1. law, govt and politics

PARALEGAL PROFITABILITY IN PRACTICE
TRACY A. GOMPF, J.D.
ASSOCIATE PROFESSOR OF LAW
PARALEGAL DEPARTMENT
MINNESOTA STATE UNIVERSITY MOORHEAD
MOORHEAD, MINNESOTA
JEAN P. HANNIG, J.D.
ASSISTANT PROFESSOR OF LAW
PARALEGAL DEPARTMENT
MINNESOTA STATE UNIVERSITY MOORHEAD
MOORHEAD, MINNESOTA
PARALEGAL PROFITABILITY IN PRACTICE
1. HISTORY OF PARALEGALS
In the 1960s, programs for paralegals were started in public service agencies for the
purpose of training individuals to assist lawyers in making legal services available to the poor.
Private law firms, businesses, and governmental agencies quickly recognized the benefits of
employing specially trained individuals to provide legal services at a lower rate, benefiting the
client and increasing efficiency. Since its inception, the paralegal profession has evolved, both
in the number of paralegals currently practicing, and in the type and level of responsibilities.
2. WHAT IS A PARALEGAL?
According to the American Bar Association (ABA) and the National Association of
Legal Assistants (NALA), a legal assistant or paralegal is “a person, qualified by education,
training or work experience who is employed or retained by a lawyer, law office, corporation,
governmental agency or other entity and who performs specifically delegated substantive legal
work for which a lawyer is responsible,” This definition emphasizes that paralegals may
perform substantive legal services but that it is expected that such services will be performed
under the direct supervision of a lawyer or through some other arrangement through which a
lawyer has responsibility.
The National Federation of Paralegal Associations (NFPA) expands the definition to
include freelance paralegals by defining a paralegal as “a person, qualified through education,
training or work experience to perform substantive legal work that requires knowledge of legal
concepts and is customarily, but not exclusively, performed by a lawyer. This person may be
retained or employed by a lawyer, law office, governmental agency or other entity or may be
authorized by administrative, statutory or court authority to perform this work. Substantive shall
mean work requiring recognition, evaluation, organization, analysis, and communication of
relevant facts and legal concepts.”
In most instances, the terms “paralegal” and “legal assistant” are used interchangeably.
Local and national organizations have attempted to more intentionally use the term “paralegal”
as defined by the ABA, NALA or NFPA so as to distinguish paralegals from other law office
support personnel who maybe performing services of a more clerical nature. Local customs and
employer preferences seem to have muddied the waters so that today we see employers using
such titles as paralegal, legal assistant, legal administrative assistant, case manager and case
assistant to describe individuals who are supporting the legal process.
While the specific job attributes will be determined by the employer, in general, legal
assistants (other than paralegals performing substantive legal work) and legal administrative
assistants tend to be a secretary who, through experience or advanced secretarial training, is able
to perform some of the tasks delegated to a paralegal, but does not have the specialized training
or experience of a paralegal. Case managers generally provide litigation support and may be
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supervised by a paralegal. They are responsible for assigned files and may in turn supervise case
assistants who exercise little discretion and work at the specific direction of their supervisor. A
significant number of government agencies, including the federal and state court systems, utilize
the services of paralegals but may or may not use the title “paralegal” to describe the position
because such positions may be governed by labor contracts that assign position titles based on
pay equity classifications.
3. WHY HIRE A PARALEGAL?
There are several attractive reasons for hiring a paralegal to assist in a law practice.
Paralegals choose their career. They have sought an education that trains and educates them to
perform legal-related tasks in a career as a non-lawyer. Although paralegals have a strong
interest in the law, they have not pursued law school for reasons such as the cost, time
commitment, long hours, and lack of work/life balance. Ironically, the use of a paralegal can
also improve these same areas for a lawyer.
Lawyers perform many tasks every day that do not constitute the practice of law.
Paralegals can meet with clients to gather information, place and return phone calls, schedule
meetings, perform both print and electronic legal research, write memorandums of law,
investigate, talk to witnesses, prepare forms or pleadings for a lawyer’s signature, organize files,
draft pleadings, prepare discovery documents for a lawyer’s signature, prepare responses to
discovery, and prepare motions for a lawyer’s signature all at a lower cost than using a lawyer or
law clerk.
The assignment of tasks to a paralegal frees up a lawyer to perform work that matters
most to the bottom line of the law office: the pure practice of law and rainmaking. The
paralegal does the bulk of the work and the lawyer is left to supervise and perform only those
tasks that consist of “practicing law.” As a result, the lawyer is able to pursue bar activities,
speaking engagements, and meeting with clients on a social basis, therefore, increasing the
potential for rainmaking.
