Know Your Firm’s Production Models + the Associated Costs and Margins

We’re at the point now where we’re focusing on finishing 2022 strong. This is the quarter to start making plans for 2023, but most people put them off until December. We have the best of intentions, but December rolls around, and with the Holidays looming, facilitating a strong planning session becomes impossible.

If you’re in a place where you have multiple people in your firm contributing to generating revenue, this episode is vital for your planning and projections for next year. And if you aren’t there yet but you know you will be, listen closely because this will serve you when you go to hire. Your firm has fulcrum numbers you have to be plugging in if you want to plan forward in a way that allows you to make smart decisions, and one of these data points is your team’s contribution to the firm’s revenue.

Tune in this week as Melissa breaks down her process for evaluating your team’s cost, revenue production, and the margins you’re left with. You’ll discover the importance of figuring out your firm’s ideal attorney to support staff ratio, how to start thinking of your team as units of production, and why using this data will cut through the noise and help you make smart projections so you can not only budget well, but create the team culture you want.

If you’re a law firm owner, Mastery Group is the way for you to work with me. This program consists of quarterly strategic planning facilitated with guidance and community every step of the way, so click here to join us!

What You’ll Discover:

• The importance of figuring out your firm’s ideal ratio of attorney to support staff.

• How naming the units of producers in your firm gives you leverage in your planning.

• Why you should be calculating the production of revenue by each employee, and how it helps you figure out your margins.

• 2 examples of revenue-building structures to show you how to plan out your revenue generated.

• Why you have to bring data into the conversation about the kind of culture you want to build in your team.

Featured on the Show:

• Create space, mindset, and concrete plans for growth. Start here: Velocity Work Monday Map.

• Join Mastery Group

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Leave me a review in Apple Podcasts or anywhere else you listen!

I’m Melissa Shanahan, and this is The Law Firm Owner Podcast, Episode #174.

Welcome to The Law Firm Owner Podcast powered by Velocity Work for owners who want to grow a firm that gives them the life they want. Get crystal clear on where you're going. Take planning seriously and honor your plan like a pro. This is the work that creates Velocity.

Everyone, welcome to this week's episode. How are you doing? Do you know how much I think about you? I hope things are great where you are, they're great over here. We are rockin’ and rollin’, lots of exciting things happening. One update I should give you all, is that Mastery Group enrollment is opening at the end of October, for a week period. And then, we close it down, and we take that cohort and get them really acquainted with Mastery Group.

For those of you who don't know what Mastery Group is, it is a program centered around quarterly strategic planning. I facilitate a day, every quarter, for you to get very clear on what you're aiming for. And reverse engineering a plan that puts you on track to get to where you really want to go, what you're aiming for.

Prior to these days, we send you a workbook, along with a strategic planning prep video, that helps you understand the data that you’ll want to have on hand. And make sure that you think through some of the higher-level things before you come to the day and we get to the nuts and bolts.

This quarter is especially exciting because, well, it's the last quarter of the year. And every time it's the last quarter of the year, it's really great to rally together, and not just finished 2022 strong in terms of how you end the year for your firm, but also making sure that you take the space to plan well for 2023.

So, that when January rolls around, and you go back, after the holidays, to work, you can hit the ground running because you've got your plans in place. You're very clear on what is expected of yourself and of your firm.

It's hard to believe that we are at the point where we're focusing on finishing the year, focusing on finishing 2022 strong. And, this is the quarter that you make plans for 2023. And most people put those plans off until December. I'm telling you; this is not the way to do it. And I'm sure it will resonate with you guys to hear that, “We had the best of intentions.”

But then, December rolls around and it's a busy month. It's a short month for work, number one, plus there's lots of things going on holiday wise. And on top of that, it's hard to facilitate for yourself a really strong planning session. To be led through it, to be facilitated through something like that, such an advantage.

So, do yourself a favor and get on the waitlist so that you're first to know when we will be opening up enrollment, so that you can give yourself this advantage to finish 2022 strong and set yourself up nicely to enter into 2023.

We'll put it in the show notes. But you can go to velocitywork.com/join to learn more about the program and get yourself on the wait-list, so that you can grab one of the seats that are available when they open up.

