Practice Management

Law Firm Business Model - Productivity/ Utilization

By Brian J. Ritchey

The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above.  Today the focus is on Productivity.

Productivity is the degree of value generated by fee earners.  It is most commonly determined via billable hours, but you can track productivity in terms of fee generation whether via hourly billing or other fee arrangement.   The concept is the same either way:  attaining maximum productivity means getting the most output from your fee earners.  In alternative fee arrangements, you can determine the productivity by breaking down each task by the time it takes to perform the task.  Then productivity becomes how many tasks you can complete in a given time frame.  One way or the other, you can only work so many hours in a day regardless of how you bill.  Since most firms still primarily judge productivity in terms of the billable hour, this article will gauge productivity by billable hours.  For some prior posts on productivity/ utilization, please look here, here, here, here, and here.

According to the 2007 Law Firm Economic Survey from LexisNexis, partners billed more hours than associates.  Based on a 1,800 billable hour per year standard, top performing firms had associates with productivity numbers that were closer to their partners. 

 In the above charts, it is clear that partners are more productive than the associates.  Considering that partners dictate what associates do, this is a disturbing indicator of a lack of workload sharing by partners of mid-sized firms.  Further, for those who do utilize their associates, profits increase.  Across the board, partners were within 10% of the 1,800 standard.  However, the best performing firms (those in the 1st quartile), had both partner and associate productivity within 8% of each other.  In the 2nd quartile, the disparity was a whopping 17%  For the 3rd quartile, it was even worse:  a 25% difference between the utilization of partners versus associates.  For those in the worst performing quartile, the disparity was a little less at 18%, but partners were only as productive as the associates in the 1st quartile.

It is worse for paralegals, though you may argue that paralegals shouldn't be held to the same billable hour standard as associates.  Even so, the higher performing firms still utilized their paralegals more than those with lower per partner income.  It is clear that utilization is a path to higher profits.

Don't read too much into the above sentence.  Again, there are only so many hours in a day and thus only so much productivity you can expect from fee earners.  You still need to measure performance based on proper leverage, rate, etc.  But you can improve short term profitability by increasing utilization alone.

Assuming the work is there, the best way to increase productivity is through incent.  Provide incentives to partners to share work with associates.  Provide incentives to associates to reach their billable goals.  Provide incentives to utilize paralegals.  Try many things and measure against production.  If it works, keep doing it.  If not, adjust. 

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Full post as published by More Partner Income on January 22, 2008 (boomark / email).