Through the use of paralegals, law firms are able to mitigate the increased cost of legal
services. For example, a lawyer can bill the client for paralegal services at paralegal rates
(usually lower than lawyer or associate lawyer rates) for work that does not involve the practice
of law. The client will pay paralegal rates rather than the lawyer's rates for these services.
Paralegals in the law firm often become the first point of contact for the client.
Unfortunately, client communication is one of the first important tasks that is abandoned when a
lawyer becomes overworked. A paralegal can supplement the amount of time a lawyer has
available. Paralegals can intercept client phone calls, advise clients on the status of a case, and
draft client correspondence.
In addition, a paralegal can supplement lawyers’ work to enable the lawyer to
consistently perform high-quality legal work. The lawyers can delegate those tasks for which the
paralegal has been trained. In exchange, the lawyers are able to focus on those complex legal
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tasks for which they were trained in law school. The lawyers can intensify their efforts and
increase the quality of their performance on client cases.
The paralegal can assist the lawyers to meet the demands of the legal profession.
Paralegals maintain calendars and reliably track deadlines to make sure that they are met.
Paralegals are often the first point of contact for clients throughout the representation. The
availability of the paralegal can give a client satisfaction when the lawyer is unavailable.
Frequent communication between the legal staff and the client will result in client satisfaction
that will enhance the bottom line for the lawyer.
Finally, the quality of a lawyer's personal life will benefit from employing a paralegal.
First, a well-qualified and competent paralegal who supplements a lawyer's professional life will
increase the chances of the lawyer's professional success, make the lawyer proud of the firm’s
work product, and relieve the lawyer from unnecessary pressure and tension derived from the
practice of law. Second, use of a paralegal enables the lawyer to have more personal time
available to be away from the office. When the lawyer uses that time for recreation, for personal
interests, for family activities, and rainmaking, the result is greater work/life balance.
4. LAWYER SUPERVISION OF PARALEGALS
There are several rules in the North Dakota Rules of Professional Conduct that address
the use of paralegals in the law firm. The rules use the term legal assistant. The rules address
the areas of supervision, unauthorized practice of law, fees, and using the paralegal’s name in
law office stationery and on business cards.
Rule 5.3 addresses the supervisory responsibility of the lawyer. The rule provides that a
lawyer must make reasonable efforts to ensure that the nonlawyer’s conduct is compatible with
the professional obligations of the lawyer. With respect to the use of paralegals, paragraph (d) of
the rule states that:
(1) A lawyer may delegate to a legal assistant any task normally performed by the lawyer
except those tasks proscribed to one not licensed as a lawyer by statute, court rule,
administrative rule or regulation, controlling authority, or these Rules.
(2) A lawyer may not delegate to a legal assistant:
(i) responsibility for establishing a lawyer-client relationship;
(ii) responsibility for establishing the amount of a fee to be charged for a legal
service;
(iii) responsibility for a legal opinion rendered to a client; or
(iv) responsibility for the work product.
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(3) The lawyer shall make reasonable efforts to ensure that clients, courts, and other
lawyers are aware that a legal assistant is not licensed to practice law.
N.D. R. Prof. Conduct 5.3(d).
Rule 7.5 permits the paralegal’s name to be identified on the lawyer's letterhead and on
business cards identifying the lawyer's firm as long as the paralegal’s status is clearly identified.
N.D. R. Prof. Conduct 7.5.
5. PARALEGALS AND UNAUTHORIZED PRACTICE OF LAW
The North Dakota Rules of Professional Conduct address the unauthorized practice of
law and provides that a lawyer must not assist another person in the unauthorized practice of law.
N.D. R. Prof. Conduct 5.5(e).
In order to recognize how much paralegals can do, it is important to recognize the few
things they cannot do in a law practice. Paralegals are prohibited from the unauthorized practice
of law (UPL). A Paralegal cannot to any of the following:
1. Retain clients or set fees;
2. Advocate and appear in court;
3. Representing clients at depositions;
4. Sign legal documents; and
5. Provide legal advice.
UPL occurs when a nonlawyer’s activities impact the legal rights of a client. Several broad
exceptions to UPL rules and statues generally exist. The most common include exceptions
allowing pro se representation and nonlawyer representation in specified regulatory and
administrative proceedings. Bankruptcy law allows a non-lawyer to assist individuals to prepare
bankruptcy petitions and schedules. In some jurisdictions exceptions allow nonlawyer’s to
perform legal activities that are incidental to other established businesses. Some administrative
courts permit a paralegal to appear as an advocate for an individual in cases such as hearings on
social security disability applications.
6. BILLING FOR THE WORK OF THE PARALEGAL
The North Dakota Rules of Professional Conduct also address the fees that can be billed for
a paralegal’s time. Rule 1.5 provides that a lawyer may charge for the work performed by a legal
assistant. The rule also prohibits any form of fee splitting between the lawyer and the paralegal.
