Don’t Forget to Consider Billing Rates When Choosing a Practice Group

Don’t Forget to Consider Billing Rates When Choosing a Practice Group

Picking a practice group is an incredibly important decision for any young attorney. Your practice group will dictate the substance of your day-to-day duties at your firm. But, your initial choice also has the potential to set the course for your entire career. Inertia in the workplace is powerful. Spend a few years doing real estate work and people are going to start thinking of you as a real estate attorney. Once people think of you as a real estate attorney, you’re likely to have a difficult time switching to a significantly different practice area. Or even more generally, it’s difficult to switch from litigation to corporate even if you’ve only been practicing for a year.

One factor that I suspect junior attorneys frequently overlook are the billing rates associated with a particular practice group.

Billing rates are important to consider because of they directly affect attorney compensation. Like it or not, a law firm attorney’s compensation is proportional to the revenue that the attorney generates for the firm. The standard rule of thumb is that for each dollar a firm generates, one-third goes to overhead, one-third to attorney salaries, and one-third to profit. Therefore, unless you are a prolific rainmaker, your ability to generate revenue for the firm is constrained by the number of hours you work.

I’ll put it differently: assuming your ceiling is to become an income partner (which for most is likely a best-case scenario), your choice of practice area operates as a cap on your income. Let’s look at some real-world numbers:

According to CounselLink® Enterprise Legal Management, which has access to law firm invoice data, the median partner billing rate for IP-Trademark is $443, for Real Estate is $372, and for Insurance is $185. Consider a hypothetical income partner: we’ll assume 2,000 hours collected for real estate and IP-Trademark and 2,500 for Insurance. Compensation is equal to one-third of revenue.

Practice Group Rate Hours Collected Total Revenue Compensation
IP-Trademark $443 2,000 $886,000 $295,000
Real Estate $372 2,000 $774,000 $248,000
Insurance $185 2,500 $462,500 $154,167

Note: the figures above are reasonable in light of what Kirkland and Akin pay their income partners.

Over the course of a year, the $71-dollar difference between IP-Trademark and Real Estate billing rates amounts to a nearly $50,000 difference compensation. For the Insurance attorney, collecting 25% more hours than the IP-Trademark and Real Estate attorneys doesn’t even get him close.

You might be wondering how this affects you as an associate, particularly if your firm is lock-step for associate salaries. The answer is that the firm’s clients aren’t paying lock-step associate billing rates. That means the associates in the higher billing-rate practice groups are more profitable than their counterparts in the lower billing-rate practice groups. When decision time comes, whether it’s who to make partner or who to lay off, wouldn’t you want to be in the more profitable group?

So, if you’re a young attorney deciding between practice areas (or firms for that matter), don’t forget to consider billing rates.