Understanding how to calculate utilization rate is integral to running a successful law firm business. Law firms are also unique when compared to other businesses because hours are divided into billable versus non-billable. According to the 2021 Legal Trends Report, your firm’s utilization rate allows you to measure your firm’s workload and productivity. It’s one of the most important KPIs law firms should track.
Read on to learn how to calculate and increase your firm’s utilization rate and how to use that information to help your law firm succeed.
What is utilization rate and why is it important for law firms?
Knowing how to calculate utilization rates is critical for law firms. When you know how to calculate utilization rate for your law firm, that knowledge can provide insight into your firm’s billing efficiency. While knowing how to calculate utilization rate is important, you should also keep in mind these other key law firm KPIs:
- Utilization rate: As stated above, the utilization rate measures workload and productivity. You can calculate the utilization rate by dividing billable hours worked by the number of hours worked in a day.
- Realization rate: This measures the potential value of work performed. You can determine your law firm’s realization rate by dividing the number of billable hours invoiced by the number of hours worked.
- Collection rate: This rate measures the ability to capitalize on work performed. You can determine this by dividing the number of hours collected by the number of hours invoiced.
What is the formula for calculating utilization rate?
The formula for calculating your law firm’s utilization rate is to divide the number of billable hours worked by the number of worked hours in a day. For example, if your law firm has a 31% utilization rate, your firm secured 2.5 billable hours in an eight-hour working day.
How to calculate utilization rate
We know you can calculate your firm’s utilization rate by dividing the number of billable hours worked by the number of total hours worked. Let’s take a look at some examples using this formula:
- Catherine worked 60 hours last week. Out of those hours, 60 were billable. If we divide 20 by 60 and then multiply by 100, we get 33.33. Therefore, Catherine’s utilization rate for that one week is 33.33%.
- Priya had a 12-hour workday. They billed five of those hours to clients. Using the same equation above, we can determine Avery’s utilization rate for the day—41.67%.
It’s important to remember that your (or your law firm’s) utilization rate doesn’t determine an attorney’s value. KPIs are metrics we can use to quantify certain operations to improve your firm’s success. Lawyers are humans helping other humans, and numbers only tell us part of that story. A revenue-related KPI won’t quantify client happiness or help you determine if you’re providing a client-centered experience. KPIs are one of the tools you should use when evaluating the operations of your firm.
How can you use utilization rates for your law firm?
Calculating utilization rates gives lawyers the important data and insights they need to make informed business decisions. For example, you can use utilization rates to better understand the profitability potential for different legal services.
Utilization rates can also provide insight into resource allocation. For example, if an attorney’s utilization rate is quite high, they might need more resources and support.
What is the average utilization rate for law firms?
As the 2021 Legal Trends Report shows, the average lawyer bills 2.5 hours of their 8-hour workday (based on a survey conducted in 2019). That’s an average utilization rate of 31%. Average rates might vary based on practice area, geographical location, and how many years of experience a lawyer has. You can get a better sense of industry standards by reviewing average industry utilization rates.
According to the 2021 Legal Trends Report, on average, full-time lawyers work 49.6 hours each week. Of course, this number will vary and in this context, we’re using it as a starting point for comparison. As for the number of billable hours attorneys work per year, this too will vary. Legal business consultants suggest that 1650 billable hours is a realistic goal for attorneys working at smaller firms. If we take 1650 billable hours and divide this by 50 weeks (assuming attorneys take two weeks of vacation), we get 33 billable hours per week. Now, we can divide this by the 49.6 figure mentioned above (average hours worked per week) and we get an average utilization rate of 66%—more than double the industry average in 2019.
So, how can attorneys close the gap between 31% and 66%? Below we outline the process to increase your firm’s utilization rate.
How to increase your law firm’s utilization rate
Track your firm’s utilization rate
What gets measured, gets managed. Now that you know how to calculate utilization rate, you need to determine what your firm’s utilization rate is. Then, set a calendar reminder to record it regularly. This might be weekly, bi-weekly, or monthly depending on your goals.
Have a clear, realistic goal
If your goal is to have a utilization rate of 45% in January, record this and set your tracking notifications accordingly. Planning backwards from your benchmark goal enables you to be clear on what you’re working towards and stay accountable.
Time tracking and calculating law firm KPIs go hand in hand. Tracking time doesn’t have to be complicated or laborious. Once you understand how to track utilization rates and the importance of it, it’s evident why you should prioritize time tracking.
Automate your law firm with cloud-based legal practice management software
It’s never been easier to automate non-billable, administrative tasks. Automation simply means you can reduce the amount of time you spend on non-billable work. With automation, you can free up your time to take on more billable, client-centered work.
Automation can help Improve your utilization rate. Learn more by reading our blog on law firm automation.
Delegate and do less non-billable work
Delegation isn’t easy, but it certainly is necessary. The high-growth and tech-centric accounting firm, Envolta, listed “learning to delegate” as one of the five hardest things you’ll have to face as a business owner. Not even the best attorneys can do everything themselves. On the contrary, the best attorneys succeed largely thanks to their ability to delegate. With the right legal practice management software, assigning tasks (from a workflow perspective) is a lot easier.
Optimize your law firm’s workflows and processes
Streamlining processes from client intake to billing will have profound effects on your firm’s workflow. Moreover, optimization should enable you to take on more billable hours, therefore supporting your utilization rate goals.
As for law firm collections, how do you optimize the process for your firm? Using modern and flexible payment solutions can help you streamline the payment process and get paid faster.
Learn more about how you can improve your collection rates, streamline your payment process, and make it easy for your clients to pay with Clio Payments.
Your utilization rate is one of the keys to your law firm’s success
By accurately tracking your time, you can be confident when calculating your firm’s utilization rate. The more you track your efforts, the easier it will be to identify challenges, solutions, and improvements.
Using an all-in-one practice management software with time tracking and reporting capabilities will help you measure your utilization rate. And ultimately, work towards tracking progress and growing this number, all while prioritizing the client-centered experience.