Well, along those same lines, strategic planning conversation, I'm going to give you something today to think about for yourself when it comes to planning. Now, most of the time when I'm getting ready to describe is used with my private clients. But everybody's in a little bit different place. And I love really tailoring and catering to the entire audience that may be listening.

So, if you are in a place where you have multiple people in the firm, not just one, contributing to producing revenue, generating revenue, which means doing the billable work, then this will apply to you. If you aren't there yet, but you know you will be, listen up, because this is something that you need to have in the back of your mind. This is how you need to think about having multiple producers in the firm, and it'll serve you when you go to hire.

We're going to start with talking about the attorney to support staff ratio. I heard a stat, a while back, that the national average for ratio of support staff to attorney is 2.75. So, 2.75 support staff per attorney, between paralegals and legal assistants. And here's what I've learned, since I first heard that stat.

I have done a lot of research, and when I'm working with clients, we figure out what their ratio is. And what's fascinating is that 2.75 isn't right for everyone. But knowing what's right for you in your practice is very important. And, there can be a learning curve of this for you.

But your firm needs to make sure that they are not paying attorneys to do work that other people in the firm could do. That's really not what you want to be using them for. Right? But what's funny, is that people jump to, when they're looking at strategic planning, without conversation around this and without facilitation, many times people will jump to hiring attorneys sooner than they should.

They actually need to get more support for the one attorney, even if that's you, so that the ratio is correct, in terms of production versus cost for that group. So, when you think about an attorney, if they have one paralegal and like, .5 assistant required for them to be optimized, then that unit; there is an attorney, one paralegal, and half/part-time assistant.

Now, a lot of this depends on the firm and your practice areas. So, this is why there's no, just one ratio that's right. It depends on what you need. So, when you're looking at this for yourself, I want you to sit down and figure out the ideal ratio that allows each person to be working at their fullest capability.

You don't want an attorney to be doing admin work. You don't want an attorney doing paralegal work, it doesn't make any sense. It's a very expensive paralegal, essentially, and a very expensive assistant. So, I know a lot of you know this, and it makes sense. But then, why are there so many people that I run into that they just think; I need more attorneys.

You should not go for attorneys unless you are making sure that that attorney has what they need to maximize their time, as well. So, let's just say for your firm, I'll just give you an example of a private client I just worked with. They determined that one side of their business, which was family law, per attorney, there should be one paralegal, dedicated, and a .5 assistant: a part time assistant.

Now, for the criminal side of things, they determined is one attorney to one paralegal. It's just a different game over there, right. So, they have identified the proper ratio that makes sense for each side of their business, that they need to keep in mind when they are hiring. And when they're projecting revenue in the future, of money that's going to be produced for the firm, of money that's gonna be coming in for the firm.

This is a very good thing to know. This is information that is leveraged for you when you are planning. Now, there are going to be times when you are ramping someone up, and so, the ratio is going to be a little wonky. But make no mistake, you know exactly what you're shooting for, in terms of optimization for production coming out of that unit of producers.

I use the word “unit”, I don't know why; it makes sense to me. Also, in my head, these are just packets of production happening inside of the firm. But no one else likes the word packet, so we don't call it that, either. But it's a team of producers.

And the reason I want you to think about it broken down like this, is because you could look at a group of attorneys and say, well, that's the team of producers. No. What does it take to crank out the work that one attorney can do? And how do we need to think about support for that, so that we're not overpaying an attorney to do the work of someone else who could be stepping into their full capability? Paralegal; legal assistant.

So, again, even if you have to ramp up to that ratio, you should know exactly where you're headed. So, again, you can work your way towards the ideal ratio, but you have to know what that ideal ratio is. You have to sit down and think about this thoroughly. If you're wrong, you can adjust it as you move forward.

I mean, every quarter, technically, the way that I teach things, you should be sitting down in evaluating the previous quarter and making plans for the next quarter. And so, that's your space to figure out; am I right about this ratio? Are we right about this ratio? And then, tweak it.

You're not going to be wholly wrong, right? So, even if you need to make an adjustment, it'll probably be like, .5 or less, of a position. So, you need to know this, and know it well enough. Having it mapped out so that it's concrete, it's out in front of you. It's something you can use moving forward but then also, evaluate at the turn of the quarter.

