Jul 08, 2022

Written By Robert Greene

How do commercial law firms make money?

Jul 08, 2022

Written By Robert Greene

Law firms are businesses, and like any business, they need to generate revenue to operate. In this article, we look at the different ways law firms make money.

Chargeable hours

The most common way law firms make money is by charging clients for their time. Those who charge fees are known as “fee earners”; these may include partners, associates, trainees and paralegals. Not everyone in the firm is a fee earner; for example, support staff are not fee earners.

Fee earners generally charge based on a billable or chargeable hour (plus VAT). The rate they charge varies depending on the fee earner’s seniority, with senior solicitors charging more than their junior counterparts per hour.

Billable hours are made of “units”. These are six-minute intervals. So, an hour’s work is made up of 10 units. To track how many units of time they rack up doing a piece of work, fee earners time themselves. This means there is a clear record for the firm and the client of how long it took the fee earner to do each piece of work on the client’s case or matter. Fee earners usually add a narrative to their time recordings, and the rate they charge may depend on the nature of the work (for example, they may charge less for researching than drafting).

Firms traditionally set fee earners billable hour targets. PwC’s “Annual Law Firms’ Survey 2021” found that, on average, trainees at the UK’s Top 10 firms recorded 1,009 chargeable hours whilst full equity partners recorded 1,195 hours.

However, charging clients according to units of time is not the only fee earning model. Many firms are adopting alternative fee arrangements (AFAs), such as fixed-fee arrangements and conditional fee arrangements.

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Fixed fee arrangement

Fixed fee arrangements, as the name suggests, involve clients paying a fixed fee for a specific matter. This may be suitable for areas of work where the work is more procedural and predictable (eg immigration applications) as opposed to areas of work where it is difficult to plan the trajectory of the work (e.g. litigation).

Conditional fee arrangement

A conditional fee arrangement (CFA) is a common arrangement in litigation. It is an agreement whereby a solicitor’s fees are only payable in specified circumstances. The general arrangement is that if the client loses, they will not be liable to pay the fees and expenses subject to the CFA. However, if the client wins, they will be liable to pay the fees and expenses subject to the CFA as well as a success fee (if this is included in the CFA). Since 1 April 2013, it is no longer possible (except in limited circumstances) for the winning client to recover the success fee from the losing party. They may, however, be able to recover their costs (including the conditional fees), subject to the court’s discretion.

One type of conditional fee arrangement is a damages-based agreement (DBA). These “no win, no fee” arrangements provide that a client is not liable to pay their legal representative unless they obtain “a specified financial benefit” (such as damages by the other party). Even if the client loses, and does not have to pay the legal representative's fees, they may have to pay for adverse costs.

Other services

Charging clients for legal services is not the only way firms make money. They can also generate revenue from ancillary services. For example, some firms charge clients or prospective clients for exclusive content, such as webinars or training sessions.

Some firms are also diversifying their offering beyond pure legal services. DLA Piper, for example, has launched a range of AI services under its Law & brand. These include legal project management, tokenisation and sustainability and ESG advisory services.

How much do law firms make?

The revenue generated by commercial law firms in the UK varies greatly. The average net profit margin for the Top 10 firms in 2021 was 38.2%, up from 33.8% in 2020 and significantly lower than that of the Top 51-100 firms (52.7%).

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