The Economics of Practicing Law: A 2001 Snapshot
See how the business side of your practice compares
to that of your peers in several key areas: billing methods, hourly
rates, overhead costs, personal income, and more.
by Dianne Molvig
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Figure
1 - 2000 Attorney Net Income by Principal Position
Figure
2 - 2000 Annual Net Income by Years in Practice, Full-time Attorneys
Only
Figure
3 - 2000 Median Net Income by Gender and Years in Practice,
Full-time Respondents Only
Figure
4 - 2000 Median Net Income by Gender and Years in Practice,
Full-time Private Practitioners Only
Figure
5 - Distribution of 2001 Attorney Hourly Billing Rates by Region and
City Population
Figure
6 - 2001 Typical Flat Fees Charged for Legal Services
Figure
7 - 2001 Use of Marketing Device by Firm Size
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How much do lawyers charge? How much does the average attorney earn
after being in practice for five, 10, or 20 years? What chunk of those
earnings goes to pay staff salaries, rent, and other overhead costs? How
do lawyers spend their time in a typical workweek?
Determining and presenting accurate answers to these and other
questions is the purpose of the State Bar's 2001 Economics of Law
Practice Survey. It provides data for countering many commonly held
misconceptions about how lawyers practice. More importantly, it gives
lawyers a tool for gauging how they're doing on the business side of
their practices in comparison to colleagues with similar experience,
working in similar settings.
"This is great information for management," says Tom Schumacher,
managing partner of an eight-attorney law firm in New Richmond. How will
he use the data? For one, he'll look at overhead costs. "I can pull
figures right off our year-end statement," he says, "and see how we
compare to the numbers in the survey. We can look at the areas where
we're off, and figure out changes we could make to bring us more in
line."
De Forest sole practitioner David Grove, chair of the State Bar's Law
Practice Section, says he'll use survey data to help him adjust his
rates. "I have a general feel for what competitors are charging in my
area because we talk," Grove points out. "But with this survey, I now
have information from a larger pool."
Private practitioners aren't the only ones who will find useful
information in this year's survey. It also presents data on net incomes
and time usage, for example, for attorneys in diverse job settings -
government agencies, in-house counsel, legal service nonprofits,
judicial clerkships, and more.
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Dianne Molvig operates Access Information Service, a
Madison research, writing, and editing service. She is a frequent
contributor to area publications.
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Supplying all the pieces of information
were 890 attorneys, out of the 3,741 randomly selected in-state, active
Bar members who received the survey questionnaire by mail this past
June. That's a response rate of 24 percent. For details on the
demographic makeup of the respondent group, see the accompanying
sidebar, "Who Are the Respondents?"
The remainder of this article highlights key survey findings. A word
of explanation at the outset: Because respondents completed the survey
in mid-2001, they gave current (2001) figures for hourly rates, time
usage, and so on. When numbers had to be on an annual basis, such as net
income and overhead, respondents provided 2000 data. Also, you'll find
few comparisons to the 1998 survey (taken in mid-1999) because the two
surveys differ greatly in the types of data collected and the target
group.
Net Incomes
The average survey respondent is 46 years old and has been practicing
law for 17 years. Among those working full-time, the average net income
for 2000 was $94,501. The average for full-time private practitioners
was $104,288.
Median net income figures are lower than the averages, which seems to
indicate that a few extremely high figures inflated the averages. For
all full-time attorneys, the median for 2000 was $79,000 - that is, half
of the attorneys earned less than that amount and half earned more.
Full-time private practitioners had a slightly higher median net income
of $80,000.
Figure
1 shows year 2000 net incomes broken down in various ways for
full-time attorneys in different types of practices. To see where
attorneys' net incomes stand at various career stages, see Figure
2.