So, when I'm doing this for private client, up on the large poster or whiteboard that we're working on, I will put the practice area. I will list out, underneath that, the ratios. So, one attorney, one paralegal, .5 legal assistant, for example. That was on the family side. I'll put ‘family’ and that ratio.

And then, on a different page or different section of the whiteboard, I will put ‘criminal’, and I will list underneath that the ratio; one attorney, one paralegal. That's what they designated.

I want you to, once you have that up on a board or up in front of you, I want you to name that unit of producers for your firm. This firm, that I worked with, has an awesome sense of humor. They decided to name, on the family side of things, each unit they named a squad. So, each family squad consists of one attorney, one paralegal, and .5 legal assistant.

On the criminal side, each unit is named a gang. So, each gang consists of one attorney and one paralegal. Naming these units of producers, is really helpful when you're talking about planning, and you're thinking about planning, especially for different practice areas.

So, once you have yours up in front of you, name, whatever you want to call your unit. And I love that my clients have a great sense of humor, and they're funny. That's what they chose the name theirs.

Once you have a name for each of these units of producers, then you're going to break down for each position, attorney, paralegal, legal assistant. You're going to break down the production associated, that should be associated with that position, or the revenue that should be associated with that position. You're going to break down the cost to the firm to have that position. And then, you're going to be able to figure out, because you have those two numbers, the margin that you should expect on that position.

So, using an example, and I'm going to turn away from this client's stuff and just use some numbers. If the rate of the attorney is $340 an hour, and the hours worked per month, is 100. And in this example, on the family law side of things, they do hourly billing. On the criminal side of things, they do flat fee, so we'll talk about that in a moment.

So, the attorney is going to work 100 hours a month at $340 an hour, is the billable rate. So, the production, or the revenue, that should be coming in every month is $34,000. That's $408,000 a year. Okay, good to know; that's what should be produced.

Now, we all know, it's not just about the revenue, we have to look at the margin of things. So now, when it comes to the cost, the investment, I do think of people as an investment, but for the sake of simplicity, it's the cost of having that person there. Let's say you're paying a salary of $90,000. And let's say you offer insurance, so maybe $850 a month or so, maybe just on average, for full time people in the firm.

So, $850 a month, that's a little over $10,000 a year. Now, taxes; let's say about $10K for the year. So, your total cost is $120,000 per year for this role of the attorney. They produce $408,000 a year, it costs you $120K to employ them. So, the margin for the firm, is $288,000. I am subtracting the cost from the production from the revenue that they produce. So, that's what the firm gets to make.

Now, what's very easy for some people to think; oh my gosh, that's amazing. Or, that number is higher or lower, than I thought. You have to remember, don't allow yourself, when you see numbers, to get an emotional reaction or feel excited. This is just data.

And if this sounds like a lot to you per attorney, one thing that you need to understand is that this money that they're bringing in, is contributing to pay for all the non-producers in the office. So, this isn't just money in the firm's pocket. But this is the margin on this person, or on this role.

Now, for the paralegal, let's say the paralegal’s rate is $150 an hour. They are also expected to work 100 hours a month for billing. Which makes the total production, or total revenue, generated by that paralegal, $15,000 a month; that's $180,000 a year.

Now, for salary, I am just going to throw some numbers out there. I have these jotted down in front of me. Let's say the salary that you're paying this paralegal, is $4,200 a month; $50K a year. Let's say insurance is, again, $850 a month; about $10K a year. And let's say taxes on this person, are about $6K a year. Your total cost for this paralegal then, is $66,000.

Now, this paralegal is producing $180,000 a year. So, when you subtract the $66,000 of cost to the firm, that leaves $114,000 of margin for this role, for this paralegal.

And then, I'm gonna go through the legal assistant, because I think for those of you who are still with me, this is probably helpful. Let's say the legal assistant, the rate is $125 an hour. Let's say that they're expected to bill about 40 hours a month for this squad, this family squad; that is 480 hours a year. So, the production, what's produced every month by this legal assistant, in terms of revenue, is $5,000; that's $60K a year, of revenue produced by this position, of this legal assistant.

The salary, let's say, is $3K a month; $36,000 a year. The insurance, in this case, let's say it's $500 a month. I noticed that some of my firms, which I think is really wise, for projection purposes and planning purposes, they often see that someone filling this position is single, is younger, and so insurance costs are lower. So, in this case, the insurance cost would be $6K a year. And then, taxes estimated at $3K a year. So, the cost for this employee, is $45,000 a year.

