<<

. 8
( 92 .)



>>

costs and a built-in profit margin.
The second method used by firms with better brand recognition or pro-
prietary services (e.g., bankruptcy processing services) may set billing rates
based on a tradition pricing curve or supply/demand approach”basically
setting the bill rate as high as the market will bear. Law firms and financial
consulting firms operate in a competitive marketplace with little regulation
and thus may set bill rates at the level their clients will pay. However, in
some professional service areas, rates may be regulated, such as the health
care industry or services for the government, which dictates acceptable rates
and guidelines for billing structures.
We next examine several recent studies on bill rates.

Standard Hourly Billing Rates by Staff Level. Standard hourly billing rates
vary among different staff levels at law firms. As a general rule, equity part-
ners/shareholders and of-counsel attorneys typically bill at the highest rates.
The biggest jump in billing rates occurs between the associate and partner
levels, as shown in Exhibit 2.4.12

Median Hourly Billing Rates by Firm Size. As the size of a law firm grows,
the median hourly billing rates increase at all staff levels. However, as Ex-
hibit 2.5 demonstrates, equity partners™ rates increase at a greater rate than
associates™ rates as the firm size increases.13

Quartile Analysis of Billing Rates by Position for Management Consulting
Firms. As Exhibit 2.6 illustrates, billing rates vary significantly: up to 25
Standard Hourly Billing Rates
RATE
NUMBER NUMBER LOWER UPPER NINTH
STATUS OF OFFICES OF LAWYERS AVERAGE ($) QUARTILE ($) MEDIAN ($) QUARTILE ($) DECILE ($)
Equity partner/shareholder 626 7,384 261 200 250 300 375
Non-equity partner 324 1,531 237 190 230 275 315
Associate lawyer 606 6,572 178 140 170 200 250
Staff lawyer 101 355 171 135 165 200 231
Of counsel 256 692 254 200 245 300 350




31
Annual Client (Billable) Hours Worked
HOURS
NUMBER NUMBER LOWER UPPER NINTH
STATUS OF OFFICES OF LAWYERS AVERAGE QUARTILE MEDIAN QUARTILE DECILE
Equity partner/shareholder 588 6,466 1,744 1,486 1,729 1,969 2,236
Non-equity partner 284 1,098 1,751 1,501 1,773 1,990 2,203
Associate lawyer 544 4,322 1,842 1,674 1,869 2,031 2,194
Staff lawyer 58 160 1,630 1,391 1,628 1,855 2,044
Of counsel 144 302 1,534 1,219 1,544 1,840 2,067

Exhibit 2.4 Standard Hourly Billing Rates and Billable Hours
32 Managing and Governing the Professional Services Firm



400
375
350
Median hourly rate (in dollars)




325
300
275
250
225
200
175
150
125
100
Under 9 9 to 20 21 to 40 41 to 75 76 to 150 Over 150
Number of attorneys in firm
Nonequity partner
Equity partner Associate




Exhibit 2.5 Median Hourly Billing Rates by Firm Size

percent between the 50th and 75th percentiles and up to 44 percent be-
tween the 50th and 25th percentiles. The distribution of rates around the
median is fairly tight for partner and project manager positions, although
consultant and associate rates fall across a wider range.14

CONTROLLABLE COSTS. While labor consumes 50 percent to 70 percent
of the firm™s costs, managing other costs in SG&A can still provide dra-
matic improvements in profits. There are specific criteria and guidelines
that will assist a prudent businessperson in keeping down costs, which have


PROJECT
QUARTILE PARTNER ($) MANAGER ($) CONSULTANT ($) ASSOCIATE ($)

Twenty-fifth percentile 184 144 100 70

Fiftieth percentile
(Median) 250 200 160 125

Seventy-fifth percentile 300 250 200 150

High value 750 500 350 250

Exhibit 2.6 Analysis of Billing Rates by Position
33
Professional Services Firm Benchmarking

an impact on the bottom line. Critical areas of focus in cost management op-
portunities are:

• Internal meetings, seminars, and training
• Travel time and expenses
• Staff expense reimbursement

As a professional services firm, it is important to train, develop, and com-
municate with professional and administrative staff. Staff meetings”by
practice group, office, department, or firmwide”are critical, but the meth-
ods and costs of these meetings can be managed. Some suggestions for cutting
meeting costs include: holding internal meetings in the office rather than at
hotels or resorts; if multiple locations are involved, holding the meetings
in the city where the majority of the participants reside; consolidating multi-
ple areas/topics to eliminate multiple trips; and using videoconferencing/
web-based meetings for both internal and clients.
Although there are capital expenditure costs to videoconferencing, in the
long run, it saves time and relieves employees of burdensome business travel.
Companies with multiple locations or clients in remote or difficult-to-reach
locations often find videoconferencing helpful and much more personal than
conference calls.
A recent analysis of a multioffice management consulting firm with rev-
enues of $200 million determined the optimal target for meeting expenses to
be 1 percent of revenue. To maintain such a ratio, managers must make spe-
cific decisions about implementing policies that reduce expenses.
Professional staff training is a necessary part of the development and
growth in any professional services firm. But it is important to evaluate the
training need by level or department. For example, CPAs and attorneys need
a certain number of hours of continuing professional education within a
given year to maintain their licenses. The controller and others on the ac-
counting staff may need to use outside training and courses to ensure the
firm™s CPAs adhere to Sarbanes-Oxley training requirements. As an executive
seeking to control costs, your job is to ask about the necessity and reason-
ableness of such expenditures.
When nonclient travel is required, the same policies and procedures
should be enforced as they would be in client travel. Consider bringing out-
side consultants into the office to conduct training for a group of employees,
versus the cost of sending those employees outside to attend an accredited
course. And, by all means, encourage the professional staff to present to one
another to promote learning and continuing education. This can be a worth-
while, cost-effective, and enjoyable way to educate and train. Chapter 10
covers the topic of professional staff training, development, and career
tracks in greater detail.
34 Managing and Governing the Professional Services Firm