Compensation of the paralegal cannot be contingent on the outcome of a case or the profitability
of the lawyer’s practice. N.D. R. Prof. Conduct 1.5(f).
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The North Dakota Supreme Court has addressed the issue of billing for a paralegal’s time.
In the case of Reimers v. State of North Dakota, 2008 ND 101, 750 N.W.2d 407, the party
against whom attorney’s fees were being assessed argued that any fees associated with the work
of paralegals should be excluded from the lawyer's fee award because a paralegal is not a
licensed lawyer. The Court noted that the federal policy to allow paralegal costs to be awarded
in federal cases promotes the use of paralegals by lawyers to reduce the cost of litigation. The
Court then held that paralegal costs can be included in reasonable lawyer's fees. 2008 ND 101, ¶
11. The Supreme Court also allowed paralegal costs in a lawyer fee award in a class action
lawsuit. Ritter, Laber & Assoc. v. Koch Oil, Inc., 2007 ND 163, ¶¶ 26, 36, 740 N.W.2d 67.
There are several federal statutes that provide for the recovery of fees that include paralegal
time. Examples of federal law include: the Bankruptcy Code at 11 U.S.C. 330(a) (1); ERISA, at
29 U.S.C. 1001, et seq.; the Sherman Anti-Trust Act & Clayton Act at 15 U.S.C. 1, et seq.; the
Surface Mining Control & Reclamation Act at 30 U.S.C. 1270(d), et seq.; and the Civil Rights
Lawyer Fee Award Act at 42 U.S.C. 1988.
7. PROFITABILITY THROUGH THE EFFECTIVE USE OF PARALEGALS
As discussed, a paralegal is a person who can help the lawyer to produce more quality
legal work in less time - and at a profit. If you were to take a yellow pad and log absolutely
everything that you did each day, then analyze whether it took a law degree and extensive
experience to do each item, we think you'd be surprised. Probably about 75% of a lawyer's work
does not require six or seven years of college and law school. After all, the lawyer personally
doesn't have to schedule depositions, get data for a deed, draft simple documents, order certified
copies, look up documents in a file, etc. Nevertheless, doing these things correctly is an
important part of professional performance. Lawyers should not charge for doing paralegal or
clerical tasks at a lawyer’s hourly rates.
When used effectively, the paralegal can become a true assistant and help a lawyer
complete the legal work. An assistant will relieve the lawyer from doing the mechanical and
repetitive tasks that clog up so much of the day. Thus, time will be available for concentration on
projects that demand experience, legal knowledge, and competence. This will accomplish two
things at the same time: (1) The paralegal will be able to perform basic tasks which the lawyer
may not have been charging for; and the paralegal's work will be billed at the paralegal rate; and
(2) The lawyer will be able to concentrate on legal work for which he or she was trained, and be
able to bill it out at lawyer rates.
Of course, the paralegal's work must be done under the lawyer's supervision because the
paralegal is not a lawyer. An educated and trained paralegal can do much of the basic work on a
case. Here are two examples of the lawyer-paralegal team approach in an estate planning case
and a litigation case.
Estate Planning Example: A lawyer has a meeting with a husband and wife to discuss
estate planning, death taxes, wills, and trusts. The paralegal also attends this meeting to
meet the clients. Afterwards, the knowledgeable paralegal can draft a memo summarizing
the meeting and suggesting recommendations for the estate planning documents. The
lawyer will review the memo, modify it where necessary, and then have the paralegal
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work on the document preparation. The lawyer meets with the clients to review and sign
the documents.
Result: Less lawyer time spent on the project; more paralegal time devoted to the file for
which the careful office-managing lawyer will make a profit; the paralegal will be able to
follow-up fact gathering with the client; and the whole process should consume less time
and be completed sooner than if the non-delegating lawyer were doing it alone. The
lawyer can represent more clients.
Litigation Case Example: The paralegal can summarize and index lengthy documents in
the case, draft discovery requests and responses, and prepare pleadings. The lawyer will
review this work, modify the drafts, work them into various final documents, and have the
paralegal make arrangements for serving them on the other party.
Results: Speedier completion of the job, and likely a more detailed and complete job.
The lawyer will then act as an "editor" (which is always easier to do) rather than as an
"author," thus productively managing the lawyer's time; and resulting in a lower charge to
the client. Besides helping with the work, a paralegal, in certain instances, can establish
excellent rapport with the client - he or she may be able to conduct a more sympathetic
and concerned interview. Paralegals can be good "sounding boards" if the lawyer learns to
use them for discussion of case problems. They have different backgrounds and training,
and experience has shown assistants sometimes can be more perceptive of the client's
perspective and concerns.
