New Attorney, New Firm
Using Hourly Fees and Innovation to Reach Underserved Clients
According to a Law Practice Magazine article “So Many Lawyers, So Many Unmet Legal Needs,” “The number of U.S. licensed lawyers has steadily climbed from 2.53 lawyers per thousand residents in 1980 to 3.85 in 2010, a 52 percent increase in 30 years. Partly due to this increase, jobs have become scarce for new law school graduates.” (Mercer, 2015).
Florida now claims the rank of the nation’s third largest state with 20 million residents and 83,418 attorneys eligible to practice law. This means that there are approximately 4.2 attorneys per thousand residents. The article goes on to state that only “one-fifth of people with civil justice issues sought assistance from a third party such as a lawyer. It seems very odd that there could be so many lawyers looking for work and still so many unmet legal needs.” (Mercer, 2015).
An obvious solution to both of these problems is for more new attorneys to start their own firms with pricing models that will bring in individuals who would have normally never sought professional legal representation. Starting a law firm can seem overwhelming to a new attorney fresh out of law school and saddled with the accompanying student loans, but armed with a realistic plan, an understanding of fee structures, and help from technology, it is possible to build a successful practice by tapping into this underserved group.
Technology, Ethics, and the Uberization of Law
We are in the era of uberization. This refers to the popular ride-sharing app, Uber, which has upended the traditional taxi cab business model with an E2E model. E2E stands for end-to-end. This model merges “genuine human interaction with the efficiency of technology.” (Wright, 2015). To flourish in this environment, attorneys must look for ways to incorporate the E2E model into their delivery of legal services. “The common pain points in the legal market for consumers are lack of transparency, affordability, and access. Consumers expect to find the information they need to make informed purchasing decisions at every step, and for many, the legal world is murky, with unpredictable costs and unclear outcomes.” (Wright, 2015). In “the legal market, an E2E offering takes away all of these pain points, delivering the services they need under a veil of accountability, simplified access via online channels, and clear pricing.” (Wright, 2015).
Current ethics rules prohibit attorneys and nonlawyers co-owning businesses that deliver legal services. As it stands, an attorney could not partner with a technology company to create a mobile E2E system for consumers seeking legal assistance. Until an app for legal services is created, attorneys need to “recognize the impact that this trend has on consumer expectations for efficient, transparent, quality service.” (Wright, 2015).
Using Innovation to Reach and Serve Clients
There will always be a place for attorneys who prefer to find clients through social connections or memberships in the local Rotary Club, but more and more attorneys are choosing to “communicate with prospective clients by using blogs, the Internet, on-demand videos and, of course, social media.” (Siegel, 2015). Many young attorneys no longer feel they need brick-and-mortar offices and are comfortable operating completely out of virtual offices. This new business model dramatically reduces monthly overhead and can be passed along as savings to their tech-savvy clientele. An attorney can further reduce costs by using technology, such as form-generating software to dramatically cut the amount of attorney time required on a matter.
Setting the Hourly Billing Rate
Within a traditional firm, the attorney’s billable rate is often determined by taking into account years of experience, firm size, position at the firm (partner or associate), and the geographic region of the firm. Many attorneys choose an hourly billing rate based on whatever they have heard other attorneys in their market are charging.
This method ignores the other side of the equation that addresses how many billable hours an attorney plans to work in a year and the revenue needed to cover overhead and the attorney’s salary. If an attorney does not expect to generate enough revenue for a profit in the beginning, “A ‘rule of thumb’ for ‘break-even’ costs in a law firm is to divide overhead by 1,200 hours per lawyer, per year.” (Bower, February, 2004.) There are formulas and calculators available to assist attorneys when setting an hourly rate for services. One of the most used formulas is the BR = T ÷ (R × U) equation.
BR = T ÷ (R × U) where:
BR = Hourly billing rate
T = Target revenues
R = Realization (Percent of billable hours actually collected)
U = Lawyer utilization (annual billable hours)
When an attorney is a sole proprietor, he or she can analyze the monthly overhead, consider how many hours a week to work, decide on a desired salary, and then use the BR = T ÷ (R × U) equation to calculate the hourly billable rate to charge clients.
