New Zealand Law Society - US Trends report finds low law firm utilisation rate

US Trends report finds low law firm utilisation rate

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An innovative and comprehensive new report on United States law firms has found that the average utilisation rate for small and medium firms in 2015 was 28% - meaning that on a typical workday lawyers billed just 2.24 hours to clients.

The Legal Trends Report has been published by Clio, which says it is the world's most widely-used legal practice management platform. The report has been put together by taking anonymised, aggregate data from 40,000 active Clio users who produced over US$60 billion in billing volume.

Because it uses actual data recorded in the practices, the report is regarded as providing a new insight into the practices of small and medium sized law firms. Traditionally these have relied on self-reported or anecdotal data. The report may be downloaded here.

Utilisation Rate

This is calculated by dividing the number of chargeable hours by the available hours. Non-billable work typically includes all administrative, overhead and marketing-related activities. The Legal Trends Report shows an average utilisation rate of 28% (of an 8-hour day). This works out at 2.2 hours of billable time per day.

The report notes that the LexisNexis Law Firm Billable Hours Survey Report from 2012 showed lawyers self-reporting that average billing rates were between 60% and 92%, averaging 6.9 hours billed for an average 8.9 hours worked.

The report says the disparity between the two results isn't necessarily surprising: "There are well-understood biases in self-reported data, such as the social desirability bias, which skews survey answers towards what people feel will seem 'good' to their peers."

The Legal Trends Report utilisation rates varied according to size of firms. Those which were sole practices (one lawyer) averaged 22% and were lowest, while mid-sized firms of 12 lawyers had a utilisation rate of 50% - over twice as high. The report notes that utilisation rates for firms with between 4 and 9 lawyers plateau, hovering between 35% and 40%.

"Utilisation rates increase with firm size, which may imply that law firm efficiency scales with size," the report says. "However, there is a plateau where efficiency does not increase with size - there are diminishing returns once you've added the fifth lawyer to your firm, and efficiencies do not find greater traction until a tenth lawyer is hired."

In New Zealand, the only regular available data on law firm performance has been that generated by the University of Waikato Institute for Business Research two-yearly Law Firm Practice Comparision. The last results, for 2015, show the average billable hours recorded per year per equity partner (82 firms) to be 1,092 and per employed senior solicitor to be 1,021. Information was collected to show average hours spent working per year and average billable hours recorded, and this has been used to calculate the utilisation rates as follows:

Utilisation rate, University of Waikato Law Firm Practice Comparison 2016

Measure Sole 1 to 3 4 to 6 Over 6
Equity Partner ave billable hours 1535 1150 997 1096
Equity Partner ave hours working 1984 2085 1919 1864
Equity Partner Utilisation 77.4% 55.2% 52.0% 58.8%
Senior Solicitor ave billable hours 872 863 1067 1204
Senior Solicitor ave hours working 1780 1754 1889 1641
Senior Solicitor Utilisation 49.0% 49.2% 56.5% 73.4%

Realisation Rate

This represents the number of hours actually billed to clients, net of discounting. It is calculated by dividing the value of billed hours by the value of utilised hours. The Legal Trends Report found the average realisation rate for lawyers in 2015 was 81% (of actual hours worked). This works out at billing for 1.8 hours per day

"Put another way, for every $100 of billable work conducted, the average lawyer writes off $19," it says.

Realisation rates varied significantly by practice area, with personal injury having the lowest realisation rate at around 40% (followed by administrative at just over 50%, then employment at just over 60%) and builder's liens the highest at over 90% (followed closely by family, conveyance - purchase, conveyance - sale, and corporate).

In New Zealand, the University of Waikato Institute for Business Research 2015 Law Firm Practice Comparison (82 small and medium firms) showed that realised charge-out rates for equity partners were 76% for sole practices, 89% for 1 to 3 partner firms, 92% for 4 to 6 partner firms, and 89% for firms with more than 6 partners. For employed senior solicitors the rates were 63% for sole practices, 81% for 1 to 3 partner firms, 70% for 4 to 6 partner firms, and 86% for firms with more than 6 partners. The information for these results was self-reported.

Collection Rate

This represents the total amount of collected revenue compared to the number of billable hours. It is calculated by dividing total collected revenue by the value of billable hours. The collection rate shows the amount of revenue collected after factoring in bad debt and other sources of lost revenue.

The Legal Trends Report found the average 2015 collection rate to be 86% (of actual hours billed). This works out at collection of payment on 1.5 hours per day.

Collection rates were fairly consistent across practice areas, with slightly lower rates in insurance and bankruptcy, and the highest in conveyancing (both sides) and builder's lien.

In New Zealand, the University of Waikato Institute for Business Research 2015 Law Firm Practice Comparison did not measure collection rate. A comparable indicator is in the lock-up data, measuring the effectiveness of collection of outstanding debts as a proportion of billings.

Lock Up (as a percentage of total gross income)

Measure Sole 1 to 3 4 to 6 Over 6
Debtors 10.1% 10.7% 13.9% 17.4%
Unbilled external disbursements N/A 0.9% 0.5% 0.3%
Work in progress 19.3% 12.8% 22.7% 9.2%
Total debtors, unbilled external 13.3% 21.0% 33.1% 25.9%

Average hourly billing rates 

The Legal Trends Report provides a time series view of billable hours, showing that average hourly billing rates in the United States have increased by 10.5% from US$210 in 2010 to US$232 in 2015. The report notes that this has only just kept pace with the National Consumer Price Index, which increased by 10.6% between 2010 and 2016.

The highest average billing rates by practice area were for bankruptcy ($275), corporate ($272), conveyancing ($263) and tax ($262). The lowest average billing rates were for criminal ($148), personal injury ($182), insurance ($200) and family ($202).

In New Zealand the University of Waikato Institute for Business Research Law Firm Practice Comparisons showed the following results for the firms which participated. This indicates that New Zealand charge-out rates increased at a much higher rate than in the United States, with the interesting exception of 1 to 3 partner firms.

Average hourly charge-out rates (net of GST), Law Firm Practice Comparisons

Measure Sole 1 to 3 4 to 6 Over 6
Equity Partner 2015  329 325 353 406
Equity Partner 2011 287 310 302 328
Equity Partner Change 2011 to 2015 14.6% 4.8% 16.9% 23.8%
Employed Senior Solicitor 2015 255 232 280 247
Employed Senior Solicitor 2011 196 224 186 209
Employed Senior Solicitor Change 2011 to 2015 30.1% 3.6% 50.5% 18.2%

The New Zealand Law Society has also collated information on chargeout rates for employed solicitors, at June 2016 and information on this is available here.

Billable rates by fee structure

The Legal Trends Report says that while many law firms are switching to alternative fee arrangements like flat fees and value-based billing, the billable hour continues to account for the majority of billings recorded in Clio for most practice areas. Notable exceptions were immigration, criminal, wills, and bankruptcy. It notes that contingency fee billing was a feature added to Clio in August 2015 and is likely to be underrepresented in the data.

In New Zealand the University of Waikato Institute for Business Research 2015 Law Firm Practice Comparison asked all participants "does your practice use value billing?". All 82 participating firms responded to this as follows:

Does your practice use value billing?

Response Sole 1 to 3 4 to 6 Over 6 All
Yes 66.7% 60.9% 36.0% 60.0% 54.9%
No 33.3% 39.1% 64.0% 40.0% 45.1%