The Hidden Metric Making or Breaking Your Law Firm’s Profitability

Are your attorneys working around the clock, yet your firm's bank account doesn't reflect their hard work? You are not alone. Many law firms find themselves struggling with cash flow despite putting in massive amounts of effort. One of the biggest mistakes law firms make when setting their billing rates is failing to run an "Employee ROI" (Return on Investment) calculation.

What is the Employee ROI Calculation?

At its core, the Employee ROI calculation simply compares how much an employee costs to employ against the revenue they are expected to generate. To figure out the true cost of an employee, you must look beyond just their base salary and factor in benefits and all the other fees required to bring them on board.

For example, if an attorney costs your firm $10,000 a month in total expenses, and they generate $20,000 in monthly revenue, their Employee ROI is a two ($20,000 divided by $10,000). This means they generate twice what they actually cost the firm.

The Magic Number for Law Firm Cash Flow

Is an ROI of two good enough? Usually, no. If your employees are generating less than three times what they cost (an ROI of less than 3), your firm is highly likely to experience cash flow issues.

This metric becomes critically important if you operate in a high-cost city or state.When you hire an attorney in an expensive jurisdiction, their high cost must be carefully compared to the pricing you plan to charge. If you pick a billing rate that is too low, leaving only a small margin between staff costs and client fees, your firm will struggle to survive financially. You might try to make up for thin margins with a massive volume of cases, but at the end of the day, lawyers cannot work indefinitely or be available 24/7.

How to Fix a Broken ROI 

If you run your numbers and realize your Employee ROI is falling short of that crucial benchmark, you generally have two options to fix the picture: you either need to adjust your compensation structure, or you need to establish a different billing rate. 

You must find the perfect balance between the amount of casework a lawyer can realistically handle and the billable rate required to make the situation profitable.Figuring this out doesn't have to be a solo endeavor. 

Partnering with a CFO who understands the unique financial dynamics of law firms can be a game-changer. A specialized CFO can help you calculate your Employee ROI by analyzing proposed billing rates and realistic casework capacities, allowing you to confidently say, "This makes sense for us to move forward".

Stop guessing when it comes to your pricing. Before setting your next billable rate, run your Employee ROI calculation to ensure your firm's financial picture makes sense and is built to thrive.