Paralegals are also expected to develop expertise at setting up systems, forms, and
documents. There is no need to draft each document from scratch each time. Let the paralegal,
who has the time, set up checklists and systems for handling routine matters.
8. PARALEGAL DUTIES IN A REAL ESTATE PRACTICE
As discussed above, paralegals can be delegated any task normally performed by a lawyer,
as long as the lawyer supervises the work, except those proscribed by law. For a general list of
tasks that a paralegal can perform, see the ABA Model Guidelines for the Utilization of Paralegal
Services which can be found at www.americanbar.org/groups/paralegals.html.
A list of many of the legal duties that a paralegal can perform in a real estate specialty
practice was developed by the Paralegal Committee of the Minnesota State Bar Association.
This list can assist the lawyer in identifying the types of tasks that can be delegated to the
paralegal to increase the profitability of the real estate practice.
Purchasing or Selling Real Property
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Prepare proposed draft of purchase agreement (or review draft if Seller).
Assist in negotiation of terms of contract.
Coordinate the executed contract terms with the other parties (buyer/seller, real estate
agent/broker, title company, opposing counsel, lender, etc.).
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Prepare closing checklist and tickle critical dates and contingencies.
Conduct or arrange for title search:
o Order title commitment;
o Negotiate title insurance coverage;
o Review exceptions and encumbrances of record;
o Arrange for discharge/satisfaction of mortgages, unnecessary easements and
permits, invalid mineral claims and any other non-standard exceptions.
Review documentation for any common interest community purchases or sales.
For corporate sales/purchases:
o Obtain corporate organization documents, including authorization of the parties to
purchase or sell real property;
o Obtain certificates of good standing/certificates of existence;
o Arrange for corporate resolution for sale/purchase.
Conduct public records search of parties, including judgments, pending litigation, tax
liens and UCC filings.
Determine if environmental assessment of property is necessary. If so, order the
assessment, review and prepare applicable releases.
Determine insurance requirements of lender and review required evidence of insurance.
Prorate property taxes and utilities and adjust for closing figures
Obtain closing figures from bank and prorate all closing costs within the terms of the
purchase agreement.
Draft or review closing documents:
o Deed;
o Bill of Sale;
o Loan Agreement;
o Promissory Note;
o Security Agreement;
o Settlement Statements;
o Affidavit of Purchaser and/or Affidavit of Seller.
o Escrow instructions and closing instructions;
o Assignments of leases, contracts, etc. as appropriate;
o New agreements (i.e. easements, leases, subordinations, etc.);
o Necessary corporate, partnership or limited liability company (entity
organizational) documentation and resolutions;
o UCC financing statements, amendments, continuations or terminations, as
required;
o Well disclosure, if necessary;
o Certificate of Value – Minnesota Department of Revenue form obtained from the
County Auditor;
o IRS Tax Form 1099-S.
Coordinate payoffs.
Organize, coordinate and/or attend closing:
o Coordinate execution and notarization of documents;
o Explain documents to be signed by parties.
Coordinate recording of real estate documents and filing of UCC financing statements.
Obtain and review title policy and special endorsements.
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Prepare closing binder.
Taxation Matters
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Obtain and analyze property information and current valuation.
Draft capital gains tax affidavit.
Determine capital gains/loss on property for income tax purposes.
Real property assessments:
o Draft complaint on real property assessments;
o Draft discovery requests and responses to discovery requests in conjunction with
real property assessment;
o Coordinate formal property appraisal and report;
o Prepare notice of appeal on valuation of property.
Development/Planning/Zoning
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Attend meetings with developer, municipalities, etc. regarding development plans.
Draft documents:
o Covenants, Conditions and Restrictions (CCRs);
o Plat notes;
o Owner association documents;
o Condominium declarations;
o Reservation Agreements;
o Design regulations;
o Joint Use Agreements;
o Ground leases.
Research and draft application for annexation/zoning and correspondence.
Foreclosures/Loan Workouts
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Lender is client in a loan workout:
o Obtain original loan file and current loan history;
o Order title update and gap letter;
o Perform UCC lien search and county records searches;
o Prepare docket and monitor calendar to insure deadlines are met;
o Order recertification of existing survey or new survey;
o Review entity organizational documents for changes or amendments and obtain
certificate of good standing;
o Prepare preliminary draft of settlement, modification or forbearance agreements
and any subordination, release or covenant not to sue documents;
o Draft any necessary assignments of contracts and/or leases, notices to contractors,
suppliers of services and/or lessees;
o Prepare or complete tenant estoppel;
o Prepare or review settlement statement;
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o Coordinate collection and disbursement of funds, if necessary;
o Organize, coordinate and/or attend closing and coordinate execution and
notarization of closing documents.
