel. Survey firms consider this to be a good response rate from busy professionals. Gene Kroupa & Associates, a research firm in Madison, compiled and analyzed the survey results.
“I’m pleased our members have shared this information,” says Nerino Petro, practice management advisor for Practice411, the State Bar’s Law Office Management Assistance Program. “The survey report is a great tool. It has the kind of information lawyers ask for when they call us with questions. So this is information that’s actually helpful to Bar members.”
Here we examine some of the survey findings. More detailed information is available in the full survey report.
Earnings and Expenses
Overall, respondents appeared to be well established in their careers. The mean (average) age for all respondents was 48; the median age (midpoint in the range) was 50. By comparison, the mean and median ages among all Bar members are both at 46, according to State Bar statistics. (See the accompanying sidebar “A Brief Profile of Respondents.”) Survey respondents’ mean and median tenures in law practice were both 21 years.
Looking at the entire respondent group, 73 percent were age 40 or older, and 55 percent had been practicing law for 20 years or more. In fact, 29 percent had been in practice for 30 or more years. These factors ought to be kept in mind in examining the income data below.
For government attorneys working full-time, the mean gross income (before taxes) in 2007 was $79,542, and median gross income was $82,000. The survey also broke down income data by type of setting, with the average gross incomes ranging from $71,133 for public defenders, to $96,333 for legislative attorneys. Bear in mind, however, that the latter average was based on a small sampling of only six respondents.
Government attorneys are a diverse group, points out William Domina, Milwaukee County corporation counsel and president of the State Bar’s Government Lawyers Division. “Still,” he says, “I think the salary figures in the survey can help government lawyers understand whether they’re being fairly compensated compared to others in similarly situated government entities.”
As for job-related expenses, 63 percent of government attorneys said they paid their own State Bar dues and supreme court assessments. For 5 percent of government attorneys, their employers paid a portion of dues and assessments, and for 32 percent the employers paid these expenses in full.
Among respondents who are full-time in-house counsel, the mean gross income for 2007 was $148,552, and the median gross income registered at $123,000. The mean amounts ranged from $100,468 for respondents having counsel positions, to $204,462 for chief legal officers or general counsel.
Forty-eight percent of in-house counsel respondents worked for a private for-profit company, 33 percent worked for a public for-profit, and the remainder were employees of other types of organizations. Ninety-five percent said their employers paid the full amount of their State Bar dues and supreme court assessments.
The respondents who were full-time private practitioners reported a mean net income (personal income after expenses, before taxes) for 2007 of $123,253; their median net income was $100,000. The range of last year’s mean amounts ran from $67,447 for associates to $171,827 for equity partners and shareholders.
One group of data that caught the eye of Robert Miller, firm administrator for Murphy Desmond S.C. in Madison, related to beginning salaries. The survey found a 2007 average net income of $58,231 (50th percentile) for lawyers with two or fewer years in practice. “The 75th percentile was about the same, at $58,000,” Miller notes. “But you see a big jump at the 95th percentile, at $128,000. That’s the impact of the big firms. It seems everybody but the big firms is paying about the same.”
In the income numbers for solo practitioners, Trueblood notes differences by practice setting. For instance, the mean net income for solos was $71,783, while the mean net income for solos in office-sharing settings was $109,586. “That makes me wonder,” Trueblood notes, “if there’s something about that informal networking available to those who share offices,” for example they might refer cases outside their areas of expertise to their office-mates.
On the expense side, total overhead for private firms for 2007 averaged $89,981 per attorney, with a median of $73,250. The firms with six to 15 lawyers had the highest average for per-lawyer overhead, at $150,600, and solos had the lowest, at $60,383.
Where the Time Goes
Nearly two-thirds (63 percent) of private practitioners said they always keep track of their time, while another 16 percent do so except in contingency or other nonhourly-fee cases. Women lawyers were more likely than men to always keep time records (74 percent versus 59 percent). The tendency to keep time records also increased with firm size.
Private practitioners reported averaging 33 billable hours a week and 42 work-hours total per week. As has occurred with previous surveys, observers are skeptical of the 42-hours figure. For Petro, that number doesn’t match with his own experience as a solo practitioner for 15 years or with what he sees now as a practice management advisor for solos and small firms statewide.
