September 8 2021
How do law firms work as a business?
Legal Career Tips
James Bosson
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At a high level, law firms operate as a symbiotic ecosystem of paralegals, associates, partners, all working together to keep client demand met. The workloads are often challenging, so each tier of the organisation needs to work as effectively as possible. At a junior level, having a wider awareness of how the law firm business model operates can really help you play your part in this.
This article will break down how law firms make money, measure the “billable hour”, and how they track productivity. It is best read alongside our ‘How are UK law firms structured?’ blog post.
How do law firms make money?
Let’s start with the basics. Law firms make money by hiring out their “fee earners” to clients and charging for their time. These are any and all legal professionals employed by the business who can work for external clients for a fee, such as paralegals or associates. When law firms are hired by their clients, they agree to work that needs to be done. You’ll usually hear this referred to as a “matter”. To turn a profit, a law firm simply needs to generate more client fees by hiring out its fee earners to work on client matters than it expends in operational costs.It’s worth noting that not every employee of a law firm is a fee-earner. Law firms also employ non-fee earners, whose time is not billed to clients. We cover this in more detail in this companion article.
What is a billable hour?
Historically, a law firm would provide the client with an estimated amount of billable hours it would take to complete that work. The law firm’s fee earners then work on the matter, and the client is billed depending on however many billable hours are spent on it.Law firms traditionally make money by charging their fee earners to client matters on an hourly basis. This is based on “billable hours” of work. The billable hour is, simply put, an hour’s labour that a fee earner has spent working on a client matter. Each billable hour is based on “units of time” that are recorded by fee earners.
Units of time are quite an archaic unit of measurement, but it’s still really important to wrap your head around them. Each “unit” of time is 6 minutes of work. This might seem a little odd initially, but dividing each billable hour into ten 6 minute increments simply helps law firms and their clients track billable time more easily. When law firms and their clients agree that 10 units of time make up a billable hour, each hour worked by a fee earner can then be billed to the client, and the law firm can turn a profit.
How do law firms track billable hours?
Law firms use software to track how many units of time their fee earners have worked on client matters. There’s loads of different options out there, but some of the more common ones include Clio, Bill4Time, PracticePanther, and TimeCamp. If you’re a fee-earner working for a client, you will be expected to record the time you have spent on each matter. This is done by recording your units of time alongside a “narrative”.A narrative is a super short (but super important) two or three sentence summary of how you spent that time. At the end of each week, the lead fee earner for each client matter will go through all fee earner narratives for that week and make sure they’re up to scratch. These narratives are sent directly to the client in order to justify how much they are being charged by the law firm, so keeping them accurate is incredibly important. Moreover, you should bear in mind that anything written in narratives could be checked by a client, so they need to be as professionally worded and relevant as they possibly can.
How do law firms measure productivity?
Law firms really like to track productivity. They do this in a few different ways, but one of the more common methods is by measuring “utilisation”. Each fee earner in the firm will have a utilisation “rate” that they will be monitored on, which tracks how much of their time is spent on “chargeable matters”. In essence, this is a productivity target based on your average ratio of billable to non-billable time. Each fee earner will be expected to actively keep their utilisation rate above to target, to ensure they are using their time efficiently. Utilisation rates are usually annual targets that are measured weekly.Additionally, some law firms will also use ‘time allowance’ for each task. This is a very generalised unit of measurement, and essentially compares the time taken to complete a task to the firm’s estimation of how long that task should take. For example, if a law firm supposes that reviewing a certain type of document takes two hours, they will flag any instances of that document review taking over two hours as being unproductive.
Why is productivity so important to law firms?
Essentially, because of client demand. Over the last decade or so, many clients have started to demand more upfront “fixed fees”. A fixed fee is an upfront cost evaluation of a body of legal work. The client presents a matter, the law firm quotes them upfront, and the work is completed to that budget. Accordingly, law firms have had to get a lot better at estimating how much time each matter will take.However, time recording has not changed. Law firms still measure the internal profitability of their staff by comparing units of time to work completed, and tracking fee-earner utilisation. Even when clients are not being billed on time-based structure, law firms will want to move their fee earners onto other matters as swiftly as possible.
Additional Resources:
- How are UK law firms structured? - this companion article pairs with the information presented here, and offers more of a breakdown of the different roles within firms. Give it a look!
- 10 tips for time-recording and legal timesheets - tracking your time is an essential part of legal work, and you need to know how to do it well. Take a look at our top tips!
- How has Covid changed the use of legal technology? - this write up from our most recent Virtual Lunch offers more insights into the technology and software that legal teams are using post-Covid.