PROFESSIONAL COSTS. A major cost in a professional services firm is per-
sonnel cost for the professional staff whose primary responsibility is to serve
clients and generate revenue. Determining appropriate compensation is a mul-
tifaceted process that includes analysis of the industry, a firm™s rank within its
sector (including industry/benchmarking studies), current market rates (what
it would take to replace the level of experience and expertise that a certain
professional has), and compensation ranges within your organization.
For law firms and financial consulting firms, compensation varies signifi-
cantly based on the following factors:

• Size of the organization
• Industry specialty
• Geographic location
• Target utilization of staff

For example, a law firm may expect first-year associates to charge 1,800
billable hours in a typical 2,080-hour year (based on 80 hours of holidays
and 120 hours of vacation time). Thus, an associate is expected to work 50
hours per week on average, which could vary from 40 to 100 hours, based on
client needs.
In most professional services firms, billable hours play a significant role in
the overall performance assessment of a professional, affecting promotions
and compensation. While each organization has a required number of bill-
able hours for each staff level, cultural expectations of the organization play
an equally weighted role in measuring performance. For example, the dy-
namic of “face time” is a crucial measurement within law firms and other
professional services organizations. Even if not engaged in billable work,
legal associates are expected to stay in the office, seek additional work, and
provide assistance to others in need. These parameters vary from firm to
firm, so each organization should establish its own billable hour require-
ments and measurement standards.
The two most important measurements regarding professional staff in a
services firm are the generation of revenue by billing time to clients (bill-
able hours) and total compensation of the professionals generating that rev-
enue. Chapter 10 covers compensation issues in more detail.

Billable/Nonbillable Hours by Employment Level (Average Hours per Week).
As Exhibit 2.7 shows, billable hours vary between 45 percent and 75 percent
for management consultants. Consultant-level professionals achieve the high-
est percentage, while project managers are billable roughly two-thirds of a
workweek. Partners, who have additional selling and firm management re-
sponsibilities, average roughly 45 percent billable time per week. Associates
are billable 56 percent of the workweek.15
35
Professional Services Firm Benchmarking



40
37.7
30
Billable hours


30.9
20 23.5 24.0
22.0
10

0
Nonbillable hours




13.8
10 13.2
17.4 18.0
20
28.7
30
Partner Project Consultant Associate Support
manager staff



Exhibit 2.7 Billable/Nonbillable Hours by Employment Level
(average hours per week)




Total Compensation. Exhibit 2.8 summarizes total compensation for the
various levels of employees at law firms. The average compensation across all
levels is $172,000. Equity partners/shareholders™ average total compensation
is $299,391, which is significantly greater than that of other levels.16

Median Total Compensation by Firm Size. Similar to hourly billing rates,
the median total compensation increases at all staff levels as the firm size in-
creases, as shown in Exhibit 2.9. The higher partner levels are rewarded more
significantly as the firm size increases in comparison to the average and lower
partners.17

PROFITABILITY. The senior executives of professional services firms are
responsible for the overall profitability of the organization. This can be mea-
sured in many ways, but one helpful statistical tool is the average income and
expenses per professional.

Average Income and Expense per Lawyer as a Percentage of Receipts. The
majority of expenses per lawyer as a percentage of receipts are allocated to
employees™ compensation”approximately 60 percent to lawyers, 15 percent
to support staff, and 4 percent to paralegals (see Exhibit 2.10).18
TOTAL COMPENSATION

NUMBER NUMBER LOWER UPPER NINTH
STATUS OF OFFICES OF LAWYERS AVERAGE ($) QUARTILE ($) MEDIAN ($) QUARTILE ($) DECILE ($)
Equity partner/shareholder 615 6,986 299,391 181,692 246,799 342,125 474,580
Nonequity partner 290 1,133 175,447 134,116 159,051 191,997 265,000




36
Associate lawyer 540 4,203 116,585 91,635 109,4196 133,087 163,749
Staff lawyer 56 139 102,841 79,919 96,788 118,365 138,471
Of counsel 160 349 165,641 118,142 149,648 201,622 264,089

<<

. 8
( 92 .)



>>