Best Practice Tips: What Does it Cost to Operate a Law Firm?

Asked and Answered 

By John W. Olmstead, MBA, Ph.D, CMC

Q. Our firm is a four-attorney personal injury plaintiff law firm with three partners and two associates located in upstate New York. Could you advise us what the expected cost range is per year for an attorney to practice? Assume the attorney generates gross revenue of $500,000 per year. What should that attorney expect to earn as gross income based on that revenue?

A. It depends on the type of practice, and whether the firm engages in extensive advertising. In general, the average range of margins are running from 35 percent to 45 percent. This is what we call the partnership pie—profits available to partners whether in the form of W2 salary or net income. If a partner practices alone with minimal overhead and maximizes the use of technology, the margin could be better. In general, a lawyer generating $500,000 in revenue in a firm such as yours with a typical overhead ranging from 35 percent to 45 percent would equate to $175,000 to $225,000. I have worked with some firms such as foreclosure law firms where the margins are 15 percent, and some high-volume advertising personal injury plaintiff firms have 20-percent margins.

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.