2019 Clio Trends Report: Is the 2.5 Hour Realization Rate As Bad As It Seems?

Yesterday, law practice management company Clio released its popular and widely read 2019 Clio Trends Report. The Clio Report is  unique because in contrast to traditional surveys which rely on responses from humans, Clio culls through millions of pieces of anonymized user data generated through its platform to identify trends related to solo and small firm practice – such as hourly billing rates, factors driving law firm growth (more billable hours, duh! and responsiveness to email and phone calls from prospective clients) and law firm utilization and realization rates.  In short, there’s a good deal of solid information in the report and I encourage all solo and small firm lawyers to read it.

But this post hones in on one of the report’s most oft-quoted statistic that lawyers perform only 2.5 hours of billable work a day.  The statistic continues to irk me because I still cannot figure out how it was derived. Moreover, is a 2.5 hour workday necessarily a bad thing?  Discussion follows.

Back when the Clio Report was first released in 2016,  I questioned  how the 2.5 hour figure was derived – and most importantly, whether it accounted for flat fee billing where lawyers don’t necessarily track and enter hours. Or, depending upon how a system is set up, a lawyer who bills $2500 flat fee for a will may enter it as an hour of time to denote a single hour. In either case, however, flat fee billing downwardly skews the number of hours worked. Back then, I was criticized for my audacity in questioning objective data – yet,  I never received a satisfactory explanation on how it was derived.

And so I just let it rest figuring that maybe someone else would try to poke at the numbers.  But instead, thought leaders and other voices merely doubled down, quoting the statistic over and over again as evidence of everything from lawyers’ dreadful inefficiency to the un-sustainability of solo and small firm practice. Turns out that in legal today, data carries the same absolutism as religion.  

But for purposes of this post, rather than try to unravel the derivation of the 2.5 billable hours/day number, I’m going to pose another question instead:

Is billing 2.5 hours a day necessarily a bad thing?

The answer is no, not necessarily.  Here’s why.

Billing 2.5 hours per day amounts to 12. 5 hours a week.  For a lawyer billing at a rather modest $275/hour, that amounts to $3437.5 in gross revenues a week.  Assume a 50 hour work week (since you probably wouldn’t need full weeks off for vacation if you only bill 12.5 hours/week to begin with) and you come out with a yearly gross of $171,875 a year. And while that still falls short of the $190,000 annual salaries  for first years at big law, it’s at the upper range of federal salaries for government attorneys who are putting in 40 hour work weeks.

Now of course, if you’re billing 12.5 hours/week, you’re still spending time on admin and marketing.  But because you also have fewer clients, time spent on admin and invoicing could be managed fairly easily even if you’re still using pen and scroll – and would be negligible – literally, minutes – if you use a practice management system.  As for marketing, fewer clients means that you may be able to fill your calendar through referrals and online networking through social media groups or Twitter instead of investing in expensive SEO-driving campaigns. Based on my non-data based, purely observational experience, I’d guess that an attorney billing 12.5 hours a week works no more than 20 hours in total to achieve those numbers.

But wait. The margins improve even further for flat fee work. Here’s what I mean. Let’s say it takes you roughly 6 hours to prepare a modest estate plan including intake, meeting with the client and generating the plan and you bill it out at $2000. At two plans a week, that’s a whopping $4000 weekly or $200,000 per year. And again, that kind of work could be sourced from referrals by building connections with a busy family law firm or CPA.

Now granted, this may not be the optimal business model for creating a sustainable and eventually sale-ble asset. But for lawyers who want to spend time with family and still have the ability to send their kids to college, or for attorneys who are ready to retire from the grind of employment but still want to earn money to avoid drawing on their 401(k) or social security, this kind of micro-firm practice can offer an ideal solution. 

That said, the Clio Report does show that a slightly larger firms – with several attorneys – tend to have higher utilization (i.e., billable hours) rates than 2.5 hours/day per lawyer. The theory is that in a larger firm, there’s more administrative and para professional support which frees lawyers up to work more than 2.5 hours instead of spending it on admin.  But what the Clio Report doesn’t disclose is the profitability of those firms.  For example, in order for a firm attorney to have enough work to bill 6 hours a day, that work has to come from somewhere.  And many small firms spend thousands of dollars a month on SEO, advertising and social media campaigns to constantly feed the beast.  That’s why many small firm owners running firms with one or two associates and a team of admin or paralegals may only be taking home $100k a year – less than the pure solo working 2.5 hours/day. To be sure, that’s not the case for all small firms but the point is that without numbers on profitability, we can’t figure out the financial health of the firms with high utilization rates that Clio classifies as “growing.”

For all my questions, I’m truly grateful that Clio takes the time to gather and process all of this data. But data is just the start of the conversation, not the end. If we really want to help lawyers and the legal profession understand the dynamics and profitability of solo and small firm practice, we need to understand what’s going on behind the numbers.