The gap between male and female lawyers' incomes persists. Overall,
female attorneys working full-time earned 72 percent of what their male
counterparts made in 2000 (a median net income of $60,000 versus
$83,500). The prevailing wisdom explains this away by pointing out that,
as a general rule, men have been in practice longer than women, so
naturally their incomes are higher. Or could it be that women just are
not compensated equally? As Figure
3 shows, the gap remains when comparing men and women who have
worked in full-time practice for equal tenures. Figure
4 shows the same type of comparisons for full-time private
practitioners. Overall, women in full-time private practice fared even a
little worse, earning 62 percent of what men earned, although they
earned slightly more than men in some subgroups.
How does this survey's gender gap compare to that of the last survey?
Unfortunately, no direct comparison is possible. The 1999 survey polled
only private practitioners, and it asked respondents for gross income,
rather than net. Also, it did not separate out attorneys working
part-time. Considering those factors, women's 1998 gross income was 51
percent of men's.
The disparities shown in the current survey's results could stir
cries of protest. But State Bar President-elect Patricia Ballman, a
Milwaukee attorney, cautions against drawing conclusions without looking
behind the numbers. She's now been in private practice for 24 years, all
of them in a big firm. As a single mother, she worked full-time but put
in fewer hours than her male counterparts as she was moving up through
the ranks. It always seemed fair to her that people who worked more,
earned more.
"If I earn less now, it's because of my life choices," she says.
"Even after your kids are grown, it's hard to get back to the level of
your peers because you've given up years' worth of hours while you were
raising a family. I know that sounds sexist, saying that men don't raise
families. But we know the reality: Women still do most of the home
chores and most of the child care."
Juggling those demands pushes some women to leave private practice,
whether to not work outside the home or to take jobs, as government or
in-house counsel, with more predictable hours. "It's not just women,"
Ballman adds. "We've had men leave our firm, too, for some of the same
reasons."
Child care isn't the only distraction, notes Oshkosh attorney Alyson
Zierdt. "Now we're seeing middle-age women attorneys, like myself, who
have aging parents," she notes. Thus, various family issues affect
women's - and men's - choices in their law careers and their earning
power. What's more, younger lawyers, of both sexes, are conveying a
clear message that they want a life, not just a career.
Meanwhile, private law firms are trying to operate in a more
business-like fashion in order to survive. With that comes a demand for
higher productivity. The push for more billable hours and the demand for
a more flexible worklife seem on a collision course. "But," Zierdt
observes, "I think there's a place for everybody. People who are
comfortable with the productivity demands and recognize the commensurate
financial rewards that go with them, will hang in there. Others will
make other choices."
Billing Rates
The survey reports that 94 percent of private practitioners have an
hourly rate that they use as a standard or starting point for computing
fees. Among private practitioner respondents, the current average hourly
rate is $146. Figure
5 shows average and median hourly rates by region and by city
population. Usage of flat fees is prevalent for many types of legal
services, as shown in Figure
6.
The 2001 hourly rate is up from $139 two years ago, for a 5 percent
increase. In the six-year span between the two previous surveys (done in
1993 and 1999), the hourly rate increase was nearly 20 percent. This
would seem to indicate a slowing of the rate of increase in the last two
years, compared to the previous six years. This year's survey also found
that only 46 percent of respondents had raised their rates in the
previous 12 months.
"In a way this is consistent with what we see everywhere," observes
James Wilber, principal at Altman Weil's Midwest office in Milwaukee,
"which is the inability of lawyers to raise their rates by much. But I
am surprised that the increase in Wisconsin is so little compared to
what we see nationally."
Only 103 out of 573 private practitioner respondents, or 18 percent,
say their firm has a policy for minimum billable hour requirements.
Usually, such policies exist in larger law firms, but other firms have
minimums as well; they just don't express them in terms of billable
hours. "We look at actual collections," Schumacher notes. "We have three
associates now, and we expect annual collections from each of them of
$125,000. Then we run a report that tells us how many hours it took them
to get there, which gives us an effective hourly rate."