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Foreclosure – lender is client:
o Prepare notice of intent to accelerate;
o Draft foreclosure notice;
o Facilitate posting of foreclosure notice;
o Attend foreclosure sale;
o Prepare judicial foreclosure documentation;
o Negotiate with owner/lender.
Leases
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Prepare initial draft of lease.
Review business terms of lease.
Negotiate and revise lease.
Due diligence:
o If commercial tenant, verify entity is in existence with Secretary of State;
o Obtain environmental report.
Draft any subleases, assignments, terminations of lease, etc.
Prepare memorandum of lease and record, if necessary.
Eminent Domain
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Condemnor:
o Determine type of land interests required (fee taking or easements; temporary or
permanent)
o Determine all holders of interests on land to be acquired;
o Draft Notice of Intent to Take Possession and serve on all holders of interests in
land.
o Draft various documents to acquire the property:
 Summons and Petition
 Notice of Lis Pendens
 Order Appointing Commissioners
 Order Transferring Title & Possession
 Notice of Award
 Etc.
Condemnee:
o Research the parcel of land to be taken;
o Prepare Answer to Petition.
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Other Land Title Matters:
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Registration/Torrens proceedings:
o Order report from Examiner of Title;
o Draft Application for Registration of Land;
o Draft Land Title Summons in Application for Registration of Land and serve on
all entities and people having an interest in the property to be registered
(identification of interested persons/entities can be obtained from the Examiner’s
Report);
o Clear all questions in Examiner’s Report;
o Arrange for hearing to register land.
Quiet Title Action.
Proceedings Subsequent/Order to Show Cause.
If you are served with a Land Title Summons or other matter:
o Research the interest held in the subject property;
o Prepare Answer (or response) within 20 days.
Miscellaneous:
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Perform any legal research.
Perform factual research in county records and court files.
Conduct UCC lien and asset searches.
Conduct searches for judgment and tax liens on property.
Draft miscellaneous transactional real estate documents:
o Easements;
o Licenses;
o Permits;
o Nondisturbance Agreements;
o Relocation Agreements;
o Access Agreements;
o Timber Sale Agreements.
Investigate title matters.
Mechanic’s Liens:
o Draft Notice of Mechanic’s Lien;
o Determine validity of existing mechanic’s liens;
o Prepare releases or waivers of rights;
o Assist with foreclosing mechanic’s liens.
Review or draft coordinates in legal descriptions.
8. QUANTIFYING PROFITS ACHIEVED THROUGH PARALEGAL UTILIZATION
[Note: This material is an abridged version of Campbell, D. Jeffrey and the American Bar
Association Standing Committee on Paralegals, “The Economic Benefits of Paralegal
Utilization,” Copyright 2005 American Bar Association.] The full article may be accessed at
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http://www.paralegals.org/associations/2270/files/2010content/Economic_Benefits_of_Paralegal
_Utilization.pdf
A.
Analyzing the Profitability of Paralegal Work - The first step in evaluating the
benefits of employing paralegals is to determine whether the work performed by
paralegals is returning a profit. This should be accomplished by a careful analysis
of costs and revenues. The best approach is to conduct a specific analysis that
compares the revenues and the costs associated with the paralegal.
1.
Evaluating Costs -Costs should be determined by allocating all categories
of expenses among partners, associates and paralegals. These costs can be
divided into three general categories: compensation costs, direct costs and
indirect costs. Compensation costs include salary, bonus, payroll taxes and
fringe benefits. Direct costs include allocated portions of rent and
secretarial support. Indirect costs include all other firm expenses, such as
supplies, technology, utilities, social activities, insurance, business taxes,
compensation costs of non-billing personnel, etc. Compensation costs and
direct costs can be easily and precisely allocated to individual time
keepers. Indirect costs, however, are usually converted to average cost per
partner, per associate, and per paralegal. The cost of maintaining a partner
exceeds the cost of maintaining an associate, which exceeds the cost of
maintaining a paralegal. While each firm must determine the relative
portion of its general overhead which supports partners vs. associates vs.
paralegals, a rough rule of thumb is that partners account for three times as
much overhead cost, and associates twice as much, as do paralegals.
The following table sets forth estimates of typical paralegal costs, divided
into the categories discussed above:
Salary (Compensation Cost)
Taxes & Fringe Benefits (Compensation Cost)
Overhead (Direct & Indirect Costs)
Total Cost of Paralegal
$40,000
+10,000
+45,000
$95,000
Once the total cost of an individual timekeeper (partner, associate or
paralegal), or the average total cost per individual timekeeper for a group of
similar timekeepers, is determined, it is important to determine the “cost
per hour” for that individual or class of timekeepers. The cost per hour is
determined by dividing the total cost for that individual by the number of
client billable hours recorded by that individual in a year. For example, the
typical paralegal referenced above has a total cost of $95,000. If that
paralegal records 1550 client billable hours in a year, her cost per hour
would be $61.29. This is the amount of the firm investment in every hour
that the paralegal spends on client matters. In order to analyze the
profitability of paralegals, it is important to know the cost per hour of all
timekeepers or classes of timekeepers in the firm.