“I don’t understand it,” Petro says of the statistic, “because we know attorneys aren’t working 8 to 5. I don’t know if it’s a lack of truly grasping how many hours they spend on work, or if they don’t include working on cases at home. I’m not sure.”
Echoing those thoughts is Alan Olson, a principal with Altman Weil who works out of the national consulting firm’s Midwest office in Milwaukee. “Based on my experience, I think the 42 hours per week is highly likely to be understated,” he says. “I think the average would be closer to 60.”
The underreporting may be due to the fact that many lawyers don’t track their unbillable time, Olson adds. Or if they do, they track only certain functions, such as management duties or pro bono work. Thus, survey respondents “might be putting in substantially more time than they’re reporting,” Olson concludes.
As for the average billable-hours figure, 33 hours a week, or 1,650 hours in a 50-week year, is “generally in line with what I see nationally,” Olson says.
When asked about their quantity of work, nearly two-thirds of respondents said it was all they could handle, 26 percent said it was more than they would prefer, and 10 percent said their workload was insufficient to keep them busy.
“My view is that this might have changed since the survey was taken,” Olson observes. “We see some firms continue to be highly successful and just as busy. But others – and probably an increasing proportion – are struggling due to the recent economic climate.”
Overall, private practitioner respondents said they donated an average of 69 hours to pro bono work last year and spent an average of 21 hours on continuing legal education (CLE).
As for government lawyers, respondents reported an average of 39 hours of legal work a week, plus other tasks bringing the total workweek to 46 hours. The average for pro bono hours was 37 last year, plus 25 hours devoted to CLE annually.
In-house counsel respondents averaged 24 hours of pro bono work last year and 22 hours spent on CLE. They reported an average workweek of 49 hours, with 38 of those hours on average spent on legal work.
“I would say 49 hours is low if the in-house counsel is personally handling litigation files,” observes Roger Flores, associate staff attorney for American Family Insurance Co. in Madison. “If you’re litigating cases, there’s a lot of time spent outside the office preparing cases for settlement or trial. Doing the job takes more like 55 hours a week.” The survey showed that 16 percent of in-house respondents ranked litigation as their top area of law. The other two of the top three first-ranked areas were transactional work (54 percent) and compliance (14 percent).
Billing and Collecting
Among private practitioners, 76 percent of respondents had a standard hourly rate they used as a guide for fee computation. As of the end of 2007, the mean standard hourly rate was $188 and the median was $180.
Respondents’ usage of other billing methods broke down as follows: contingent fees – 43 percent; retainers – 35 percent; value billing – 16 percent; per diem – 2 percent; and “other” – 5 percent.
“It’s clear the billable hour is still the preferred method of billing,” Petro notes. He concedes, however, that in reality more value billing may be occurring, but lawyers don’t think of it as such. Say an attorney puts in three hours of work on a matter and normally charges $150 per hour. “The bill may seem too expensive,” Petro says, “so you charge for only two hours of work. But, still, in your own mind, you’re billing on an hourly basis,” rather than thinking of it as value billing.
The survey asked private practitioners how long it had been since they’d raised billing rates. Half of the respondents had done so within the past year (34 percent within the past six months, and 16 percent within the previous seven to 11 months). But for 30 percent of practitioners, it had been one to two years since the last rate increase, and for 19 percent it had been more than two years.
“We counsel firms to review their billing rates and pricing at least annually,” Olson says. “Even with good firm management, law firm costs are rising, and the amount of nonbillable time devoted to client service, business development, and firm management is increasing substantially.”
Miller of Murphy Desmond calls attention to survey statistics showing how much the last rate increase had been. Thirty-six percent of respondents said the increase had been 5 percent or less, and 40 percent had raised rates by 6 to 10 percent. But 24 percent of respondents reported raises of more than 10 percent (7 percent at 20 percent or more; 17 percent with an increase of 11 to 19 percent). Miller says he’s surprised to see nearly a quarter of respondents raising rates by more than 10 percent in one jump.
“You’d think if you have clients who are at all sensitive to rate changes,” he notes, “that they would rather get three or four 5-percent increases over time instead of 15 to 20 percent in one fell swoop.”
