Want To Understand Law Firms? Learn the RULES.

The most important lesson you can learn before working in a firm is how a firm makes its money.

Do you honestly understand how law firms actually work? I mean, sure, you know it’s a pyramid scheme fueled by the tears of associates, but I’m asking if you get why firms work as businesses?

Welcome to the belly of the NALP beast, people.

Sometimes there are stupid articles about things they don’t teach you in law school. But what you should really learn in law school is how a law firm makes its money and exactly what you can do to be valuable to that process. You’re going to work there, right?

If you’re an associate of any length of time you probably still don’t know how the firm makes its nut and that’s criminally stupid. This is why you don’t understand your bonus. If you’re a partner who doesn’t understand, then… well, tell your dad the managing partner hi.

Bright and early yesterday morning I watched Tom Grewe of Bryan Cave LLP and David Montoya of the University of Texas School of Law school a bunch of people on law firm business and the magic of RULES.

RULES is a handy acronym developed by Robert J. Arndt to assist law firms in measuring profitability. The goal is to encourage a holistic approach to the law firm business rather than get yourself tripped up on single factors that can contribute to profitability.

R stands for Realization. It’s basically how much you’re really worth as a cog in this here machine. The formula here is “Fees collected divided by time value billed.” In other words, how much you got versus how much you were supposed to get. No one pays sticker price for a new car, why would they pay sticker for a lawyer? The value of your work is that discount.

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As an example, assume an attorney billing $300/hour. She bills 10 hours for a client in a straightforward matter. That would be $3,000, but she discounts her rate for this client to $275 because she assumes the client appreciates basic acts of kindness. So of the $2,750 she now has gets written down another $250 because either she doesn’t think the client will pay or honestly thought she could have done it faster or whatever. So now the bill sent out is $2,500. And of course the client is an armadillof**ker so he disputes an hour of work. She takes off that $275 and now the firm collects $2225. Take $2,225 and divide it by the $3,000 she was supposed to get for 10 hours of work and you have your realization rate right there. Back in the day firms were realizing 92-95 percent. The crash dipped it into the 80s. In any event, this is how your really value firm attorneys.

U stands Utilization. Billed hours divided by targeted billing. Most firms generally set the 2000 hour/year mark. Some budget for pro bono, marketing activities, etc. Others just make you market and don’t care about what it does to your hours. If the firm as a whole is billing less than it’s supposed to be billing… well, that’s an issue.

L is Leverage — how many non-partner attorneys are there for every partner. Remember the pyramid scheme remark from earlier? Yeah, that. “Mo associates, mo money,” which is the English translation of the word “verein.”

E is for Expenses. For a law firm, the three categories of expenses are people, rent, and everything else. Most firms try to keep these balanced at 65 percent wrapped up in people, 26 percent in rent, and 9 percent in the catchall. The trick is that “catchall” is the only area where firms have a ton of wiggle room, which is why you probably have computers running Windows ME.

Finally, S is for speed or the date charges are incurred vs. received. If you have a client paying every month on the dot, then good for you. But most firms don’t have such dreamy clients. Also most firms don’t have lawyers — associates or partners — good at getting their time in the system which also screws up your speed.

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Take all this together — how effective your lawyers are with their time, whether they’re spending enough time at work, the leverage, the costs, and how fast you’re getting paid, and you’ve got a sense of profitability.

This may not make you feel any better at 4 a.m. while fighting with someone about grammar in a reinsurance contract, but at least it gives you a sense of the leviathan you’ve hitched your wagon to.