A North Carolina administrator follows an extremely simple formula to calculate the attorneys’ monthly and yearly profitability. It also shows them their own profitability compared to the other attorneys’.
Originally, the firm showed them only the billed hours, says the financial manager for the seven-attorney firm. But that wasn’t enough. The billed hours alone were not a good representation of where they were in the firm.
So he expanded the report to show each attorney’s percentage contribution to the firm.
Start with the costs
The measurement starts with three short calculations.
1. First is the attorney’s salary and benefits.
2. Next is the attorney’s share of the cost of the paralegal support.
3. And third is the attorney’s share of the overhead, which includes the basics of rent, office supplies, equipment, and everything else it takes to run the office.
Here’s an example:
Salary and benefits
| salary |
$100,000 |
| health insurance | $6,000 |
| bonus | $3,000 |
| profit sharing contribution | $6,000 |
| 401(k) matching contribution | $3,000 |
| stipend | $2,000 |
| TOTAL | $120,000 |
Paralegal support
| paralegal’s salary and benefits | |
| $50,000 (with two attorneys sharing the paralegal) | |
| TOTAL | $25,000 |
Overhead
| rent, supplies, equipment, etc. | |
| $500,000 (with seven attorneys in the office) | |
| TOTAL | $71,428 |
Attorney’s total cost
| $216,428 per year, or | |
| $18,036 per month |
That’s what it costs to have the attorney on the payroll.
Now for the contribution
Using the broad numbers, gauging month to month the percentage of each attorney’s contribution to the firm’s profit is quite simple.
For the amount billed, the manager uses an expected realization rate of 90%. So if the attorney bills $29,000 this month:
| amount billed | $29,000 |
| expected realization | $26,100 |
The profit margin for that attorney is: $18,036 (monthly cost) ÷ $26,100 (monthly revenues) = 69%
Thus, 69% of the associate’s revenues goes to covering the cost, leaving a profit margin of 31%.
Compare attorney to attorney
The manager also calculates the associate’s percentage of the overall revenues for the month. So if the total billings are $200,000:
| amount billed | $200,000 |
| expected realization | $180,000 |
$26,100 (attorney’s realization for the month) ÷ $180,000 (firm’s realization for the month) = 14.5%
The firm expects each associate to bring in at least 10% of the total production, so the attorney in the example would be doing well.
The big picture
The attorneys get the report every month. They like seeing it because they want to know where they stand.
The numbers do other things as well. They show the associates how expensive it is to run a law firm. “New lawyers think it’s easy to open the doors and start producing,” he says, “but it takes a lot of money to run an organization.”
Seeing their own percentages also encourages them to be productive and to appreciate the business aspects of operating a firm.
And with the running numbers, the firm can see immediately when someone’s profit is sliding and can take steps to correct it.
