Determine Your Hourly Cost Structure
Abraham Lincoln said that a lawyer’s time is his stock in trade, and it’s true. Although knowledge, creativity, and relationships are vital to the provision of quality legal services, the only way we’ve come up with so far to measure the cost to a firm to provide those services is to apply personnel and other costs across the number of hours of service provided. Thus, every managing partner, administrator and every firm should know how much it costs to provide an hour of legal services. Without this basic building block, you don’t know whether you’re making money or losing it.
If you have a fair fluency with Excel, it’s not too difficult to use linked spreadsheets to allow you to determine your hourly cost structure. Basically, you want to add up all direct and shared costs (including compensation) for each timekeeper, and divide the total by the timekeeper’s annual billable hour requirement. This will give you the cost for that timekeeper to provide an hour of legal services.
Your first spread sheet will show overhead cost other than staff salaries and timekeeper compensation. These costs can be broken down into two types – fixed cost (such as rent, equipment costs, and support staff salaries) and costs that change with the amount of work you do (such as supplies, consumables, overnight delivery, and overtime).
Your second spreadsheet will gather timekeepers’ support staff cost. Take all staff compensation (salaries, bonuses and benefits) and attribute them to each timekeeper. Whether you allocate individual support staff salaries directly to a particular fee-biller or simply lump all support salaries into general overhead will depend on staff assignment and usage in your firm and your approach to how you wish to break down costs.
Your final spreadsheet will show direct timekeeper revenue and compensation. The idea here is to have each timekeeper estimate his or her revenue over the budget year, taking into account different rates for different matters, delays in collection, write-down’s, write-office and contingencies.
Understanding your hourly cost structure has enormous implications for examining the financial status of your firm and for determining your top-profitability lawyers (as opposed to top revenue generators… which may or may not be the same!). More about that in a later tip!
A lawyer’s stock in trade is assistance. If a client receives the same assistance instantaneously, they will not feel cheated because they didn’t get their fair share of the lawyer’s time. Indeed, they will be happier because they got assistance faster.
Time is not our stock in trade. It’s just the only resource necessary for the production of assistance that is in severely limited supply.
Assuming that hours of work are the product that we produce, and that each has the same value, can only lead us to concluding that we generate more value only by doing more hours of work.
That’s plainly false. We generate more value when we help more. It doesn’t matter how long it takes.
I’m not disagreeing with the important point of the authors: knowing your cost and revenue structure is clearly important, and in order to use person-hours effectively it may be necessary to track time.
But Abe was wrong.