The Economics of Practicing Law: A 1998 Snapshot

Links to figures in this article require that you have the free Adobe Acrobat Reader Software on your computer.

By Dianne Molvig

hile striving to stay abreast of case law and other developments in the legal field, attorneys somehow also must find time to monitor the business end of law practice. Usually the latter gets limited attention. Lawyers would, after all, much rather spend their time being lawyers than business managers. But every attorney knows that without proper business management, a practice soon flounders.

The State Bar's 1998 Economics of Practice Survey is a tool attorneys can use to evaluate the economic side of law practice. You can use the results to assess how you compare to your peers in several key areas: billing methods, hourly rates, overhead costs, personal income, and more.

In mid-1999 the Bar sent a four-page questionnaire to 3,175 active Bar members residing in Wisconsin, representing a stratified random sampling based on geographic regions. Questionnaires went out to private practitioners only, unlike in previous years' surveys, to better focus on economic issues specific to private law practice. Attorneys sent in 955 completed questionnaires, for a response rate of 30 percent. Of those, 932 were usable for analysis.

Respondents tended to be more experienced attorneys. Eighty percent were age 40 or older (68 percent in the Bar's total membership are age 40 or older), and respondents' average tenure in practice was 20 years. Law firm partner/shareholder described 59 percent of respondents, while 30 percent were sole practitioners, and the remaining 11 percent were associates.

As for other demographics, 32 percent said they practiced in communities with populations of less than 25,000, while 31 percent were in communities of 25,000 to 99,999 residents, and 37 percent practiced in communities of 100,000-plus. Men made up 83 percent of those responding, compared to an 80 percent proportion of male private practitioners in Wisconsin.

The rest of this article looks at key survey findings. When possible, these are compared to findings from the last survey done six years ago. In many instances, however, the surveys asked different questions, or answers were in forms not directly comparable to those of the previous survey.

Billing Practices

Almost all surveyed attorneys (96 percent) said they bill some of their work by the hour. The average total billable hours for 1998 was 1,435 per attorney, with a median of 1,500 hours. The map in Figure 1 shows a breakdown of billable hours by six geographic regions. Looking at types of practice, sole practitioners tended to bill fewer hours, with an average of 1,194 hours for the year, compared to averages of 1,496 for law firm associates and 1,535 for partners.

This finding surprises Cedarburg attorney John Stevens, a sole practitioner and chair of the State Bar's Law Practice Section. "The sole practitioners I know by and large spend a lot of time working," he notes. But, he points to one explanation why solos may have a harder time tallying as many billable hours. "I probably work on average 50 hours a week," he says. "If I bill out 25 of those, I'm happy, because I have to wear a management hat, and I'm active in my community and in the Bar. A lot of solos tend to be active in those areas. By the time I take on those responsibilities, I'm lucky to get half of my day billed out."

Three-fourths of surveyed lawyers said their firms have no minimum billable hours requirement. Of those who do work under such a requirement, 21 percent said the minimum had increased during the past two years. The average annual billable hours among this group is up to 1,686 (median 1,800).

The vast majority of respondents (88 percent) said their firms give no credit on an hour-for-hour basis for pro bono activities. Less than 1 percent credit pro bono on a prorated basis.

While the billable hour is the predominant billing practice, other billing methods also have gained acceptance. (See Figure 2.) Seventy-two percent of surveyed attorneys said they bill some of their work by flat fee. Sole practitioners are the most likely to use flat fees (82 percent, compared to 63 percent for law firm associates and 69 percent for law firm partners). The tendency to bill by flat fee drops as size of firm climbs. It also drops as size of town increases. Figure 3 shows a breakdown for flat-fee usage by type of legal service provided.

As Baldwin attorney and State Bar Law Practice Section member Tom Schumacher sees it, the migration to the flat fee largely has been driven by technology. "Many of our processes are now streamlined from start to finish," Schumacher says. "What took me five or six hours when I started practicing back in the early 1980s now takes me half an hour. If I billed for that on an hourly basis, I'd go broke fast."

The flat fee allows an attorney to factor in not only his or her time and expertise but also investments in technology and other overhead. Also, with flat fees, clients know what to expect up front, Schumacher says. "If they're coming to a lawyer and they think they're going to spend a lot of money," he notes, "you can tell them what you're going to do and that it will cost 'x' dollars. Clients are a lot more receptive to that."