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It should be noted that although absolute costs will vary from firm to firm
and from region to region, the relative cost differentials between paralegals,
associates and partners will be similar.
2.
Estimating Revenues - Revenue potential is determined by multiplying the
paralegal’s hourly rate times the billable hours anticipated. A rate of $90
per hour times 1550 hours equals a revenue potential of $139,500. To shift
from potential revenue to actual revenue, a collection realization rate must
be applied. Assuming a collection realization rate of 92.5 percent, revenue
potential of $139,500 would generate actual revenue of approximately
$129,000.
In evaluating the potential revenue of paralegals, it is important to
remember that most paralegals should spend relatively little time on nonbillable activities such as client development, community involvement or
firm management. Although in larger paralegal programs senior paralegals
will spend time mentoring, training, interviewing and evaluating their more
junior colleagues, their primary role is to produce billable hours. Thus,
billable hour expectations should not be too modest. The greater the
number of hours billed by the paralegal, the larger the profits to the firm.
3.
Determining Profitability: Comparing Costs to Revenue - Profitability
is determined by comparing projected revenue with the costs associated
with employing the paralegal. Using the examples of costs and revenues
set forth above, the paralegal generates revenue of $129,000 at a cost of
$95,000, thereby producing a profit of $34,000.
If the comparison does not result in an acceptable profit level, the law firm
needs to take corrective action by:
increasing the paralegal’s hourly rate;
increasing the number of billable hours required of the paralegal; or
reducing the paralegal’s compensation costs (salary or benefits).
a.
This profitability analysis is useful for estimating the profitability of
paralegals with varying levels of experience. Although paralegals
can and should be profitable regardless of their level of experience,
lawyers must recognize that the relative profitability of paralegals at
different experience levels depends upon relative salaries, benefits,
overhead, billing expectations, hourly rates and realization.
In most circumstances, a lawyer can justify billing an experienced
paralegal at a significantly higher rate than that of an entry-level
paralegal. Thus, even if a senior paralegal’s compensation and
benefits are substantially higher than those of entry-level paralegals,
the profits generated by the experienced paralegal might be greater.
This is because the additional revenue derived from the senior
paralegal’s higher billing rate can more than compensate for his
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increased salary and benefits.
The following chart illustrates this principle:
Entry Level
$30,000
+ 9,000
+45,000
$84,000
Salary
Fringe Benefits
Overhead Costs
Total Costs
Hours
Hourly Rate
Potential Revenues
Realization Rate
Total Revenue
Less Total Cost
Profit
Entry Level
1600
x 80
$128,000
X 90%
$115,200
- 84,000
$ 31,500
Experienced
$ 50,000
+15,000
+45,000
$110,000
Experienced
1500
x 110
$165,000
x 95%
$156,750
- 110,000
$ 46,750
You will note that this example assumes that entry level paralegals
will, on average, record more client billable hours than will
experienced paralegals. This is due to the fact that senior
paralegals will tend to have more administrative and management
responsibilities, such as mentoring, training and evaluation of
junior paralegals, and participation on firm committees. However,
the higher number of client billable hours worked by entry level
paralegals is at least partially offset by the fact that they normally
have lower realization rates than do experienced paralegals.
Although the above analysis might lead one to believe that law
firms should seek to employ only experienced paralegals, that is
not the case. While it is certainly true that a small firm which
employs only one or two paralegals will benefit if they are all
experienced, a larger firm which desires to develop a large
paralegal program will be better served if it employs paralegals
with a wide range of experience levels. The presence of entry
level as well as experienced paralegals permits those with more
experience to focus their efforts on more sophisticated and
challenging work. This increases the job satisfaction of the
paralegals, with a resulting reduction of costly turnover. In
addition, the utilization of paralegals with a range of experience
levels, and therefore employment costs, permits the firm to
perform lower value work, and therefore lower billing rate work, at
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a profit.
b.
Comparing Profitability of Paralegals and Associates – Just as
the profitability analysis allows for comparison of the relative
profitability of entry level and experienced paralegals, it permits
comparison of profitability of paralegals and associates. In the
following example we address the relative profitability of a midlevel paralegal and a first-year associate, two classes of timekeepers who often perform similar types of work.
