Determine your profitability to assess your worth

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Published on 1/4/10

A coaching client presented an interesting dilemma: He is a sole practitioner with two associates, and his practice had slowed to the point that both associates are down to 50 percent utilization of their time.

Given the effort and expense spent training the associates, he did not want to terminate one of them, but saw only two other viable choices: take work from his desk and transfer it to them, giving him more time to market the firm but not immediately increasing the firm revenue; or have the two associates focus on practice development efforts that are within their comfort zone, to take up the slack time and hopefully generate additional revenue.

In analyzing a lawyer's worth to the firm there is no formulaic expression that specifically depends on origination, billing or collection. To say that an attorney is worth the amount of profit due to billing or the amount of profit due to business brought in does not take into account subjective factors that must be considered.

For example, what is the attorney's work ethic? How does he fit into the culture of the firm, especially in a small firm? How and how quickly does the attorney respond to the needs and wants of clients? Can the firm grow because the rainmakers can focus on origination while this attorney competently completes assignments?

Furthermore, does the lawyer's combination of skill and attitude demonstrate potential for career growth beyond the immediate level of business? If lawyers are trained in the culture of the firm and have the necessary ability, they should be capable of learning new technical skills. Skills are teachable; attitude isn't. And skills mean both knowledge of the law and the ability to understand the business of law.

This point leads to an analysis of the lawyer's profitability, which is something different from worth to the firm. All associates can determine their own personal balance sheet if they plug in the right numbers. In the case of the two associates, this is what they need to know:

  • their total billable hours by month;

  • how many hours the firm billed out for them;

  • the percentage of write-offs the firm will take on their work when billings are done;

  • in larger firms, there may be a difference in the write-down percentage based on associate class (first year, second year, etc.);

  • their direct compensation expense — salary, bonus, pension, allowances;

  • the indirect expenses they represent — overhead for physical space, insurance, education and more (if the firm lacks an accountant to provide that information, a general rule of thumb is one-third of gross revenue or billings).

With this information, associates can compute the net profit that they provide the firm with the following equation: billings - [associate's total compensation + direct and indirect expenses] = net profit.

The net is the profit available resulting from an associate's effort. Associates cannot remain with their firms unless it is profitable for the firm to keep them on an ongoing basis. While new associates may not earn more than they cost the firm in the beginning, at some point that situation must change, generally within three to five years of hiring.

The associate's responsibility is to do the work assigned in the most effective and efficient way possible and in the shortest amount of time. Fulfilling that responsibility in a way that produces net profits for the firm is a near guarantee to keeping the job.

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