They trade hours for dollars. The billable hours model has a lot to answer for, like cashflow instability, culture problems and clients who would rather get “legal advice” from random people on Facebook. Chronic busyness is another major problem caused by billable hours – lawyers feel like they have to do repetitive legal work manually to justify the fees they’re charging, instead of adding value.
Innovative lawyers are all about working smarter to better serve their clients. One way they do this is by using their firm’s valuable intellectual property to generate revenue for years to come. They turn traditional legal services into legal products and services that are not linked to the billable hours model. This frees up their time, improves cashflow (particularly when there are bumps in the road), and makes them more money.
Until a couple of years ago my Dad and I had a law firm and an online legal services called Legal Beagle. Legal Beagle was a conveyancing machine and all the clients we served came to us from our digital marketing (we never met our Legal Beagle clients – our service was completely online and we marketed it nationally). We had a very responsive marketing funnel – if we needed more clients we turned up our marketing spend, and if we were too busy we turned it down or off. In early 2016 my Dad died. He was the biggest fee earner at our firm so not only did his death have a massive emotional impact, it had a big financial impact too. The only way we got through it was Legal Beagle – we turned up the marketing spend to serve more clients.
I am going to break down the maths around selling legal products and services online so you can see how innovative lawyers have more time and money, and better cashflow.
Let me tell you about two law firms: Rapture Law and Atomic Legal (yep I made these firms up, and yep Blondie is my favourite band of all time). Both firms provide legal services to startups, entrepreneurs and SMEs, and started operating at the same time.
John and Phoebe have been lawyers for 10 years and decide to start a new law firm together called Rapture Law.
John and Phoebe charge clients $200 per hour and they bill an average of 80 hours per month, earning $16,000 in monthly revenue each.
Rapture Law ends year one with total annual revenue of $384,000.
John and Phoebe want to increase their firm’s revenue but they’re worried about raising their hourly rate as their clients might complain. Instead, they spend hours on networking and relationship building to find new clients and referral sources. They each bill an average of 100 hours per month, earning $20,000 monthly revenue each.
Rapture Law ends year two with total annual revenue of $480,000. John and Phoebe are stoked with their firm’s increase in revenue.
Rapture Law really starts to take off. They have so many clients wanting to work with them, so they’re working all the time. They decide to increase their hourly rate to $300 and they’re each billing 120 hours per month and working nights and weekends. That’s $36,000 per month each in revenue.
Rapture Law ends year three with total annual revenue of $864,000.
Rapture Law are burning out so they reduce their hours doing client work to 100 hours per month. They raise their hourly rate to $350 – they have heaps of clients now so why not. Due to burn out, John takes 3 months off over winter and Phoebe takes 3 months off over summer to recover and spend time with their young families. This means less revenue for the firm, but they figure the bump in their hourly rate will make up for it.
Rapture Law ends year four with total annual revenue of $720,000.
John and Phoebe realise that in order to produce high quality legal work at the same time as having young families without going crazy, they can only bill 90 hours per month each. That’s a nice change of pace, but John and Phoebe are ambitious and want to break the $1m in revenue mark for their firm, but at this rate the firm will make $864,000. If they want to make more money, they either need to raise their hourly rate or work more hours.
Now let’s talk about another law firm, Atomic Legal. Anita and Shane have also been lawyers for about 10 years, and started Atomic Legal at the same time that John and Phoebe started Rapture Law, but they’ve done things differently.
Anita and Shane charge clients $200 per hour and they bill an average of 80 hours each per month, earning $16,000 monthly revenue each.
Atomic Legal ends year one with total annual revenue is $384,000.
Anita and Shane want to increase the firm’s revenue but they’re afraid they’ll lose clients if they raise their hourly rate. Anita and Shane decide to create a legal toolkit for startup businesses and entrepreneurs. The legal toolkit will have automated document generators for nearly every kind of document a startup business needs, from a shareholders’ agreement to website terms and conditions, and will have help videos and guides on a range of useful topics.
The price of the legal toolkit will be significantly less than getting legal work done by Anita or Shane.
Because Anita and Shane are working on creating the legal toolkit, they’re only able to bill 70 hours per month, which means they earn less than they did in year one.
