We’re oddly driven to hire people. If the President wants to fix the unemployment problem, he should put family law attorneys in charge. Every time I meet one, the conversation heads straight to the desire to hire somebody. He or she always wants an associate, a paralegal, or a virtual assistant. We rarely talk about getting rid of people. It’s always hire, hire, hire.
What’s that about? I have no idea. I start digging around as we talk, and I nearly always find the revenue doesn’t support the need for another employee. There’s something psychological going on with the interest in hiring. It’s definitely not a desire driven by the financial situation. It’s almost always something else.
When Should You Hire Someone?
The pertinent metric is revenue per employee. You want that number to be as high as possible. When that number goes up, you’ll find profits going up. You’ll also be able to hire better employees because you can afford to pay them more and can provide better benefits. Hiring prematurely lowers the revenue per employee number.
At this point, the question you should be asking is this: How does an increase in revenue per employee affect the bottom line? In other words, does an increase in revenue per employee result in an increase in profits? The answer, according to study after study, is that it does. There’s a strong correlation, and you’ll see the impact on profits as you bring up this key metric.
What’s a Healthy Revenue Per Employee Number?
I’m a big advocate of avoiding hiring until you’re running along with $300,000 in annual revenue ($25,000 per month). When you hit $300,000 per year, you have revenue per employee of $300,000. That’s the revenue divided by the number of employees (you). If you decide to add a paralegal at that moment, then your revenue per employee drops to $150,000.
How’s $150,000 of revenue per employee? It’s okay. It’s not great, but it’s not terrible. I’ve spent time with lawyers grossing $100,000 per year who are paying a staff person. They’ve got revenue per employee of $50,000, and that’s pretty awful.
Of course, each area of the law is a bit different. Personal injury lawyers might have very different ideas about what constitutes a good vs. bad number. You’ll have to ask around in your practice area. Most of the numbers I see are in family law practices.
My judgment is that $100,000 in revenue per employee is a problem that needs fixing. That’s not a particularly healthy number, and you can do better. $200,000 isn’t bad. $300,000 and above is very good.
In a practice grossing $6 million and running on 15 employees, you’re at $400,000 in revenue per employee. That’s outstanding in this area of the law.
Trust the Facts and Figures, Not Your Emotions
Before you hire someone, stop and think about revenue per employee. Don’t jump to hire before the business needs the help. Determine whether you need help based on the metrics, not based on your emotional needs or because you’re feeling overwhelmed. You’re running a business, and emotion isn’t a reliable indicator.
If you’re feeling overwhelmed by the work, but the revenue doesn’t justify adding to the team, then the problem isn’t what you think it is. It’s not about having too much work, and it’s rarely about poor time management. When the revenue per employee number is low and it feels like you’ve got more work than you can manage, the issue usually revolves around price. You’re likely not charging enough, or you’re failing to collect what you’re owed. These issues are exacerbated by hiring. Hiring makes it worse, not better, because expenses increase and profit goes down.
Look carefully at your revenue per employee. There’s gold in that number. Drive it up. Pay attention to it monthly, and use it to decide when to hire and when to fire. Take the energy you’re currently using dreaming about hiring more people and apply it to driving up your revenue per employee. It’s revenue per employee and not the number of employees that will help you achieve your business goals.
