A recent survey by NatWest showed that the average profit per equity partner in a law firm had increased to £111,000, an increase of £4,000 from the prior year. Much of this increase has been achieved through an improvement in rates, either through stronger pricing or improved recovery rates.
However, the hours recorded by fee earners remained flat. The average fee earner’s day consists of 4.4 hours being chargeable, which results in an average of 1000 chargeable hours per annum, leaving 700 hours being spent on non-chargeable activity (excluding holidays). I wonder whether law firms are actually looking at utilisation and profit or whether the focus remains on driving improved fee income through recruitment and price.
Increasing utilisation rates, ensuring these are billable of course, drives an increase in fee income which feeds straight into profit, enhancing profit per partner. Assuming a recovered rate of £100 per hour and a fee earner group of 30 people delivering an additional half an hour chargeable a day, this equates to £345,000 of additional fee income and profit in one year. The maths is easy; the challenge is unravelling what else goes on in each fee earner’s day to understand where that extra half an hour, or more, of chargeable time can come from. Does it come down to an under-recording of time or is work being done outside of the scope of initial engagement terms that is not being recorded and therefore not being recovered from the client through additional fees? Or are fee earners in comfort zones of recording the 4.4 hours per day as they just have not been challenged on this before? I believe that the setting of chargeable hour budgets does not lend itself to effective practice management; a balance of fee earner KPIs including billable (and recoverable) utilisation is more appropriate.
Additional profit, which in turn is additional cash, can only make life easier; for example, investment in technology, restructuring bank and other debt through earlier repayment of facilities thereby reducing interest costs, ability to better remunerate key employees not to mention attracting new talent to the firm through increasing profitability.
A focus on utilisation is a no brainer in improving productivity, fee income and profitability thereby helping to reduce the pressure of the day to day financial management of a law firm. It can deliver a higher performance and reward culture without impacting on work-life balance.