Now, they are producing $60,000 a year. So, there is a margin of $15,000 with this position, for this squad. So, now you know, by role, what's expected. Which provides a ton of clarity when it comes to setting expectations of people, in terms of the hours that are expected every month. Helps you determine billable rates, and should you raise them? Is it time? And then, it changes everything here, right, laying all this out.

So, you have a list of your, in this case, the family squad; one attorney, one paralegal, .5 legal assistant. And then below that, I write out for my clients; okay, attorney, when it comes to production of revenue: What's their hourly rate? What's their hours expected to be worked, for billable hours? And then, what does that mean for production of revenue?

Then, we figure out cost for that employee, or for that role, salary, insurance, and taxes, and we get the total cost. And then, we are able to see what is our margin by having this person in the firm.

This is really helpful. You do this for each role, because then you can see it broken down, what's expected by role. But then, you can add up the production and the cost, and see the total production for this family squad. And the total cost for the squad, and the total margin for the squad, for this unit of producers.

This is super powerful for projection purposes. Now, in this example, that I'm going to use here, if I run with those numbers, that I just shared with you, that breakdown, that means for the whole squad, the production of revenue is $618,000 per year. For the whole squad, the cost is $209,000 a year.

And that means the margin for the firm, by having this squad doing the work, together is $409,000 a year. So, almost $410K a year is what's to be expected if you have an attorney, a paralegal, and a legal assistant, working together, to handle a certain caseload, right?

After we got this set and straight, in terms of expectations with production of revenue, and expectations with cost to employ those roles, then we can look ahead and use it in projections. And so, I worked through them with the math, because I mean, this number is assuming that everybody is like fully up and running.

And, they are going to hire a new attorney. So, there's going to be a ramp up period, and we had to factor that in. So, we did some math to figure out what are the billable requirements going to be? It's not going to be 100 out of the gates. So, what does that look like? And we figured out for the first quarter plus, actually, what it needs to look like.

So, we were able to project out, for 2023, what is the revenue going to be. Should it be the goal for that department, for the family law side of things? Because they already have one squad up and running. And they're about to hire a new associate, which is going to form a second family law squad, inside of their firm.

So, now, if we know, up and running for a full year, is $618,000. And we're going to provide some space for ramp up period, then, what does that mean the new person is going to produce? On top of what the first family squad is going to produce.

So, these two squads together, we came up with a number that was a really great goal for them, that would mean real growth. And they're very excited about the growth that that would mean. And we used data to figure out…

Of course, this is going to stretch them. I mean, they have got to get a lot of things in place for them to stay on track with these numbers, but they can absolutely do it. And if they do stay on track with these numbers, they can hit these goals at the end of 2023.

Okay, then we turn to the criminal side of things. And the reason I'm gonna go through this, as a second example, it's the same thing except it's not hourly, it's flat fee. So, I will show you how we did this for them.

For the criminal side of things, we know… We know this for everything, every side of things, every matter type, every case type, every practice area, we know this number. But we have an average revenue, per case, for the criminal side of the business. And we know, because of the way that I have them track, I have them set up in a tracking portal, we know the average case length is seven months.

Now, we know all of this information for family, as well. And we do use that in different ways, but we don't need it to determine the revenue that will be produced by this unit of producers. So, in this case, the family squad, which is hourly billing structure. We don't need the average revenue per case and the case load. We don't need any of that to figure out what they'll produce; they just need to hit their hours.

This is different, and so, that's why I want to show you this flat fee example. So, let's just run with those numbers. If the caseload that can be handled is 100 cases, which is what felt appropriate to this firm, for the gang, to be able to handle, 100 cases.

So, if they are handling 100 cases, and we know that the average case length is every seven months, and we know that the average revenue is $3,600 per case, then you can take the average revenue times the number of active cases. And, that's the revenue for those seven months.

So, that works out to be a little over $51,000 a month of revenue that should be generated by the gang for these cases. That works out to be $617,000 a year. Okay, great. That is what the gang is able to produce in one year, in 12 months’ time. Also, we were able to figure out how many cases that means that they would have their hands on, over the course of the year, which is 171.

