According to a recent article in the Times, partners at US law firms in London generate 25% more profit than their English counterparts, with some achieving a net profit margin of more than 70%. But how do they do this given starting salaries at some of these firms are as high as £180k?
Yes, the amount of money newly qualified solicitors receive working for these US law firms does appear to be eye-watering, particularly when I consider my £9k traineeship salary in 1999. But one has to set these salaries in the context of how much the same firms are charging for these same NQ’s to do the work.
According to Bloomberg (in an albeit American article), these law firms are charging more than $2000 an hour. The chart in the same article makes for eye-watering reading.
The rub is that junior lawyers at Kirkland & Ellis work on average 14 hours per day. If you dial this £180k salary back, a newly qualified ‘astronomical’ salary actually works out a rate of pay of £50 an hour.
‘Yes, but they wouldn’t charge a junior lawyer out at £1800 per hour’
You can bet your stetson they would under the guise of a partner overseeing the work and this would mean that, looking at salary alone, one can work out that the margin on hourly rate would be 72%. Not to mention what they make on all of the incidentals.
There’s a top number and a bottom number that you must be familiar with for every work type in your business.
The top number is your average fee value (AFV). The average fee values at these top American law firms will be astronomical and everything in the business will be geared towards keeping them that way. Value is in the eye of the beholder after all.
In my opinion, average fee value is one of the most important metrics in your business and you must understand what it is across every work type. If you keep your cost base the same but increase average fee values across the board by a few percentage points annually, your turnover and profit will increase significantly.
Worryingly, we frequently ask law firm partners what their average fee value is for a particular work type and they typically don’t know.
Have a quick look at the following to see what the impact is of even minor changes in average fee values. The table below has been worked out on the basis of a firm generating £1 million pounds worth of fees across a number of categories.
Now, if we increase these values across the board by 10%, the 10% doesn’t have a huge impact on the fees one would charge an individual client (i.e. they are unlikely to balk at this increase) but they add £100k of revenue to the top line without changing anything else. The output of this is simply ‘more money for the same work’.
As a result of the law firm accounting rules, lawyers have been in possession of more advanced technology than most other professional practices in the form of practice management software. These were initially sold on the basis of their cashroom management functionality and since then, in my experience, about 10% of their overall functionality has been deployed by most law firms.
All you have do is interrogate the software so that provides a report for you detailing for every category of offering the total fees generated and the total number of matters in the given period. Divide the former by the latter and voila – your average fee value.
If you’d like to discuss your law firm’s marketing strategies, get in touch with our team today on 0333 344 2722 or complete the online enquiry form and we will get in touch right away.