Part of coming to grips with the financial management side of your practice is learning to read the numbers. One of the more important ones to understand is the concept of “Effective Hourly Rate”.
You determine the effective hourly rate of any file in the firm by taking the amount received in connection with the matter and dividing it by the hours actually spent on the file. Let us assume that a bill for 100 hours was sent, and that the lawyer’s billable rate was $200 per hour. Let’s also assume that the entire bill was paid in full. The amount billed was 100 hours x $200 = $20,000. To determine the effective hourly rate, we need to know not just the number of hours billed, but the actual number of hours worked on the file.
No, we’re not talking about padding the bill, but the normal write-ups and write-downs that occur during the preparation of a bill for legal services. If the lawyer actually put 200 hours of work into the matter, then the EHR was actually only $100 per hour ($20,000 ÷ 200 hours = $100 per hour), not the lawyer’s billing rate of $200 per hour.
Determining EHR illustrates why it’s especially important for you, as a managing partner or administrator, to get accurate records of all of the hours worked in connection with a particular matter – regardless of the way the firm bills. Your standard lawyer billing rate may be $200 per hour, but if you have recorded all your time expended on contingent or flat fee matters, you will be able to determine how much you actually earned per hour through the representation. And if your lawyers are able to put in 50 hours on that same hypothetical matter for which you were paid $20,000, then your EHR would be $400 per hour ($20,000 ÷ 50 = $400 per hour).
Pretty good, indeed! Furthermore, determining your EHR has important considerations as you move to alternative billing.