Table of Contents
According to US News, the average salary of a lawyer is $126,930. And it’s common knowledge that lawyers are among the best-paid professionals in the country. However, do you know how law firms like The Medlin Law Firm earn the money to pay their employees’ such high salaries? If your answer is NO, keep reading to find out how they do it.
How Do Law Firms Earn Money?
To know how a law firm earns money, you first need to know how lawyers earn money. Many experienced lawyers can approximate how much time it will take to resolve your legal issue. Therefore, they’ll charge you an hourly rate for their services. For example, if your lawyer charges you $100/hr and spends 100 hours resolving your case, you’ll pay them $10,000 for their services.
The amount of hours your lawyer spends working on your case is commonly referred to as ‘billable hours.’ Law firms make money by charging a fee for these billable hours. Therefore, you’ll find that most law firms have targets of how many billable hours each lawyer has to work per year, which is normally around 1700 to 2300 hours.
So, if a law firm has 5 lawyers. And each lawyer works 2000 billable hours at a rate of $200/hr. The law firm will make a total of $2,000,000 in revenue.
Now, how do law firms using this model earn a profit? It’s simple. They set the hourly fee of their lawyers at a rate higher than the lawyers’ salary. For example, let’s assume Lawyer A gets paid $300,000 annually. If Lawyer A works 2,000 hours a year at a rate of $400 per hour, the law firm will make $800,000. Even after subtracting the lawyer’s salary and accounting for other expenses, the firm will still be left with a handsome profit.
What Should Law Firms Do To Keep Their Profits High?
Most law firms fail because of decreased revenues. Therefore, law firms of all sizes need to make the necessary effort to ensure revenues remain high. Below are tips guaranteed to help law firms increase their revenues.
Embrace Good Finance and Management Practices
A law firm’s lifeline is its ability to make money. Without capital running a law firm becomes impossible. Every law firm should have a business plan with a clear financial plan. The financial plan should show where the money comes from, how the money is spent, and how the money is used to support future growth.
On top of that, law firms should adopt proper management practices. Otherwise, how will the legal firm attract clients and increase revenue if it has poor customer service, can’t properly handle client information, or its employees have low morale?
Leaders Must Be Competent And Ethical
It’s quite uncommon to find a legal firm without a leader. The type of leader determines whether a law firm will succeed or not.
For example, in July 2009, Max Dreier, the sole equity partner of Dreier LLP, was sentenced to 20 years in jail for committing investment fraud. And as a result, he ruined his reputation and his law firm’s reputation, which eventually closed down due to his debts.
Legal firms need competent and ethical leaders who prioritize the firm’s growth. They are men and women who inspire partners and associates to work together and achieve success. Effective leaders motivate their employees to develop their skills and abilities. Competent leaders also have a greater ability to build their team’s loyalty and trust, which helps foster the firm’s growth.
Establishing A Formidable Team
How a law firm treats its employees greatly determines how those employees will perform. And to get the best out of the partners, associates, and paralegals, law firms need to operate like a team. Team members don’t play solo. When working as a team, each team member actively contributes to achieving the firm’s objectives.
When employees work in such a collaborative environment, they develop an emotional connection to their job. As a result, employee turnover reduces due to increased loyalty and trust.
Don’t Be A Jack Of All Trades
When starting out, a law firm should focus on one legal field. Focusing on one field of activity allows the law firm to build its reputation, grow its list of clientele, talk to clients and ask for their feedback. All of these will help the law firm build a strong foundation for future expansion into other legal fields. If a law firm decides to focus on multiple legal fields, it becomes difficult for the law firm to attract clients and increase revenue.