Atomic Legal ends year two with total annual revenue of $336,000.
Atomic Legal is taking off. They launch their legal toolkit and sell it for $1,000, and they are selling 5 toolkits per month (a total of $5,000 per month). The toolkit sales have resulted in more clients for Awesome Legal. Anita and Shane don’t want to burn out so they raise their hourly rate to $300 and each bill 80 hours per month ($24,000 monthly revenue each).
Atomic Legal ends year three with total annual revenue of $636,000.
Anita and Shane are very clear about not working evenings and weekends. They are getting busier so they decide to hire two lawyers to help with the client work. These lawyers bill about 100 hours per month each at $200 per hour ($20,000 per lawyer, so $40,000 total), and Atomic Legal keeps about 40% (so about $16,000 per month total).
Anita and Shane are still billing about 80 hours of client work each per month. They haven’t increased their client work because they’re spending time on selling their legal toolkit and are now selling 10 toolkits per month ($10,000 per month).
Atomic Legal ends year four with total annual revenue of $888,000.
Shane takes 3 months off as he and his partner have a baby. Once Shane is back at work Anita decides to give up client work for 3 months to go and live in Bali and spend that time creating their next legal product.
Shane wants to spend more time with his family and write his first book. Anita is enjoying speaking at conferences and writing articles as she has become a thought leader on the law firm client experience and how to better serve SME clients. Anita and Shane both really enjoy spending time on selling their legal products, but they still like working with clients and don’t want to give that up. They decide to take on another two lawyers to do client work, and reduce their hours doing client work to 50 hours per month.
Atomic Legal is now selling 20 legal toolkits each month ($20,000 per month).
The new legal product that Anita created while in Bali is a subscription based legal product which they sell to startups and SMEs for $500 per month. They are taking on 5 new customers for their new subscription legal product every month.
Atomic Legal ends year five with total annual revenue of $1.143m.
So what’s the difference?
The key differences are:
- Anita and Shane of Atomic Legal invested in their intellectual property early on in their business journey, and that IP is making money for them year after year. The result of this is they have more time to spend on what really matters to them, and they are far more likely to avoid burnout. By the end of year five, they also have more revenue.
- John and Phoebe of Rapture Law trade hours for dollars. They are not leveraging their intellectual property, so to make more money they need to work longer hours, raise their prices, or take on staff. All of which leads to burnout. And less $$$.
- Atomic Legal took a revenue hit in year two so they could focus on building a legal product that would earn revenue from the firm that was independent of Anita and Shane’s time. Rapture Law grew their revenue in year two by working longer hours. Rapture Law was quickly overtaken by Atomic Legal’s ability to earn money without Anita and Shane having to work longer hours.
- Anita and Shane from Atomic Legal can easily take significant chunks of time off to spend time with family and travel, and still increase their revenue. John and Phoebe at Rapture Law each took 3 months off in year three which cost the firm over $120k!!!
- John and Phoebe from Rapture Law had to keep increasing their hourly rate, possibly to the point where they could price themselves out of the market. Atomic Legal doesn’t have the same problem.
- Shane and Anita from Atomic Legal never bill more than 80 hours per month. John and Phoebe from Rapture Law get up to billing 120 hours – we all know how much work you actually have to do to bill 120 hours.
- In year five both law firms have built successful businesses, but the Atomic Legal team has the time and energy to focus on growing their law firm. They also have a balanced life and pursue hobbies and passions outside of work. The Rapture Law team has to keep up their billable hours to make bank, so focusing on growing their law firm keeps getting pushed to the bottom of the to do list (I know you know what that’s like).
When your business in built solely around your ability to crank out billable hours until you’re 65, your firm’s revenue is totally vulnerable to what life throws your way, like a big client not paying a big bill, you getting sick, others getting sick, death, pregnancy, moving, and staff leaving.
When you invest in your IP you create a machine that will help you to earn revenue year after year, so you can take time off and grow and enjoy your business.
Find out how Australian lawyer Deborah Vella is turning her legal services into online legal products. Deborah has reduced the repetitive legal work in her firm so can spend more time working on her business and with her young family. You can read her story here.