Whether you are an individual fee earner, you lead a practice group or you are in a financial management role, it is really important to know what the Base Cost per Hour of your fee earners is.
Without it, you cannot accurately calculate profit at an individual fee earner, matter or client level and you won’t have a detailed picture of where the profit in your firm is coming from. Consequently, you won’t be able to make good decisions to improve profitability.
How do you calculate Base Cost per Hour?
Base Cost per Hour = the TOTAL cost of a Fee Earner ÷ their Number of Billed Hours.
What should Base Cost include?
The TOTAL cost of a Fee Earner includes all their:
- directly attributable expenses such remuneration, recruitment fees, CPD, memberships, bad debts written off etc.;
- proportion of overheads and infrastructure costs such as rent, furniture, IT hardware, licenses for IT software and non-fee earners such as HR professionals, practice manger etc.; and
- administrative support costs from secretaries or paralegals.
Using Base Cost to calculate and lift Matter Profitability
Calculating the Base Cost per Hour of your fee earners is necessary to ensure that the cost of infrastructure and admin. support as well as the direct costs of authors is included in your measurement of matter profitability.
You can also use the Base Cost per Hour proactively to make more informed decisions about staffing a file in order to maximise the net profit margin of your matters.
Calculating Base Cost per Hour per Matter
The Base Cost per Hour of a Matter is the combined Base Cost of all the authors working on the matter. e.g. A1 did 80hrs @ $385 + A2 did 20hrs @ $335 = combined base cost per hour of $375 for 100 hrs.
To ensure accurate calculation of matter profitability, firms should be wary of using historical Base Cost per Hour data to measure the profitability of current matters.
For instance, is a fee earner makes a concerted effort to capture more time and lift their utilisation rate, their Base Cost per Hour will probably go down. If they have negotiated a pay rise or started using more secretarial support, their Base Cost per Hour will have gone up.
Where there have been significant changes in the way a fee earner operates, firms can use an Adjusted Base Cost per Hour figure, but really, firms should review their Base Cost per Hour per Fee Earner each quarter to avoid using incorrect data.
Reducing the Base Cost of Fee Earners
You can really only do this if the fee earner:
- is underperforming with respect to utilisation;
- has high levels of bad debt write-offs;
- has excessive expenditure (e.g. on client development);
- is using excess amounts of support; and
- is paid too much and you need to re-negotiate their salary arrangements.
That is, if someone is a great performer, the only way you can reduce their Base Cost per Hour is to keep performing for more hours, which isn’t the best strategy.