Lawyerist.com offers an online calculator that requires three pieces of information to arrive at a realistic hourly rate. It can be found at https://lawyerist.com/84440/lawyer-hourly-rate-calculator/:
Calculate Your Hourly Rate
• How much do you need to make per year? (After taxes. In other words, how much do you need to pay your rent/mortgage, have a social life, keep up your student loans, save for retirement, etc.). A rough estimate of $3,800 per month requires an after-tax annual salary of $45,600 ($65,143 pre-tax).
• Estimate your monthly business expenses (Don’t forget to factor in annual expenses like bar dues, malpractice insurance, etc. And don’t forget to factor in regular upgrades of software, hardware, and office furniture and equipment.)
• How many hours per week are you willing to work, on average?
“If you want to know how we arrived at that hourly rate, here’s the equation:
[(Income /. 7) + (Expenses * 12)] / [(Hours / 5 / 3) * 241]
In other words, first we are putting your taxes back in, using 30 percent as a rough estimate of your tax rate. Then we add expenses. That works out to the total amount of money you need to make in a year, which we divide by the number of hours you want to work in the workdays available in a year divided by three. We divide by three because you have three jobs: lawyering, marketing, and business administration, and each of them takes about the same amount of time. In other words, you can only bill about a third of your time.” (Glover, 2015, July).
When using the online calculator and inputting $45,600 as the desired after-tax annual salary, $5,000 as the anticipated monthly business expense, and 60 hours to be worked weekly, the resulting hourly billing rate is $129.82. “If your rate seems way lower than what you’ve learned from asking around…you might be able to market to a relatively untapped client base. The access-to-justice gap is huge, and if you can charge half the going rate and still meet your income target, why not give it a try? You might have an easier time getting clients that way.” (Glover, 2015, July).
Flat Fees
For a new attorney, using an hourly rate is simpler and safer than a flat fee. If an attorney has not handled a similar matter in the past, it is difficult to estimate how many hours will be required. That said, price-sensitive clients are wary of signing up for a service with no way of knowing what it will ultimately cost them.
“Increasingly more popular in recent years, the fixed or flat fee can create a win/win situation for the client and the law firm. Clients enjoy the certainty of the total fee and the ability to compare law firms on the more meaningful basis of their total cost, as compared to only one element of that total cost (hourly rate). The law firm can budget its revenues more accurately and can even increase its profits through improved efficiency, process reengineering, cost reduction and substituting capital (technology) for labor. Cash flow can be improved by requiring payment up front or on a schedule” (Bower, March, 2004).
Law School Debt
An ABA survey found that “a typical law student borrows a total of $75,728 to attend a public law school, or $124,950 to attend a private one.” (Jarvis, 2012). More recently a U.S. News & World Report article asked, “Which law school graduates have the most debt?” and unfortunately Florida Coastal School of Law in Jacksonville comes in at number four nationally with an average indebtedness of $162,785 for 2014 graduates and with 93 percent of the graduating class incurring law school debt. (U.S. News & World Report, 2015). These amounts do not include any undergraduate loans that the graduate may have still been carrying before starting law school. Loans of this amount are understandable when doing a tuition comparison of Florida law schools. At the University of Florida Levin College of Law, tuition for two semesters for the 2015-16 school year is $22,299.30 for Florida residents and $38,904.00 for non-residents. At the private Florida Coastal School of Law, tuition for that same year runs $44,730. When these amounts are multiplied by three years of law school and then living expenses and books are added in, it becomes very apparent that students are paying a high price for their law degree.
The Washington Post website features a student loan calculator to determine the monthly payment required based on the amount of indebtedness and the interest rate. For a student loan in the amount of $80,000 with a 4.7 percent interest rate and a 10-year repayment period, the monthly payment would be $835 and the total owed with interest would be $100,235. The website advises that you should try not to owe any more than your expected gross salary. This site states, “Financial advisers say student loan payments should be no more than 10 percent of your income” and with a monthly payment of $835, for “your loan to be affordable, you should make at least $100,235 a year.” (Jarvis, 2012).