Paralegal
Salary
Fringe Benefits
Overhead Costs
Total Costs
Hours
Hourly Rate
Potential Revenues
Realization Rate
Total Revenue
Less Total Cost
Profit
$ 40,000
+ 10,000
+ 45,000
$ 95,000
Paralegal
1550
X 90
$139,500
x 92.5%
$129,000
-95,000
$ 34,000
Associate
$100,000
+ 15,000
+109,000
$224,000
Associate
1850
x 160
$296,000
X 92.5%
$273,800
- 224,000
$ 49,800
Although this example demonstrates that a firm will generate more
profit on a first-year associate than on a mid-level paralegal, there
are several reasons why attempting to do so is not necessarily in
the long term best interests of the firm. Firstly, the example
assumes that the first-year associate will bill 1850 hours, while the
paralegal will bill only 1550 hours. Therefore, the firm must have
the additional 300 hours of work to keep the associate busy.
Secondly, the example makes clear that while the cost to the client
for the associate’s services is $273,800, the cost for the paralegal’s
services is only $129,000. Therefore, client relationships, and
presumably repeat business, should be significantly enhanced by
effective paralegal utilization. Finally, although “profit per capita”
might be greater on an associate than on a paralegal, the “return on
investment” for the firm is greater on paralegals than on associates.
9. IMPROVED RETURN ON INVESTMENT
A.
Calculating Return on Investment -Although profit per capita is a useful
statistic, it does not provide any information on the efficiency with which the firm
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converts investment to profit. In order to analyze efficiency, the firm must divide
the profit generated by a timekeeper by the cost to employ the timekeeper. This
equation provides the return on the firm’s investment (ROI) in the timekeeper.
The greater the return on investment in a timekeeper, the greater the firm’s
efficiency and profit margin, and the lower the demand for capital.
In the prior example, which compared a first-year associate with a mid-level
paralegal, the profit generated by the associate was $49,800, on a cost of
$224,000. The profit generated by the mid-level paralegal was $34,000, on a cost
of $95,000. As we noted, the profit per capita on the first-year associate is greater
than on the mid-level paralegal. However, when the profit is divided by the cost,
it is clear that the ROI on the associate is only 22.2%, while the ROI on the
paralegal is 35.8%. Thus, the profit margin on the hypothetical mid-level
paralegal is more than 50% greater than the profit margin on the hypothetical first
year associate.
B.
Profitability and Return on Investment in Alternative Fee Matters -It should
be noted that the potential for the greatest profits and ROI through the use of
paralegals is in work that is not billed on an hourly rate basis. If fixed fees are
established for a specific transaction, lawyers’ profits will be directly related to
their ability to operate efficiently and keep their investment in billable time low.
Every hour of work that can be performed by a paralegal rather than a lawyer will
lower the investment in the project. Similarly, for the contingency lawyer,
shifting a larger portion of work to a paralegal increases the potential for profit
and decreases the potential for loss.
1.
Fixed Fee Case
If the fee for a service is fixed, the profits and ROI will be related directly
to the ability to deliver the service at a low cost. Consider the following
example:
Fixed Fee Worker
Hours Cost/Hr Investment Profit ROI
$1000
Partner
5 hrs
$1000
Associate 7 hrs
$1000
Partner
Paralegal
1 hr
9 hrs
$225
$1,125
($125) (11.1%)
$135
$ 945
$ 55
$225
$ 65
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$ 225
$ 585
$ 810
$190
5.8%
23.5%
2.
The Contingency Case
The contingency case provides the greatest potential for paralegal profits.
The fee will be determined at the conclusion of the case. One goal of the
lawyer is to minimize the firm’s investment in the case. By expanding the
role of the paralegal, the lawyer is minimizing the dollars that the firm has
invested in the case. Consider the following examples which show the
lawyer losing money without a paralegal and making a profit with a
paralegal:
Verdict
$120,000
$120,000
Fee
Workers
Cost/Hr Hours
Investment
Profit
ROI
$40,000 Partner
$225
180
$40,500 ($500) (1.2%)
$40,000
Partner
$225
100
$22,500
Paralegal
$ 65
125
$ 8,125
$30,625 $9,375 30.6%
10. IMPROVED CLIENT SATISFACTION AND RETENTION
One of the benefits of employing paralegals is improved client relationships. This can be
achieved through a combination of reducing overall legal fees and providing clients with
more accessible and familiar firm contacts. This is a natural result of delegating work to
well qualified paralegals.
A. Reducing Legal Fees
This point is demonstrated by comparing the following two examples:
Example 1: All work is performed by a lawyer at a rate of $200 per hour.
Interview with Client
Interview with Two Witnesses
Gather Information
Review Documents
Legal Research and Analysis
Draft Pleading
Trial Preparation
Trial
Total
3 hr.
4 hr.
6 hr.
3 hr.
4 hr.
3 hr.
5 hr.
4 hr.
32 hr.