Olson concurs. “One of the reasons we advocate at least an annual review of billing rates,” he says, “is that smaller incremental rate increases are more likely to be understood by clients than a single large increase – although I hasten to add that depends on the client, the lawyer, and so on.”
Uncollected fees also concern Olson. The survey showed that the mean proportion of uncollected bills was 15 percent, with a median of 10 percent. One-third of respondents pegged their uncollectibles at more than 10 percent. “That is high based on my experience,” says Olson, who describes uncollectibles as “unintentional pro bono.”
“In many firms,” he adds, “10 percent would reflect the profit margin after covering overhead, associate compensation, and other expenses. So by definition, that would come out of the bottom line.”
Solos had the highest rate of uncollected bills, according to the survey, with 42 percent stating that more than 10 percent of billed fees were uncollected. “I would shoot for 5 percent, and no more than 10 percent,” Petro advises.
The survey also asked about types of expenses charged to clients. Time spent on telephone calls and travel, as well as travel costs, ranked as the most prevalent. Petro noted that solo and small-firm attorneys were less likely to charge for expenses like photocopying and computerized legal research. The reason, he speculates, is that they can relate to their clients’ situations. Still, he notes, while cost containment is admirable, “If it’s coming at the expense of lawyers’ ability to keep their doors open and provide a living for their families, there is an issue.”
Promoting Your Services
The Web site ranked just behind the yellow-pages display ad as the marketing medium of choice among private practitioner respondents. Of those who answered questions about marketing, 86 percent said they market their legal services, with 73 percent using yellow-pages ads, and 65 percent having Web sites.
In Dane and Milwaukee counties, however, yellow-pages ads got lower usage – 50 percent of respondents in Dane County and only 27 percent in Milwaukee County, compared to 82 percent in other counties combined.
“What we’re seeing at the national level,” Petro reports, “is that more and more consumers are turning away from traditional advertising media like the yellow pages and going online as their first choice for trying to find legal services.”
Other marketing channels used by at least 10 percent of respondents included listings in legal directories (48 percent), firm brochures (36 percent), seminars (30 percent), newspaper and periodical articles (25 percent), newspaper ads (18 percent), client newsletters (18 percent), radio and television ads (16 percent), and electronic newsletters (14 percent).
Almost all firms (99 percent) with more than 15 attorneys market their services in some way. As firm size diminishes, the usage rate tapers off, to 70 percent for one-attorney offices. Solo practitioner Trueblood was surprised at this finding. But she noted that the marketing vehicles to choose from in the survey didn’t include the one she relies on most: community involvement.
“In my experience, a lot of solo practitioners participate in various community and business networking groups,” she says. “That’s part of their marketing. It’s one on one.” Part of that, she adds, is relaying to people in her community why it’s worth coming to her to get help.
“As a former newspaper reporter and editor (for 20 years), I always felt I was a troubleshooter trying to avoid problems,” she says. “I still do that as an attorney. Some people come in to see me because they’ve tried to do something themselves. But it’s much easier to do it right for them from the beginning, rather than trying to straighten it out later. That’s what I try to get across to people.”
As Petro sees it, community involvement is important for lawyers for lots of reasons, including marketing. But, he notes, “You also have to be able to give potential clients something that gives them reasons to think you could help them. That’s why it’s important to have an ‘elevator speech’ ready or a firm brochure on hand.”
Whatever marketing channels an attorney or firm uses, tracking results is critical, Petro emphasizes. No matter if you’re practicing in an urban center or a small town, “Find out where your clients are coming from,” he advises. “That’s easy to track, especially at the time of intake. When I practiced, I had a question on my intake form to find out how I got them as clients. If people didn’t fill it in, I’d ask.”
Both Petro and Olson urge attorneys to resist the perhaps natural tendency to cut back on marketing during an economic downturn to save costs. “During a recession, we counsel firms to market more aggressively to retain clients and develop new business,” Olson says, “rather than hunkering down and waiting for the storm to pass.”
The same goes for solos and small-firm attorneys, Petro adds. “This is when you need to do more to tell people what differentiates you from your competitors,” he says. “Now, if you’re in a small town, that might not be critical. But you still have to explain to people what services you provide so they’re aware of what you do and how you can help them.”