This presents a problem when compared to the expected first year salary for a new attorney within the state of Florida. “According to The Florida Bar’s 2014 Economics and Law Office Management Survey, the median salary for a starting attorney with no internship or clerking experience is $50,000… In the North Region, which includes Jacksonville, Tallahassee, and Pensacola, the median salary for a beginning attorney is $40,000. The Central-Southwest Region, which includes the Orlando and Tampa areas, has a median salary of $50,000 for a beginning attorney. In the Southeast Region, which includes Palm Beach, Ft. Lauderdale, and Miami, the median salary for a beginning attorney is $55,000.” (floridabar.org).
Many young attorneys would assume that carrying law school debt precludes them from going into private practice on their own. As with undergraduate student loans, there is a six-month deferment, or grace period from the date of graduation during which no loan payments are required. There is also a 24-36 month unemployment deferment available after the standard grace period.
“In addition to deferrals for schooling and unemployment, you can obtain up to 24 months of forbearance during the life of the loan.” (Foonberg, 2004). This can give an attorney time to get a new practice up and running. For additional information, a good resource is the magazine Student Lawyer, published by the Law Student Division of the ABA. That website is www.abanet.org/lsd and ABA membership is free for all law students. Florida Bar members have access to SoFi, a student loan consolidation provider that offers low interest rates to refinance loans at significantly reduced monthly payments. To further reduce the monthly payment, some attorneys have elected to repay their student loans over a 30-year period.
Startup Costs
In the article, How Much it Really Costs to Start a Solo Practice, the author points out that “while it is theoretically possible to meet with clients at coffee shops, draft briefs on the display models at an Apple store, and do research at the law library, you won’t be doing your clients or yourself any favors.” (Glover, 2012). Realistically, startup costs will likely be in the range of $5,000-15,000 and will vary based on the geographic location of the firm as well as the level of comfort and technology the attorney requires. Ideally the attorney should have money set aside for several months of personal living expenses until a client base has been established.
Often the new attorney starting a firm will have a working spouse earning enough to support the family until the firm becomes profitable. If the attorney owns a home, a home equity loan to cover startup costs for the firm can be explored. Other options include using savings, having a parent give or lend the money, getting a bank loan (a cosigner will likely be required), or financing the startup with credit cards.
The first order of business when starting a firm is to scout office space based on price and proximity to the courthouse or on a targeted demographic of clients. Make sure there is adequate parking available for your staff and is convenient for clients. Determine exactly how much money will be required upfront. Some leases specify first and last month’s rent as well as a security deposit. Commercial lease space is priced by the square footage. It is important to learn exactly what is included in the monthly rental rate because commercial lease terms are very different from residential leases.
“Under the terms of a triple modified lease, a tenant must pay rent and all operating costs related to the property. The lease gets its name from the three types of operating costs that typically includes: real estate taxes, insurance, and maintenance. A triple net lease is also known as a net-net-net lease. A modified gross lease is similar to a typical residential gross lease in which the landlord pays all operating costs. Under the terms of a gross modified lease, a commercial tenant pays some, but not all, of the operating costs. Utilities and interior cleaning services are common tenant-paid costs under a gross modified lease.” (http://smallbusiness.chron.com).
Another option is to share office space with other attorneys who can be a great source of referrals and legal knowledge.
After locating office space for the new firm, the new attorney will need to furnish and equip it with the practical basics. If the attorney wishes to convey a more upscale image and the budget will allow it, theses cost estimates can be adjusted.
Monthly Overhead
It is imperative to create a realistic budget for the firm to calculate monthly operating expenses. A 12-month cash flow budget should include all expenses and projected cash inflows. The two largest monthly expenses are office rent and salaries. Salaries for support staff vary widely based on experience, title, and geographic location of the firm. According to usawage.com, the average hourly pay for a paralegal in Tallahassee ranges from $14 to $30. Some new attorneys will hire a receptionist rather than a paralegal or legal secretary to save money, but this can actually be less cost efficient when the attorney is spending valuable time on tasks that could have been delegated to an individual with legal experience.
It is important to determine a base monthly salary for the attorney. Later, when the firm is more profitable, the attorney can take draws in addition to the monthly salary. The worksheet amounts below are based on one attorney with an annual salary of $50,000, one full-time paralegal with a pay rate of $16 per hour, and monthly office rent of $1,000. All other expense amounts are estimated or drawn from the website of the vendor listed.