Money In, Money Out

When they do use an hourly rate, respondents reported an average rate of $139 and a median of $130. Bear in mind that the average respondent had been in practice for 20 years, which may have skewed these numbers upward. The map in Figure 1 shows a breakdown of average hourly rates by region. Figure 4 shows average hourly rates by practice area.

Statewide, respondents reported a wide range in average hourly rates - from $45 to $315. Sole practitioners had a lower average rate ($117 per hour) than law firm partners ($151) and associates ($127). As law firm size increased, so did hourly rates. Rates climbed as attorneys had more experience as well. Women attorneys charged less ($122) than men ($142), which may be a reflection of the fact that, overall, women respondents had fewer years of practice experience. The average years in private practice for male respondents was 21, while it was 12 years for female respondents.

In the 1992 survey (published in the October 1993 Wisconsin Lawyer), the average hourly rate was $116 (median $105), translating into a 19.8 percent increase in the average from 1992 to 1998. Much of this increase could be due to rising overhead costs, Schumacher suggests. "Employee costs drive this somewhat," he says. "We've found it's better to pay our support staff well and keep them, as opposed to losing them and having to retrain somebody else from scratch."

Office overhead costs for 1998 averaged $129,888, with a median of $77,698. Nearly half (47 percent) of respondents said their office overhead was below $75,000, while 28 percent stated it was in the $75,000-to-$124,999 range, and 26 percent reported it was $125,000 or higher. Overhead figures cannot be compared for 1998 and 1992, as the 1992 survey asked attorneys to express their overhead costs as a percentage of their hourly rate. That was difficult for most of those respondents to do, as more than half said they had only "moderate" or "little" confidence in their answers. This year's survey attempted to avoid that problem by requesting a dollar figure, asking, "What were your 1998 overhead costs?"

Expenses Billed to Clients

The questionnaire asked respondents how often they billed clients for various expenses, on a scale of "always" to "never." Figure 5 shows the results. Some law practice observers are perplexed about why more often than not, attorneys refrain from billing for paralegal/legal assistant time. "In this day and age, with so much pressure on lawyers to keep their fees down on behalf of clients, it's incredible to me that they aren't billing more of their paralegals' time," says James Wilber of the Midwest office of Altman Weil Inc. in Milwaukee, a management consultant firm for attorneys.

In today's practice climate, firms need to do all they can to leverage their paralegals' time, Wilber emphasizes. "Leverage in a law firm is usually nonowner professional time that's billed to clients," he explains. "Whatever those professionals bring in over and above the cost of having them there goes to the profits of the law firm. Having associates is one way you do that; you make a profit off them. That's the name of the economic game in law."

Paralegals should play the same role in firm economics, Wilber says. "In many firms today," he notes, "use of paralegals - and clearly that means recording their billable time and billing for it - is at an all-time high. It's been growing every year for several years. It's amazing to me that the survey's number shows what it does. It runs counter to the trend we see."

Driving that trend is client preference, he adds. Clients would rather pay the much lower paralegal rate whenever possible. What's more, paralegal time is one expense clients are happy to pay. "They don't like being billed for copying - or at least for more than the actual cost of it - or for postage," Wilber says. "They think that's kind of nickel-and-diming them. But studies show that clients clearly recognize paralegal services as valuable, over and above the services they're getting from the lawyer. That makes the survey's finding all the more astounding to me. And all the more reason why firms [that are] not billing paralegal time should be meeting to find out if they want to change that."

Another factor could be entering into the survey's finding. Although the questionnaire had separate lines to denote billing for paralegal time and secretarial time, some lawyers still may have included secretarial time in the line about paralegals. That would skew the result because, as Figure 5 shows, lawyers rarely bill clients for secretarial time.

Why would respondents focus on secretarial services in answering the paralegal question?

"I think that's where the lawyer's ego comes into play a little bit," Stevens points out. "I think there are lots of lawyers who want to say, 'Oh yes, I have a legal assistant.' But as you talk with them, you find out what the (legal assistant) is doing is a skilled legal secretary's job, rather than meeting with clients and assembling facts," which are more in line with typical paralegal duties.

Uncollectibles Decrease

The ratio of uncollectible accounts took a dramatic dive since the survey six years ago: down from an average of 15 percent in 1992 to 8 percent in 1998. Why the plunge? The survey itself reveals no clues, but Wilber offers some theories. One is that the economic times have changed. "Six years ago was when the recession hit," he says, "and it was pretty slow in the legal profession. But now, because of the demands on their time, I think more lawyers are forced to be more selective in what work they're taking. And they're doing work for clients who are more likely to pay the bills."

