There comes a time in all associates’ careers when they stop and do the math. They think about their salary, bonus, and benefits. They think about their billable hours. They multiply their billable hours by their billable rate and suddenly they think, hey, WAITAMINUTE. My firm makes
three four five times what it pays me!
Like any other salaried employee, the more hours an associate works, the less they make per hour, bonuses notwithstanding. They might not mind so much if they’re also bucking for promotion, i.e., up for partner. Regardless, at some point, every associate thinks, “if only I were paid as much per hour as I bill per hour . . . .”
That moment for me was the epiphany that ultimately led to helping form my own firm. But since that time, I’ve also been able to see the other side of the fence, so to speak. There are a lot of reasons — some obvious, and some less so — why the math isn’t quite as simple as it seems….
First, of course, you need clients. If you can’t generate business, your practice will fail. No matter how uneven the law firm math may look to an associate, they also know that zero hours times any rate is zero income.
But if the associate has clients or potential clients, or believes he can generate business, then the calculators come back out. He starts by considering the expenses involved in running a solo or small firm practice.
These are mostly obvious, and everyone knows that income will be offset by expenses. Associates know that someone will have to pay the rent, and the staff, and buy supplies. They might consider a virtual office to minimize those costs. And even with a traditional office, the economics don’t appear too onerous for a new law practice, especially where there is cheap commercial real estate available. They price malpractice insurance, and may actually find it to be affordable. All in all, working for yourself appears to be a good investment. Again, this assumes you have clients.
This analysis only goes so far because there are so many subtle complicating factors that make working for yourself much more challenging than the simple math might suggest.
For example, if you leave a firm to work for yourself or a newly formed small firm, your billable rate might go down, perhaps significantly. Your matters might be smaller than those that were handled by your firm, and your clients might require lower rates. Indeed, your lower rates might be an essential part of your marketing message.
Besides a potentially lower billable rate, you also are certain to work far fewer billable hours if you are working for yourself. I think most lawyers significantly underestimate just how many non billable hours will be spent performing administrative tasks. I think many also underestimate the time they will have to spend on mission-critical business development. So not only is the billable rate lower, but also the number of billable hours is dramatically lower for the owner than the associate.
If the matters you are working on really are smaller than those handled by your firm, then your clients won’t be willing to spend as much on those matters. If a client is willing to spend $100,000 to resolve a $1 million controversy, then he will only spend $10,000 to resolve a $100,000 controversy.
Finally, an attorney who leaves a firm often rediscovers some of the joys of life outside of work. It’s perfectly natural that quality of life takes on renewed importance, and that’s a good thing. But when doing the math, you have to remember that working less means billing less, especially when combined with all the other factors.
So, don’t be impulsive. Simple math notwithstanding, the reality is that running a successful solo or small firm practice is much more financially challenging than it seems, even assuming you have clients. A smart and detailed plan is absolutely essential for a new business — including a solo law practice — to succeed. If possible, spend time gaining experience, contacts and pedigree before launching your practice.
Running a solo or small firm practice poses such serious challenges that it should not be seen as simple or as an easy way to make a living. The business aspect is so challenging that, in my opinion, one really shouldn’t undertake the project without some sort of extra motivation, whatever that may be.
Even beyond all this, there still are deeper, more fundamental reasons that not everyone could or should work for themselves. Let’s assume you have clients. You factor in the expenses, the lower billable rate, the fewer billable hours. You have the experience, contacts and pedigree to maintain a practice. And you’re motivated enough to tolerate a slimmer than expected profit margin.
Nonetheless, many if not most attorneys simply are not willing or able to make the financial investment, not to mention the enormous emotional investment, required to run a practice. Others will be deterred by the fear of the unknown. Many if not most lawyers have no idea how to go about starting a private practice, and many if not most have never run a business.
But the fundamental reason an associate might forego opening a private practice is risk. The risk of failure entails both financial loss as well as embarrassment. Starting a business is risky, and the amount of risk in opening a new firm or solo practice is simply more than many naturally conservative lawyers can tolerate. It’s not a pejorative to point out that you can’t let go if you’re afraid to fall. Next to a lack of clients, it is the considerable risk of failure that most belies the simple math that might otherwise convince associates to work for themselves.
Tom Wallerstein lives in San Francisco and is a partner with Colt Wallerstein LLP, a Silicon Valley litigation boutique. The firm’s practice focuses on high tech trade secret, employment, and general complex-commercial litigation. He can be reached at [email protected].