(http://freespreadsheet.net/author/admin/page/27)
Using the monthly budget above and the previously mentioned hourly rate calculator, the minimum hourly rate the attorney could charge is $118.78. This is based on an after-tax salary of $35,000 ($50,000 before taxes), estimated monthly business expenses of $5,375 (does not include the attorney’s salary), and an average 60-hour work week. One year of billing can be calculated as 365 days minus 2 weeks for vacation, 100 days for weekends, and 10 federal holidays resulting in 241 workdays. Because attorneys have three jobs: lawyering, marketing, and business administration, a 12-hour day would result in four hours of client billing. The hourly rate of $118.78 multiplied by four hours per day is then multiplied by 241 workdays resulting in revenue of $114,503 for the year. The monthly business expenses of $5,375 multiplied by 12 months equal $64,500. Total revenue minus expenses leaves $50,003 of before-tax salary for the attorney.
Conclusion
It is possible for an attorney fresh out of law school to start and successfully run a new firm. Given the current job market for law school graduates, it may even be necessary for attorneys not interested in working outside the legal field. This endeavor requires research, planning, and a very serious commitment to putting in long hours, not just practicing law, but in marketing and carefully managing the business side of the firm.
Some attorneys may be fortunate enough to have numerous connections in their community or a source that provides a steady stream of referrals to fill their client lists, but for most new attorneys to thrive it will be necessary to tap into the previously underserved market of people who consider the professional services of an attorney to be out of reach. The challenge will be in finding the best way to connect with these individuals to convey that the attorney is offering a new firm model that offers transparency, affordability, and access. Until there is an established app for legal services, the innovation must come from the ingenuity of the young attorney who is driven to succeed.
References
Bower, W. (2004, February). Ten Keys to Success in a Small Law Practice. Law Practice Today.
Retrieved from http://apps.americanbar.org/lpm/lpt/articles/fin02041.html
Bower, W. (2004, March). Pricing Legal Services. Altman Weil. Retrieved from
http://www.altmanweil.com/dir_docs/resource/ce653539-fd49-4cfa-a6fe-2c68136304c3_document.pdf
Floridabar.org. (n.d.). So You Want To Be A Lawyer Pamphlet. Lawyer’s Income. Retrieved from
/tfb/TFBConsum.nsf/0a92a6dc28e76ae58525700a005d0d53/
f7b930ac1e0a7b7a85256b2f006c5c32!OpenDocument#Untitled%20Section
Foonberg, J. (2004). How to Start & Build a Law Practice (5th ed.). Chicago, IL: American Bar Association.
Glover, S. (2012, June 22). How much it really Costs to Start a Solo Practice. Retrieved form
lawyerist.com
Glover, S. (2015, July 6). Lawyer Hourly Rate Calculator. Retrieved from
https://lawyerist.com/84440/lawyer-hourly-rate-calculator/
Jarvis, H. (2012, November). Getting a Grip on Your Student Debt: Practical Advice for Students. Law Student Division. American Bar Association. (Vol. 41, No. 3).
Retrieved from http://www.americanbar.org/publications/student_lawyer/2012-13/nov/getting_a_grip.html
Mercer, M. (2015, July/August). So Many Lawyers, So Many Unmet Legal Needs.
Law Practice Magazine. Retrieved from http://www.lawpracticemagazine.com/lawpracticemagazine/july_august_2015#pg46
Siegel, D. (2015, July/August). Do ethics rules stifle innovation? Law Practice Magazine.
Retrieved from http://www.lawpracticemagazine.com/
U.S. News & WORLD REPORT. (2015). Which law school graduates have the most debt?
Retrieved from http://grad-schools.usnews.rankingsandreviews.com/best-graduate-schools/top-law-schools/grad-debt-rankings
Wright, P. (2015, July/August). The Uberization of Law. Law Practice Magazine. Retrieved
from http://www.lawpracticemagazine.com/july_august_2015#pg50
Christine Bilbrey is a practice management advisor at The Florida Bar Practice Resource Institute. If you have questions regarding your law office operations, the PRI team stands ready to assist — 866-730-2020, [email protected], or by live chat on the PRI website at www.floridabar.org/PRI .
