Here’s a scenario I bumped into recently. It illustrates how hiring an associate can actually reduce, rather than increase, your income.
Lawyer has been practicing three years. Things are going well. She’s building her practice through a combination of networking, pay-per-click advertising on Google, and speaking to local groups.
Her revenues are now $300,000 per year. She’s doing the marketing and doing a big chunk of the work. She has an administrative assistant and one associate who do the rest. Her associate is billing at $130 per hour and collecting about $120,000 in revenues each year.
Her annual expenses are as follows:
- Rent: $30,000
- Miscellaneous: $40,000
- Marketing-related costs: $48,000
- Payroll/benefits (one administrative assistant and one associate, including benefits): $100,000
What’s the net? She’s grossing $300,000. Her expenses are $218,000. Her net is $82,000 per year.
Where Can She Go From Here?
She’s happy with the size of her firm. She doesn’t want to grow. She doesn’t really want to manage more employees or do more marketing.
She would like to keep things exactly as they are except that she would like to make one tweak. What’s the tweak? What’s the change?
You’re ahead of me. You’ve already figured it out.
She wants to make more money. She’s not happy at $82,000. She has a dog to feed and student loans to pay. Sure, she’s happier than she was when she was taking home $40,000 (in the first year), but she’s not happy at $82,000.
She’s struggling with the fact that her marketing is working, but her take-home pay isn’t what she thinks she deserves.
What’s the solution? What should she do?
An Action Plan for Growing Revenue in a Small Firm
Her goal is to stay small. This is a lifestyle business. She wants autonomy. She doesn’t want a boss. She wants the freedom and flexibility to manage her own schedule, pick her clients, and do what she wants to do.
Here’s her action plan:
- Go on an associate diet. She hired earlier than she should have hired. Her revenues were lower than they should have been for hiring. Eliminate the associate.
- Raise prices. She’s more experienced now and can increase her hourly rate. Simply shifting some of the hourly billing from the associate back to herself will have that impact (since she has a higher rate).
- Trim the paid marketing as the networking grows exponentially. She won’t need to spend as much on marketing as she grows her network. Her investment in meeting local lawyers is paying off now and will pay off even more as each day passes. She can afford to cut some of the pay-per-click advertising and miss out on a few clients immediately.
- Stop taking as many cases. To an extent, that will happen when she cuts the pay-per-click budget. By raising prices and shifting the work from the associate to herself, she can take fewer cases and get by without as much labor cost. She’ll free up the time she was using to manage the associate so that she can use it on the cases.
Making these changes—quickly—will have an immediate impact on her net. She should see her take-home pay nearly double over the course of implementing the plan.
The Projected Results
Here’s my expectation of the financial impact:
- Rent: $30,000 (although she can probably cut that since the associate is gone and less space is required)
- Miscellaneous: $35,000 (ditching the associate saves on CLE, insurance, licenses, etc.)
- Marketing-related costs: $36,000 (cut $1,000 per month from the pay-per-click budget)
- Payroll/benefits: $50,000 (savings from associate diet)
What’s the net? I estimate that with the increased prices (mostly resulting from shifting the workload and not actual price increases) and taking fewer clients, she’ll gross $270,000 in the coming year (she may well do better). Her expenses will be $161,000.
Her new net? $109,000. That’s an increase of $27,000. I’m using conservative numbers. Given her networking activities, she may see even more prospective clients calling, which allows her to further increase her rates while holding steady on the number of clients.
Will she have more client contact? Certainly. Will she eliminate the time required to train the associate and answer the endless questions? Absolutely.
Will the new plan have the impact she desires? Will she keep her lifestyle practice while increasing her income? I think so.
