What Is Your Law Firm’s Utilization Rate?
There are many different measures by which law firms can view their success. Of course, revenue is a critical one, and increasing revenue can be accomplished by bettering your firm’s utilization, realization, and collection rates. While all three are important, a recent study by Clio showed that the most prominent factor in determining your firm’s overall revenue is your utilization rate.
First, let’s briefly distinguish among the three. A law firm’s utilization rate is a way to measure how many hours a particular lawyer spends on billable work on any given day. The realization rate measures the amount a law firm invoices, as compared to the amount of billable work lawyers say they performed. The collection rate measures how much a law firm collects, as compared to the amount invoiced to clients.
Your utilization rate hinges on the productivity of the attorneys at your firm. Typically, the more hours each attorney spends on work that can be billed to clients outside the firm, rather than on internal tasks, the higher the utilization rate will be.
You might be thinking that the lawyers at your firm are highly efficient, and that they know better than to waste time on tasks that don’t directly feed into revenue. But the reality is, someone has to deal with the details of the day-to-day calendar. When it comes to clients, lawyers spend a great deal of time on answering simple (non-legal) client questions and on meeting minor deadlines that don’t correspond to urgent projects. Internally, scheduling meetings with colleagues, assisting with firm marketing and follow-up with potential clients, and inputting numbers for firm bookkeeping and accounting all eat into an attorney’s valuable working hours. Quite literally, tracking time spent on billable hours and invoicing the hours to the client eats up time!
According to the Clio study, the result of all these extra tasks cutting into the workday is an average utilization rate (across more than 1,000 law firms surveyed) of 2.5 hours per day of billable work per attorney, or 31%. This is based on an 8-hour workday, and many firms operate differently, but the picture is clear. Attorneys are spending twice as much time on tasks that don’t require a law degree as they are on practicing law. And those tasks don’t pay commensurately with practicing law.
How can you improve your law firm’s utilization rate? By far the most effective approach is to remove non-legal tasks in order to free up your attorneys’ time for billable work. This is accomplished in one of two ways: outsourcing and automating.
With technology these days, it’s fairly simple to automate certain tasks. For example, you can set a Google calendar alert that will automatically schedule an in-house meeting and invite the same attendees on a weekly or monthly basis. This cuts out the time it takes to manually set up and send the calendar invite each go-round.
Likewise, you can set up a subscription order for office supplies on a recurring basis, whether it’s monthly or biannually.
Outsourcing requires a bit more effort on the front end to locate and retain reliable help, but it’s well worth the investment. For small to midsize law firms, the areas in which it is most helpful to outsource are accounting and billing, and client marketing. Hiring an outside accountant or bookkeeper (or both) means that experienced professionals in that area of financial management will be removing those tasks from your attorneys, and likely performing them more efficiently, which will cost you less in the long run. Similarly, hiring a marketing team or independent contractor will ensure your firm’s name is out there without your attorneys spending potential billable time to make it happen. Hourly rates for marketing work are typically substantially less than hourly rates billed to clients by attorneys.
Turning back to the Clio study, it was found in 2018 that the most successful law firms had only a slightly higher than average utilization rate of 33%. The firms whose revenues shrank the most in the fiscal year, though, had utilization rates as low as 21%. The difference between 21% and 33% is 12%, or roughly one hour of billable work per day. Attribute that number to every lawyer in your law firm, and multiply it by the number of workdays in the revenue year, and the under-utilized hours pile up fast. Even more importantly, if your firms gets out ahead of the curve and starts to automate and/or outsource non-billable tasks, you can increase your utilization rate even more.