This is the fourth in a series of conversations that consider the operational and design realities affecting today’s legal sector.
IA Interior Architects and New York legal business consulting firm SB2 Consultants take a look at the metrics driving contemporary law firm management and design. Guiding any enterprise effectively demands accurate metrics. What factors must be identified, quantified, and adjusted if a law firm wants its business and the design of its work environment to succeed?
“We track industry standards for a number of important business metrics, including attorney utilization and realization, total fees collected, and fees recorded versus fees billed, and we can use them to advise a client on how their performance varies from best practices,” said Mark Santiago of SB2. He went on to detail several of the most critical metrics that measure a law firm’s success.
The process of tracking metrics begins with the essential units of law firm work—the billable hours of the lawyers themselves. Attorney utilization vs. realization looks at the total hours logged compared to the actual time billed to clients. This can be a good measure of the efficiency with which a firm is performing its work. Moving forward from there, by measuring the ratio of fees billed to those collected, revenue conversion efficiency allows the effectiveness of a firm’s matter management capabilities to be analyzed. Fees recorded versus fees billed is another key metric to track, revealing how much time is written off and demonstrating how effectively the firm is delivering its services.
KEY BUSINESS BENCHMARKS
- Overall Attorney Utilization measures actual attorney billable hours against an annual budgeted amount.
- Billed Hours Realization tracks attorney labor hours as recorded compared to those which are billed and finally to the total fees actually collected.
- Revenue per Lawyer (RPL) is calculated by dividing the total fees collected by the number of attorneys.
- Profits per Equity Partner (PPEP) is determined by dividing the firm’s total profits over the total number of equity partners.
- Revenue Conversion Efficiency is calculated by dividing the total fees billed by the total fees collected.
- Work-in-Progress (WIP) in Days is calculated by dividing the total amount of unbilled fees by the daily budgeted fee amount.
- Docket to Pocket gives the average collection time of a receivable beginning from the day it is recorded until payment for the work is received.
Measuring Space: Law Firms Compared to Other Industries
In addition to having a comprehensive set of business metrics to track, law firms also measure their space differently than other types of business entities. While most entities look at the usable square footage needed for each member of the total staff, law firms primarily measure the rentable square footage required on a per attorney basis. This goes back to the core law firm philosophy that any expense, including real estate, is measured against the revenue generators in the firm—the lawyers.
As recently as ten years ago, it was not uncommon to find some law firms utilizing 800 or more rentable square feet per attorney if their space had not been recently renovated. Today that number is typically between 600 and 800 square feet, with the most progressive firms requiring even less. There have been a number of factors driving that number down.
Law firms have been forced into a more competitive fee landscape and as a result have looked more carefully at costs. One of their largest expenses after salaries and benefits is real estate, which in a healthy firm is between 6 percent and 7 percent of total revenue.
Benefits of Space Reduction
A number of changes in the way law firms operate have also driven space utilization lower. Most firms used to allocate a considerable amount of space to legal files and case rooms. Both have rapidly been moving into the digital realm, and the need for allocating physical space has dropped. “Even the library, a former icon at most law firms, has also gone the digital route allowing most firms to eliminate or greatly reduce their footprint in new office build-outs and renovations. However, for some firms the library still carries a symbolic meaning and a vestige of it remains in the form of bookshelves in corridors, conference rooms, or other spaces around the firm,” notes IA’s Erik Hodgetts.
The move to a universal office size of between 150 and 180 square feet for all attorneys regardless of seniority has also helped drive down utilization for some firms. This not only provides a space savings but can result in much greater flexibility when moving personnel around within the office. “This is a move that can be seen through a number of lenses. While it does save space and provide flexibility, it is a much more agile solution that allows firms to more easily co-locate teams and enable practice groups to foster a greater sense of collaboration,” adds Hodgetts. Being able to rapidly arrange teams in an optimal way can also help attorneys better collaborate and cross-sell a broader suite of legal services to their clients.
To get the most out of costly real estate, it has also become essential for spaces in law firm offices to serve more than one purpose. For example, the thoughtful design of conferencing areas with movable walls allows rooms to combine and host groups of varying sizes. Providing these spaces with flexible furniture lets them also accommodate layouts for training, large presentations, or dining. Planned correctly, even the corridors and common areas of these client-facing zones can be leveraged to allow the firm to host large-scale social events which otherwise might require the rental of expensive off-site space.
Changing Support Ratios
Law firms have also evolved in how they support the work of their attorneys. One of the most notable changes is the ratio of attorneys to legal secretaries. In the past this ratio might have been two or three to one, but larger firms have evolved to a ratio between five and seven to one. “The reasons for this are mostly centered on generational changes in the workforce. Younger attorneys do more of their own document management and don’t require the same type of support that attorneys of previous generations did,” according to IA’s Russell Manthy.
In addition to the reduction in secretarial staff, the characteristics of the support needed for today’s legal practice are evolving. Some firms are combining the functions of legal secretaries, paralegals, and even concierge-type support into blended teams that better serve the attorneys. Flexible spaces with features such as a single universal open workstation for all support staff are needed to accommodate these teams, and this often leads to a more open design than was typical for law firms in the past.
Meeting and Collaboration
In-person meetings continue to be an essential activity for the legal industry. In a general sense, meeting space in law firms follows the ratio of about one meeting seat per attorney, although this may vary depending on the needs of a specific practice. However, the characteristics of those meeting spaces are changing. While the tradition of larger and more formal meeting rooms is still strong, some firms are looking at utilization data and finding that meeting rooms designed to accommodate groups of 12 to 16 are most often used for groups of four to five. To better accommodate this, the ratio of smaller meeting spaces to larger spaces is on the rise. Additionally, more informal collaboration spaces are finding their way into law firm design, with younger attorneys in particular desiring alternate settings for interaction with their teams and for work.
Key Design Metrics
- Rentable Square Feet per attorney commonly ranges from 600 – 800 rentable square feet today, with the most efficient firms pushing below this range via aggressive space-saving techniques.
- Attorneys per Secretary has reached 4:1 or even 5:1 in mainstream firms, with more progressive examples reaching to levels as high as 7:1 or 8:1.
- Conference Seats per Attorney continue to cluster tightly around one dedicated meeting seat needed for every lawyer due to industry demand.
- Partner Office Sizes for firms maintaining a separate category for partners generally range from 180 square feet to 225 square feet.
- Associate Office Sizes can be as efficient as 125 square feet to 150 square feet in many markets.
- Universal Office Sizes when all attorneys including partners are given the same space allocation are a bit larger at 150 square feet to 180 square feet.
- Floor Plates for today’s less support-intensive firms have been reduced to an ideal size range of approximately 23,000 to 28,000 rentable square feet.
Meaning in the Numbers
While these metrics tell a quantitative story about utilization and support, they also speak to trends in the evolution of the practice of law. In the past, law firms could sometimes seem like silos of what were essentially a group of small separate businesses gathered under a single banner and roof. In today’s evolving and competitive business world, they are shifting to support cross-functional legal teams that better serve their clients on multifaceted assignments. Regularly gathering—and more importantly acting—on the key measurements related to productivity and efficiency creates a heightened level of control and understanding of a firm’s finances. Having an office space and a business structure that reflects these realities can lead to greater success for any law firm.