Time Usage
The survey found that on average, full-time attorneys put in a
44-hour workweek, while private practitioners work 43 hours per week.
Both the entire respondent group and private practitioners say that, on
average, seven hours of their workweek go to noncompensable tasks. Many
observers remarked that the numbers seemed low, especially for private
practitioners, based on their own experiences and what they see among
colleagues. "You have to work nine hours, eating lunch at your desk, to
bill seven hours a day," Ballman notes. "And then there's work at night
and on weekends."
Grove also believes that the normal private-practice lawyer's
workweek may be longer than the survey shows. "I figure most work about
50 hours a week," he says. "They start early and work late, they're not
just putting in eight-hour days." One can only guess at the reasons for
the disparities between survey findings and what people perceive as the
real lawyer workweek. Grove suspects it may be that many attorneys don't
pay enough attention to how they actually use their time - especially
the unbillable time. "The question is always," he says, "what do you
count in that? Do you count the Rotary luncheon as networking and
marketing, or do you just count it as lunch?"
But one point the survey numbers do make clear, says State Bar
President Gerald Mowris of Madison, is that attorneys are generous in
donating their time. Nearly 40 percent of respondents report spending
from two to 45 hours a week in unbilled community service. "That's a
lot. Then on top of that," Mowris notes, "they're doing several hours of
pro bono work per year. It's gratifying to see attorneys giving that
much of their time." Nearly two-thirds of respondents reported pro bono
hours, ranging from one hour to a high of 520 hours per year.
Overhead Expenses 
Overhead
Expenses
Only private practitioners responded to this
portion of the survey, with 155 sole practitioners and 234 firms
providing information.These respondents indicated that
for 2000, their average per-attorney overhead was $68,654, broken down
into $33,884 for labor (salary and benefits for all nonlawyer
personnel), $13,980 for occupancy (rent or mortgage, phone, utilities),
and $23,631 for all other nonsalary expenses. The average gross receipts
per attorney for 2000 was $159,269. Thus, for 2000 the average
expenses-to-gross-receipts ratio was 0.35.
Now to compare medians. The median total overhead figure was $60,000,
while median gross receipts tallied $145,000. Comparing median overhead
to median gross receipts yields a ratio of 0.41. For median data on
overhead, gross receipts, and ratios by region, firm size, and community
population, see the full report, available from the State Bar.
Grove, whose lean management structure allows him to keep his
expenses-to-gross-receipts ratio in the range of 0.22 to 0.27, says he's
encouraged to see the survey findings on this ratio. Perhaps, he
concludes, attorneys are making changes in how they use technology. In
the past, too many attorneys merely slapped new technology on top of an
old management structure, hoping that the added cost would be offset by
productivity gains. It often was not.
"Maybe what's happening now," Grove says, "is that technology is
starting to pay off in productivity increases and lower expenses due to
changes in management structure. For example, it may no longer be one
attorney, one assistant, but rather three attorneys, one assistant or,
as in my case, two attorneys and no assistant."
Wilber finds the survey's expenses-to-gross-receipts ratios are
roughly similar to what he sees nationally. But as for the average gross
receipts figure of $159,269, "that's lower compared to what we see in
firms across the United States," Wilber says, "where that number might
be $250,000 per lawyer, or even $300,000 or $350,000 per lawyer in
bigger firms." The difference persists when comparing firms of similar
size. For instance, nationally for firms with fewer than nine attorneys,
the average gross receipts per lawyer was $266,053 for year 2000,
according to Altman Weil's latest survey. Compare this to the $162,085
average (gross receipts figure) reported by Wisconsin attorneys in
similar-sized firms.
Finally, Wilber offers a caution on expenses/receipts ratios. Avoid
focusing too much on cutting overhead as a way to improve the ratio, he
advises. Sure, you want to trim your overhead as much as is reasonable,
which depends on the nature of your practice. But, "in our view," Wilber
says, "the more important number is the revenues-per-lawyer. That's
where the action is. If you want a more profitable firm, you have to get
your people busy and engage in marketing."
