How to diagnose an unprofitable lawyer using three numbers: 6-5-4
By Alex Barr, Director at Catalyst 5
Finding more profit in a law firm is hard - I get asked to do it quite a lot. But diagnosing why an individual lawyer is not profitable is much easier. In fact, three numbers can show you where the problem sits: 6, 5 and 4. Here’s how:
The 6-5-4 Rule is not a replacement for detailed financial reporting. It is a quick diagnostic that helps you identify where a performance problem sits and where management or coaching attention should be focused.
In simple terms, a lawyer is likely to be a source of profit when they track six hours, spend five hours on billable work and recover the equivalent of four hours at their full rate. If your firm uses different daily targets, apply the equivalent ratios. When one of the three measures is out of line, it points you towards the problem to fix.
6
What it is: Every lawyer should record at least six hours of each working day.
Time recording is not merely an accounting process; it shows whether the firm is making money, losing money, underpricing work, overservicing clients or placing unsustainable demands on its people. Visibility of how time is spent - especially non-billable time - is the first step towards improving profitability. Without it, the lawyer, their HOD and the leadership team are working blind. Consistently exceeding target may reduce the urgency, but it does not remove the value of accurate time data. Nor is fixed-fee work an excuse: successful businesses understand the true cost, in time and other resources, of delivering their product.
Tracking fewer than six hours, the key problem to fix is: Poor or incomplete visibility of how working time is being used, caused by gaps in time-recording habits, understanding or accountability.
What to talk about: Check that they know how to use the time-recording system and that the available codes are tidied up to reflect the work done by their department. Encourage them to record time as they go, without filtering or adjusting the raw picture. Use technology, regular prompts and calendar alerts to build the habit, and do not allow more than half a day to pass before time is entered.
5
What it is: 5 hours spent on billable work. Hours spent working on a file – this is not the same as recovered revenue/cash in the bank.
Less than 5 billable hours, the problem to fix: Not enough good quality work.
What to talk about: Are they tracking current lead sources, enquiry volumes and conversion rates? What’s changed? Are they attracting the right clients? What sources of work have they not tried yet? Have they told their HOD that they have a shortage of work? Has the HOD checked whether work can be reallocated from someone who is over capacity? Do they have a BD plan matched with BD skills, including referral generation? Do they have the training, coaching and mentoring to deliver it? Have they asked marketing and BD for support?
4
What it is: Good commercial discipline. The aim is to recover the equivalent of at least four hours at the lawyer’s full hourly rate, while billing promptly and minimising lock-up so that recovered value turns into cash. I once mentored a young lawyer who believed he needed to record nine billable hours to recover one hour of revenue; no one else had noticed anything beyond his poor turnover.
Recovering more than 90% of recorded billable time at full rate is unusual, although excellent when achieved. In this model, a healthy benchmark is an 80% recovery rate: four hours recovered from five billable hours.
Less than 4 hours recovered, the key problems to fix: Better pricing, efficient working practices and fixing scope creep.
What to talk about: Start with work mix: do they know which clients and types of matter are most profitable, and are they taking on the wrong kind of work? Then look at delivery: do they need technical training, greater confidence, AI or better-implemented PMS, CMS or CRM software? Next, test the estimate and price: are they under-scoping the work because they lack reliable time data from similar matters, underpricing it or discounting at the point of sale? Finally, examine scope control and billing. How do they manage client expectations when the scope changes? Telling clients in advance is a reason; telling them afterwards is an excuse; telling them at the end of the file will simply fail. Do they check time spent and bill at agreed milestones, or ask for money on account?
If a lawyer tracks six hours but records only four billable hours and recovers three, it is tempting to focus on recovery. However, the first failing number is five: they do not have enough billable work. Improving pricing alone will not solve that shortage. Conversely, if they track six hours, record five billable hours and recover only two, workload is not the problem. The first failing number is four, pointing instead to pricing, scoping, delivery or write-offs.
Keep It Simple
The best performance measures are often the simplest.
The 6-5-4 Rule provides a quick way for partners, department heads, and practice managers to understand whether a lawyer is likely to be profitable and, more importantly, where intervention is needed.
Because when a lawyer isn't profitable, the question isn't simply:
"Are they working hard enough?"
The better question is:
“Is the problem time recording, insufficient good work or weak commercial discipline?”
The 6-5-4 Rule helps you find the answer in minutes.
Want to find where profit is leaking from your firm?
The 6-5-4 Rule is a useful starting point. If you would like help diagnosing the causes of underperformance and turning the findings into practical action, get in touch.
Alex Barr
alex@catalyst5.co.uk
www.catalyst5.co.uk