Bear in mind, too, Wilber notes, that it's totally up to people in the firm to decide when to write off old, uncollected accounts. "I know firms that carry accounts receivable for years," he says, "even though they know they'll never collect them. Others are very disciplined about writing them off after a certain period. So what we're looking at (in the survey) is a snapshot. It could change from one year to the next very easily, depending on who is cleaning up their old accounts and writing them off."

As a lawyers' management consultant, Wilber would like to believe that two other factors are pushing uncollectibles down. "I'm hoping that one reason is that firms have gotten more selective about what matters they're taking in," he says. "The best time to assure you're going to get paid for a matter is when you take the case. You can spot a lot of potential problems in getting paid during case intake. If you exercise the discipline there, it's more likely you'll get paid at the other end."

Second, Wilber hopes uncollectibles have fallen because firms have gotten better at collecting accounts receivable. That means putting the task in the hands of someone in the office other than attorneys. "Our experience is that lawyers don't want to do it," Wilber notes. "They think it interferes with the attorney/client relationship, which it could. And it's just not something they want to do. To get around those kinds of human inclinations, we suggest to firms, if they're large enough to have an office administrator, that they turn the collections over to that person. They need to train the person and be sure the form letters and so on are appropriate and legal. But once the system is in place, it gets the lawyers out of that business."

Finally, one more bit of advice from Wilber about pursuing uncollectibles: Draw the line at suing the client. "It's the quickest way to get a malpractice claim filed against you," he says. Pursue this route only as a last resort when trying to collect a sizable sum of money, he adds. And the decision to sue should never be up to only one partner. Says Wilber, "It should be discussed among some larger group in the firm" - either all partners in a smaller firm, or executive committee members in a larger firm.

What Attorneys Make

Survey respondents' gross personal income for 1998 averaged $130,805, with a median of $100,000. Figure 6 shows that nearly one-third of respondents said they grossed less than $75,000, while 29 percent fell into the $75,000 to $124,999 bracket, and 40 percent made $125,000 or more. Again, the fact that more than half of the respondents had been in practice for 20 or more years may have boosted the average income. Comparisons to 1992 figures are not useful, because that survey did not focus exclusively on private practitioners.

Sole practitioners' average gross personal income was $108,000 compared to $67,308 for law firm associates and $153,618 for partners. Women's average income was about half that of men's ($72,339 versus $141,979). Why so much lower? One factor that may enter in is that fewer women have been in the legal profession as long as men. Few age 60-plus women attorneys with 35 years' experience are out there to pull up women's average income, while that demographic is much more common among male attorneys.

Other factors also may come into play, suggests Madison attorney Linda Balisle. She notes that fewer women go into civil litigation, which can bring in huge contingent fees and thus higher pay. "And that fits into a second reason," Balisle says, "which is that women have responsibility for families in a way that a lot of men still don't. Because of those responsibilities, women can't be on the road as much. They can't have as much of an up-and-down life as a lot of high-roller, contingent-fee litigators do."

The billable hour system may be another factor, Balisle says. The survey found that women tend to bill fewer hours than men (averages of 1,266 and 1,469, respectively). "I've observed that a lot of women, once they have kids, get a lot more efficient in their work," Balisle notes. "You get more done in less time, but that means you bill less. In a law firm's finances, that penalizes you. So part of this is just the structure of the way we pay people."

Family responsibilities also influence women's incomes in another way. "More women hang out their own shingles," Balisle says. "And lawyers who are solos make less than partners in law firms. Many women do not feel they fit into traditional, large law firms. Linda Roberson (her partner) and I do a lot less administrative work with our firm than we did in a big firm."

Time and money - that's a balancing act all lawyers struggle to manage. Stevens says that one overriding impression the survey results left with him is that the time demands of the legal profession continue to intensify, even with effort-saving technology. "We have technology in most of our offices so we can accumulate facts quicker, and we can communicate those facts to others quicker," Stevens points out. "But when it comes to analyzing a problem and communicating that to a client, I don't think we have many ingenious ways to save a lot of time doing that. As I went over this survey, it struck me that giving solid legal judgment and advice to clients takes time. It takes time to communicate ideas to people, to gain their confidence. And I think that's the real challenge facing our profession."

Wisconsin Lawyer