$ 600
$ 800
$1200
$ 600
$ 800
$ 600
$1000
$ 800
$6400
Without any paralegal assistance, the lawyer works 32 hours on the case and bills
the client $6,400.
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Example 2: Significant work delegated to a paralegal at $90 per hour.
Interview with Client
Lawyer
Paralegal
3 hr.
3 hr.
Interview with Two Witnesses
Paralegal
Gather Information
Paralegal
Review Documents
Paralegal
Legal Research and Analysis
Lawyer
Paralegal
Draft Pleading
Lawyer
Paralegal
Interoffice Conferences
Lawyer
Paralegal
Trial Preparation
Lawyer
Paralegal
Trial
Lawyer
Paralegal
Total
$600
$270
4 hr.
$360
6 hr.
$540
3 hr.
$270
1 hr.
4 hr.
$200
$360
1 hr.
3 hr.
$200
$270
1 hr.
1 hr.
$200
$ 90
2 hr.
4 hr.
$400
$360
4 hr.
4 hr.
44 hr.
$800
$360
$5280
Under this scenario, the lawyer works 12 hours and the paralegal 32; billing is
$5,280, and the client saves $1,120, or 17.5 percent of the original fee.
These examples demonstrate that even when there is some duplication of effort,
such as when a lawyer and a paralegal both attend a client interview and a trial, it
is more cost effective for the client when the lawyer delegates work to an
experienced paralegal. This is true even when, as in Example 2, significantly
more time is billed to the file. Because increased efficiency leads to greater
savings to clients, and presumably more work for the firm, it is often beneficial
for paralegals to become specialized in one practice area, where they can develop
complete familiarity both with specific cases and with individual lawyers’
practice styles.
Delegation to a paralegal works best in situations in which the paralegal has full
involvement in the file. In most cases, the more work shifted to paralegals, the
greater the savings to the client. This holds true, however, only if the shifting of
work permits a reduction of lawyer hours on the file.
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B. Improving Service
The second significant way in which paralegals can improve client relations is by
acting as an accessible and consistent client contact. While lawyers are often out
of the office on business, and, therefore, are not immediately available to clients,
paralegals normally work in the office. Therefore, an experienced paralegal who
has a working relationship with a client can often respond to client questions and
concerns more promptly and effectively than can lawyers.
Furthermore, paralegals can maintain close working relationships with clients,
particularly institutional clients, for years. While associates often move from one
practice area to another in order to gain broad experience, leave the firm for other
professional endeavors, or become partners and develop their own clientele,
paralegals often work with one or a small group of partners servicing the same
clients for years. Such clients develop a high degree of familiarity with and
confidence in these paralegals - a much higher degree of confidence than they
have in new and frequently changing associates. Thus, paralegals can strengthen
client relationships not only by saving clients money, but also by enhancing client
service and building client confidence.
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BIBLIOGRAPHY
ABA Standing Committee on Paralegals, http://www.americanbar.org/groups/paralegals.html
Akins, Donald S., “Economic Benefits and Working Relationships,” Chapter 2 in Working with
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Association, 1980.
Campbell, D. Jeffrey, “Associates Versus Paralegals: The Shifting Balance of Profitability,”
SCOLA Update, Vol. 4 No. 1, Fall 2001.
Campbell, D. Jeffrey, “Enhancing Profitability Through Paralegals,” Law Firm Leverage in
st
the 21 Century: Associates, Paralegals & Technology, August 2001.
Campbell, D. Jeffrey and the American Bar Association Standing Committee on Paralegals,
“The Economic Benefits of Paralegal Utilization,” Copyright 2005 American Bar Association.]
The full article may be accessed at
http://www.paralegals.org/associations/2270/files/2010content/Economic_Benefits_of_Paralegal
_Utilization.pdf
“The
Economic Disadvantages of Associates Over Paralegals,”
Management & Administration Report, October 2002.
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Office
Greene, Arthur G. (ed.), “Leveraging With Legal Assistants,” American Bar Association,
1993.
Greene, Arthur G., and Cannon, Therese A., “Paralegals, Profitability, and the Future of Your
Law Practice,” American Bar Association, 2003.
Legal Assistant Utilization Survey, Legal Assistant Management Association, 2003.
Model Guidelines for the Utilization of Legal Assistant Services, American Bar Association,
1991.
National Association of Legal Assistants, www.nala.org
National Federation of Paralegal Associations, www.paralegals.org
Utilization of Legal Assistants Among Private Practitioners – A Survey Sponsored by the ABA’s
Standing Committee on Legal Assistants, American Bar Association, 1998.
Wilber, James S., “Break the Legal Food Chain,” Legal Management, March/April 2003.
2002 National Utilization and Compensation Survey Report, National Association of Legal
Assistants, August 2002.
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