Okay, so we know the gang’s total production, now we need to look at the cost. Well, let's just run with the numbers that we had before, the cost for the attorney and the cost for the paralegal. So, that total would be $186,000, that would cost the firm to have these positions producing work.

That means the margin for the gang is $431,000, because they produce $617K, and they cost $186K. This is projections, right? But this is really good, based on data planning for the future. So, that means you should expect, the firm should expect, a margin of about $430,000 for each gang inside of the criminal side of the practice.

Now, again, this side of the firm is going to be hiring an associate, at some point next year. And we did factor in, we factored in a ramp up period, and what that means for the total production, and the margin for the business. Because here's the thing, when you're ramping someone up and they aren't at full speed, the cost ratio is much higher. Because they aren't bringing it in, so your margin is much lower on the person.

So, you really, you want to be efficient with getting it up to speed, to the best of your ability. And there isn't a reason to hurry, but you want to make progress, getting them up to speed. Because it's a big cost to the firm with very little return, in terms of production.

Okay, now, guys, you have everything you need to predict and project and stretch yourself. I mean, all of this is stretching. They're making plans for who they're gonna hire next year, in order to make this happen.

Now, they do the math to figure out; what does that mean they're on track to hit, if they see these plans through? And not only what is it that you expect to hit in terms of revenue, what is the people expense associated with these plans? And then, from there, what is the margin that the firm should expect with these plans?

And then, we did a whole exercise to break down costs in the business, not like, line-item kind of stuff. But looking at some of the categories, of expenses and budgeting, really well for next year and in a really organized way. And so, they know what to expect to budget for people cost.

Because now, they've already figured out what the budget is for each of these producers, that we just talked about, to pay them. And so, then, we list out; okay, the other supportive roles in the firm, what are their salaries? What are those people expenses going to be? And, add all of that up to get the total people cost. And then, we can do all kinds of things from there.

Look at ratios. And, do we like the percentage of revenue that is going towards people? Is it healthy? Is it bloated? Let's have these conversations and get to the bottom of it. This really is about using data to cut through the noise. To cut through the feelings, to get the facts, to make smart projections that, of course, will stretch you. And to, quarter by quarter, build the firm that will give you the life you want. And to build the culture, inside of the team, that feels right for you and to you.

There are a couple points I want to make on top of this, just to help bring it all home. The first, is that I think culture is really important. And of course, I want it focused on, but what I want you to realize is that by focusing first on culture and not looking at the data, not bringing data to the conversation with culture, then you will be off. You will be stunted in your growth.

And that is because there's no accountability, inside of the culture, for things that make sense for the growth of the firm. And of course, not at the cost of your people. I'm not saying drag them through the mud. But I have firms say to me all the time; I want there to be a balance in this firm. I don't want people working these ridiculous hours, and I won't be that boss that’s going to make them do that.

I would never suggest that. If you take this example, that I just walked through today, that I used 100 hours per month minimum billing, that is not difficult to hit if you're a full-time attorney. In my opinion, it's a little low if you've got support staff on your team. But okay, so let's just run with that for a minute.

One hundred hours… Because I don't have feelings about this, I go on numbers, I go on facts, I go on data, for evaluation, and for planning and projection. And then, you can look at it and see; do you like what you see or not?

And if you don't, then something needs to be adjusted with the data. I just keep coming back to that. And of course, in the end, it needs to feel right to you, as the owner of your business.

Now, if we're using 100 hours a month, do you know how many hours on average, that is a day, it's 4.65. Now, I certainly wouldn't expect someone to work eight hours a day billing. And I certainly wouldn't expect, maybe even seven, right? Like, you need some space; you need to be able to go to the bathroom, you need to be able to have conversations that are helpful. So, I'm not saying everybody should just crank.

But really think about how realistic that is to hit, that 4.65. And what's funny, is that teams will come to me, and I have had this happen before, where the minimum requirement is 100, but nobody's really talking about the fact that they're hitting 79, or maybe 84. And you're kind of looking around, like, what?

You do that math, how many hours a day is that, they’re billing on average per month, or per day? You know, you have to have data. So, this idea, I think people want to check the culture box, and that they're giving a lot of room for lifestyle, and I am all for that.

