The Economics of a Plaintiff’s Practice

The subject of court approval of attorney’s fees in a case involving minors addressed in this post and this one have given rise to a discussion on the TAJ listserve about the wisdom of the decision.  The debate has been interesting.  One point made by several commentators is that  some judges do not understand the economics of law practice.  I first made that point on this blog here and said I would address it. 

Here we go.

I was having dinner with several judges one night last spring and the subject of depositions came up.  I mentioned that the cost of depositions was outrageous and that the cost of getting a transcript of a full-day deposition was almost $2000.  To a person, they were shocked.  I took the opportunity to talk about the cost of malpractice insurance, rent, etc. and once again they were shocked.  That conversation gave rise to the comment in my previous post is that we need to better educate judges what it costs to run a law office.

One explanation for judge’s not being aware of the cost of running an office is that they are out of touch.  That is probably true, but it is understandable.  If you don’t regularly buy something you have no particular reason to keep up with the changing price of it.

At the age of 13 I began  what became almost six years of work in  grocery stores.    I clearly recall that on average a paper grocery sack of groceries would run $10.00.  Obviously each sack could run more or less, but it was a safe bet that if Mrs. Sternitsky bought six bags of groceries she would leave the store with $60.00 less in her wallet than when she started. 

Thirty-five years later my estimate is that groceries run about $20.00 per plastic sack that is half the size of the good ol’ paper sacks of my youth. 

But I wouldn’t know that if I didn’t regularly go to the grocery store. 

And that is the problem with judges.  Its not that they don’t care about what lawyers pay in overhead – it is that they just don’t know what they pay.  And they have no reason to know because they don’t have to go to the grocery store.

New judges know.  I can guarantee you that Chancellor Thurman in Cookeville knows – he just left private practice a little over a year ago and he remembers it well.  But it would be rare indeed for a judge who has been on the bench for twenty years to have any idea on what it costs to run a law office.

Location makes a big difference, too.  Ten or so years ago a lawyer from a small town and I were talking law office economics.  He was paying his long-time secretary one-third of what I was paying mine, and we were both paying market rates.   Rent in Nashville is often double or triple what it is in a more rural area.

So, let’s start a discussion on the subject.  What is your per lawyer overhead cost?  For these purposes I am including every expense item in your office except anything you pay yourself, anything you pay  to or on behalf of another lawyer, anything you pay to or on behalf of a paralegal, and contingent fee case expenses.  Paralegal salaries and benefits are typically not included  in such calculations because they are treated as time-keepers; i.e. in firms that do hourly work they could bill for the work they do.  (There are varying definitions of paralegal out there.  For these purposes if you have an employee who regularly does typing, filing, etc. for a lawyer consider the employee part of overhead.) 

The goal is to come up with the cost of running your law office on a per lawyer basis.   If you have not had a constant number of lawyers throughout the year come up with a fair estimate, using a fraction if necessary.

I’ll go first.  Our overhead runs about  $115,000  per lawyer per year.   My  overhead is a little higher than it should be because (a) we signed a lease at the height of the market with traditional escalator clauses and the rate is now 20% above market and (b) our space is inefficient.  This factor alone raises overhead $10,000 per lawyer (or  more).

I was talking with a friend who is a partner in a major Nashville firm and  he told me that their overhead runs $180,000 per lawyer per year.  Assuming that a lawyer in that firm "bills" 1800 hours per year, the overhead cost per lawyer in that firm is $100 per hour.  If the lawyer’s income is $180,000 per year, the cost to the firm is a total of $200 per hour for each hour the lawyer can bill and collect.

The traditional law firm rate-making model assumes a profit margin of 33%.  It is easy to see why we have 6 and 7-year lawyers charging upwards of $300 per hour in these large firms.  

 If you have overhead at $100,000 per lawyer per year, you hire a young lawyer and pay him or her $70,000 per year,  you need that lawyer to generate $255,000 in income to meet a reasonable profit goal of 33% (a profit of $85,000).  By the way, your "cost" of that young lawyer is $100 per hour at 1700 "billable" hours per year. 

So, let’s share what we pay in overhead and then find a way to let judges know what it costs to run an office.  If you don’t want to share your data with your name email the figure to me and I will just post your city and your overhead number.  I will keep your information confidential.