Expenses Billed to Clients
Roughly two-thirds of responding private practitioners say they
"always" or "usually" charge clients for travel time and costs, while 88
percent charge clients for time spent on phone calls. Almost half always
or usually pass on copying/duplicating costs to their clients.
But the number that perplexes some observers, as it did in the 1999
survey, is the high proportion of private practitioners who fail to
charge clients for legal assistant time. Only 46 percent say they always
or usually pass on this cost to clients. "That floored me," says Lori
Kannenberg, a law firm administrator at Lawton & Cates, Madison, and
past-president of the Wisconsin Association of Legal Administrators.
"We've been talking for years and years about billing for paralegal
time. It's unfortunate that more firms aren't doing that."
Still, the survey finding could be skewed, because of a lingering
problem with definition. The survey asked about billing for legal
assistant time without defining "legal assistant." Some firms, however,
use that job title for staff who actually are secretaries, not
paralegals. And the vast majority of firms do not charge clients for
secretarial time (only 11 percent of survey respondents always or
usually do so).
That leaves a somewhat fuzzy picture of whether firms bill often
enough for paralegal time. But if they don't, "they're losing out on
potential revenue," Kannenberg notes. "And they probably have employees
who feel undervalued."
At Kannenberg's firm, for example, some staff members who opted to
get training as paralegals now serve as both secretaries and paralegals.
They're paid more for the paralegal portion of their work. In turn,
their paralegal time is billed to clients, who are happy to pay the
paralegal's rather than the lawyer's rate for legal work. Does this
disparity in pay for support staff having mixed duties create tensions
among staff? Not if you educate employees about the reasons for the
difference, Kannenberg maintains. "Here we make it no secret," she says,
"that if you take on more responsibility, you will be paid more. And you
will bill for your time."
Marketing and More
Seventy-two percent of private practitioner respondents say they
market their services. Figure
7 shows how firms, in three size categories, use various marketing
devices.
A couple of statistics, in particular, caught the eye of Jennifer
Rupkey, director of client development for Michael Best & Friedrich,
a large Milwaukee law firm, and president of the Wisconsin chapter of
the Legal Marketing Association. She notes that for larger firms, the
usage rate for Web pages is a close second to the rate for firm
brochures. "In the past, the brochure was typically the core piece,"
Rupkey points out. "Now the Web site is close behind. In the future, I
don't see firms replacing their brochure with a Web site, but rather
using the Web page to complement the brochure. Brochures will remain
useful for distributing at client meetings and seminars," she says.
Rupkey also notes that only 12 percent of firms with fewer than 10
attorneys have a Web page. "I'm surprised at that," she says, "because
they're the ones whose clients would be on the Internet looking to hire
a lawyer. Smaller firms could get clients as a result of their Web
site." By contrast, larger firms, because of their target clientele, use
Web sites as "an informational tool that complements our other marketing
devices," Rupkey explains. "We don't look to get new clients through our
Web site."
When asked to assess the quantity of their work, 61 percent of
private practitioners say their workload is "about right," while 29
percent report it is "more than they can handle," and only 10 percent
say it's "insufficient to keep busy."
Finally, of private practitioners, 59 percent responded that the
number of lawyers in the community in which they practice is "about
right." This result is nearly the reverse of a similar question in the
recent Bench/Bar Survey, as reported in the November Wisconsin Lawyer.
In that survey, 53 percent of respondents said there are "too many
attorneys in practice today for the amount of work to be done."
The difference in findings between these two surveys is a result of
what the questions asked of respondents - that is, an overall assessment
of the lawyer count versus sizing up the situation close to home. "It's
similar to the differences in public perceptions about lawyers," Mowris
points out. "Overall, they rank lawyers low. But they rank their own
lawyer high. It may be the same factor at work here. How close you are
to something skews your perception."
Wisconsin
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