How Law Firms Make Money

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Hi Nicole,
Could there possibly be a feature giving more insight into how a law firm works as a business, the way it generates profit and gets work from clients. As well as the role of lawyers in commercial law firms and how they tackle different business crises? (if possible!)

Thank you!

Hey GD, I love the suggestion, it's something I used to struggle with! I've spoke to @Jaysen and he said we can get the guide started this weekend and aim to get it out next week (depending on how deep we go).
So just a tentative outline:

How is a law firm structured?

How does a law firm make money?

Profits per equity partner (PEP) (this is used all the time to refer to law firms but it can be quite confusing and it's also controversial!)

The role of lawyers in commercial law firms

How do lawyers tackle different business crises?

Is there anything else you'd like us to add? We'd be very happy to do so! Also, when you mention business crises, were there any in particular that you had in mind?

Hey,

I'll answer these questions over the next few days. Starting with the first -

How are law firms structured?

Most large commercial law firms operate as a limited liability partnership or "LLP". An LLP, like a company, has a separate legal personality. It can enter into contracts, incur debts and conduct business in its own name. If things go wrong, the members of the LLP - the partners - are only liable to the extent agreed (or as stated in the members agreement).

A majority of the large commercial firms have moved to an LLP. In the UK top 50, Slaughter and May is the only general partnership. As a general partnership, the firm is not obliged to register or file accounts with Companies House, so it's good for law firms that want to keep their financials private. But it's not so good if things go wrong because the partners in a general partnership have unlimited liability - so each partner is personally responsible for the debts/liabilities of the firm.

The partnership - whether an LLP or general partnership - is a structure that has been used by law firms for decades. The equity partners own the law firm and have a right to share in the profits once the firm's expenses are paid. They're flexible vehicles that can deal with changes to the partnership and compensation. As owners of the business, partners get a say in how a law firm is run, although the overall law firm strategy is often delegated to an executive committee.

How do law firms make money? How do they charge clients?

Law firms make money by charging clients for the legal services they provide. They make a profit by generating more fee income than their overhead expenses and salary costs. Overheads include a bunch of things, such as supplies and equipment, rent, technology, marketing, recruitment, non-lawyer salaries and many more.

The most common way to charge clients is to bill by the number of hours worked on a matter. This number is then multiplied by the hourly rate of the fee earners to get the appropriate fee. The hourly rate takes into account the fact that different bands of fee earners have different rates, so a partner's hourly rate is going to be significantly higher than a trainee's rate. It's also easy to calculate because law firms require fee earners to record the time they spend working.

The billable-hour system is a pretty straightforward way to charge clients and determine profit. But it has also been criticised as encouraging overbilling, bill padding and inefficiency. That's led to a range of new few arrangements being introduced into the mix such as alternative fee arrangements and hybrid fee arrangements. The former covers fixed fees and contingent fees (often in litigation where fees are based on successful recovery), whereas the latter might include capped fees, which are hourly rates up to an agreed amount. This is not to mention the discounts that are often given to clients for repeat or volume work.

Hi Jaysen,

This is a great feed. I was wondering if it would be possible to have a forum for discussing key financial and corporate terms that will be required knowledge for assessment centres? For example, what is due diligence, facility agreements, and other technical language that may help?

Many thanks,

Christy

Hey Christy - very interesting idea. It's certainly a topic that would be very useful for students. Although, I would need a moderator to help manage the forum as my hands are pretty tied up at the moment.

Will have a think!

Hi Jaysen,

Of course, that would make sense - let me know if you need an amateur moderator aha! I just happened to read that interviews are becoming more technical, and I suppose for students with little experience it is difficult to really purely on internet research to apply in a practical setting!

Thanks

Hi Jaysen,
Of course, that would make sense - let me know if you need an amateur moderator aha! I just happened to read that interviews are becoming more technical, and I suppose for students with little experience it is difficult to really purely on internet research to apply in a practical setting!

Thanks

I do agree. I'll drop you a PM next week to discuss this further.

@Jaysen - is this post still on your agenda?

@Jaysen - is this post still on your agenda?

Are you referring to Christy's post?

Are you referring to Christy's post?

I was referring to the outline that Nicole said that you might be covering

I was referring to the outline that Nicole said that you might be covering

I will try get round to it at some point - might be a little while though!

Hey Jaysen,
It's really great! I was looking for a forum where i can discuss issues and get solutions. I guess i am on the right place

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