But you have to measure what that actually looks like, and what is expected for the firm. There has to be accountability for the guidelines that are being laid down, and the requirements that are being laid down. And if it's not being met, that person needs to get some help. Like, coaching from you or a mentor within. Or, they might not be a good fit.

Something needs to change, though, they can't just keep billing underperforming. When you really think about what that means per day, it's nothing. So, this can be a wakeup call for having minimum requirements that feel really healthy and good. And then, to having a look at what's actually happening in the firm, and making some decisions about what will happen next year.

What will happen next year? And that, is what this helps you do. It's one of the things that this really helps you do; is project forward in a smart way. Take the reins, and do it in a way that feels right, in terms of culture, but it is connected deeply with data.

Okay, the other thing I want to point out and mention here, is when it comes to setting goals, there are all kinds of judgments out there about how to set goals. And there are times where people will recommend that you should 10x; you should have a goal that's 10x and just go for it, just plow forward as fast as you can.

Having worked with people for over 15 years now, on setting goals and achieving them, I have to tell you, that does not work unless you can do it out far enough, where you can reverse engineer to figure out what needs to happen now. And so, people have this idea about 10x. And I am all for that mentality of 10x-ing, but within what time period are we talking?

It's not to cap yourself on what's possible, that's not what I'm trying to do. What I am trying to do is to help people understand that you should shoot for numbers that are so high, you should go for it. But you should ask yourself; how long do I think that's going to take?

And if the answer is eight years, all right, then work backwards. What does that mean you need to be at in year five? What does that mean that you need to be at in year three and two and one? These are the questions. When you can get back to that, then it's like; oh, okay, that's what I need to do in this next year to hit that goal in eight, let's go. And then, you can figure some of this out.

So, what I'm saying here is, the projections that I'm using, it is the truth for them. This is what a family squad or the gang can produce in the firm. They can change some of that by pulling different levers. One of the levers that they can pull is raising fees. Whether it's their hourly rate, or whether it's the flat fee doesn't matter, but raising fees, that is a lever that you can pull.

So, with the same unit, you can get more revenue by raising fees. Or, another way is to increase efficiency. Maybe the caseload that a squad, gang, team, unit, inside of your firm can handle is 40. And you think; man, I know they're so maxed out at 40. But it shouldn't be that way, we need efficiency in the firm.

So, then that allows you to evaluate that, and figure out what systems and processes need to be revamped, or revisited, or created, so that you can have the efficiency that's appropriate. And so, what would that mean, in terms of caseload for that unit of producers, it could go up, right? So, these are the things that you can look at.

Asking these kinds of questions can be extremely valuable when you're planning, and projecting, and taking a step back to really think higher level about the business. But having this information, with the units of production, is so, so critical to being able to plan forward, in a way that makes sense for your firm, and gives you visibility, and can allow you to make smart decisions.

I realize that there was a lot of numbers being thrown around in this episode. I wanted to do my best to really give an example. And I was hesitant to just vomit out all those numbers. Because when you're only hearing it versus seeing it up on the board, it's just very different. It's very easy to get lost in all the data.

But if you do slow down, and you do write down the numbers, examples that I've given, and you plug in your own numbers and data, and see this for yourself and for your firm, this is a big deal. There are certain numbers in your business that are fulcrums or fulcrum numbers; they're so important for planning, and production, and evaluating the health of a business. And this is one of them.

So, average revenue per case, for sure. Percentage of revenue contribution per practice area, yup, that's an important number. And this is an important number two. It's not just about what the attorney produces on their own.

It's not just about what the paralegal produces on their own. It's what the team that is centered around, and with one another, what they produce as a team. So, what you should expect, when this team is rolling for production, for cost, and for margin.

That is what I've got for you this week, my friends. Thank you for tuning in. If you want to work with me, get yourself on the waitlist for Mastery Group, and I'll see you here next Tuesday.

Hey, you may not know this, but there's a free guide for a process I teach called, Monday Map/ Friday Wrap. If you go to velocitywork.com it's all yours. It's about how to plan your time and honor your plans. So that, week over week, more work that moves the needle is getting done in less time. Go to velocitywork.com to get your free copy.

Thank you for listening to The Law Firm Owner Podcast. If you're ready to get clearer on your vision, data, and mindset, then head over to velocitywork.com where you can plug in to Quarterly Strategic Planning, with accountability and coaching in between. This is the work that creates Velocity.