Law Practice Management Asked and Answered Blog

Category: Profit Improvement

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Apr 27, 2011

Contingency Fee Profitability: Can You Make Money From Contingency Fee Work

Question:

Our firm is a 12 attorney general practice firm located in the Phoenix metropolitan area. In additional to general practice, we do a fair amount of insurance defense work as well. In an effort to improve firm profitability we have been considering alternative fee arrangements – particularlly contingency fees – with some of our existing clients as well as venturing into personal injury plaintiff work. Can we improve profitability by doing more contingency fee work?

Response:

The CEO of the Howrey LLP, when interviewed about the law firm's recent dissolution, advised that deferred profits from contingency fee work led to the firm's demise.  Howrey is a good illustration of what can happen when the risks of contingency fee work is not considered or managed. Contingency-fee work can pose major risks for law firms, as they earn no fees if they lose those cases and sometimes have profits deferred in protracted litigation. In addtion, cases can be lost with no fee whatsoever recevied. Whether your firm is considering "big deal" litigation or bread and butter run of the mill personal injury litigation you may want to consider the following:

  1. Don't dabble in contingency fee work. Take it seriously and insure that your case portfolio is adequately diversified.
  2. Reduce case portfolio risk and improve case profitability by implementing a sound case intake system to insure that you are selecting quality cases.
  3. Realize that you have to spend money to make money and that you simply may not have the financial resources to take on certain cases. Learn how to say no and when to refer these cases out to others.
  4. Insure that you have an adequate portfolio of cases (number of cases, size and type) to insure diversification and manage risk.
  5. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Typical metrics include effective rate and/or LODESTAR.

In essence the fundamentals of risk and return is at work and should be considered when accepting contingency fee work. You are betting that you can beat your hourly rate that you receive (or would receive) on hourly work. Contingency fee work often involves the risk of no fee at all, financing the case, long time periods before the case is concluded and fees are received, client advance investments, etc. For these risks the firm should be able to expect a premium. In other words – the effective rate on contingency fee cases should (on average) be greater than that for hourly work.

Many law firms are not receiving a "risk premium" at all and are often, on average, obtaining an effective rate close to their bill rate. So, do consider the risk involved and evaluate methods of mitigating the risk as much as possible. In general – don't dabble – but work to a portfolio of cases large enough to diverisfy your risks.

Herbert Kritzer has done extensive academic research over the years on contingency fees which can be found in his book – Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States. The book can be ordered from Amazon.com. Link to Amazon

While I have outlined a cautious approach here I want to also clarify that I have many clients that are doing very well and making a lot of money doing contingency fee work. It is the firms that did not grow up doing contingency fee work that "dabble" where I see the problems.

So proceed with caution – but go for it if it makes strategic sense for your firm.

Click here for blog ideas for personal injury firms

Click here for articles on other topics

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

Feb 23, 2011

Times are Tough – How Are Other Small Firms Doing?

Question:

I am a partner in an 8 attorney firm in the Chicago suburbs. Our firm has started having discussions about what we need to be doing differently. This is huge for us – one meeting a year is our typical meeting frequency and then only to discuss how we are going to cut the pie. How have other firms done during the recession? What are you seeing?

Response:

In general small firms in the midwest have fared pretty well during the recession. Last year some firms had the best year ever while others experienced flat or 10% revenue declines. Small firms that had the biggest problems were those that had issues before the recession or were in problem practice areas. Big law firms have had to face unique challenges.

Small firms that have weathered the storm and fared the best were those that:

I believe that law firms that fail to focus their practices, set goals, measure accomplishments, and foster accountability will fall short and not meet their financial objectives. Law firms that fail to plan are planning to fail.

Law firms as well as solo practices need to begin focusing their firms and practices, setting firm and individual production goals, measure accomplishment and implementing systems to instill accountability from all members of the team – attorneys and staff alike.

Consider using budgeting which is a tool that can be used to measure goal attainment and how well the firm is doing.

What gets measured is what gets done.

Click here for our blog on law firm strategy

Click here for my article on creating strategic (business) plans.

 

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

Feb 09, 2011

Surviving in an Insurance Defense Law Firm – Reinventing the Practice & Staying in the Game

Question: 

I am the founding partner of a 17 attorney firm in Missouri and I serve as the managing partner. We have 12 partners and 5 associates. Our practice is entirely defense – personal injury and workers compensation. The majority of our clients are insurance companies and third party administrators. We represent a handful of self insured companies. While we have had a successful past fifteen years are firm is now struggling. We have lost market share and our case counts are way down due to the economy and regulatory changes in Missouri. Our profitability has suffered as a result. We need to make some changes but are unsure where to start. Could you share your thoughts?

Response:

The present state of the insurance defense practice presents numerous challenges to the law firm. These challenges simply cannot be ignored – they will have to be faced head-on. The solutions are complex and will require time to sort through. While solutions can come in different varieties, they will take the form of one of two general strategic approaches.

  1. Reinvent the Practice – Stay in the Game
  2. Exit or Diversify the Practice

The remainder of this post will focus on reinventing the practice and staying in the game.

For some firms the appropriate strategy may be to stay in the game. These will be firms that have a well-established reputation in insurance defense, where insurance defense represents a major source of their revenue, and where adequate leverage and profitability and leverage exist. These firms will not be firms that dabble in insurance work. These firms will be committed to this practice area and will focus on it exclusively. Some of the following actions will be required to reinvent the practice and stay in the game:

  1. Get leverage back on track. Tough decisions will be required here. High priced senior associates will have to be let go. Unproductive partners will also have to leave. Paralegals should be hired. Ratios need to get back to 4 to 1.
  2. Partnership admission criteria will become more demanding. Time required to make partner will be lengthened.
  3. Compensation will be based upon performance.
  4. Billable hour quotas will be enforced.
  5. Expenses will be tightly controlled.
  6. Flat fees and other forms of alternative billing will be commonplace.
  7. Unique out-of-the-box solutions will be designed to provide tailored services to meet client needs and differentiate the firm from competitors. The firm will no longer wait for the insurance company to take the lead. The firm will take the lead and provide clients will a menu of service solutions.
  8. Technology will be employed to the fullest extent to reengineer work processes. It will not be used just for technology sake or to keep up with the corporate litigation law firms. When technology is employed old outdated practices and processes will be eliminated.
  9. Standardized practices and procedures will be developed and used throughout the firm wherever possible.
  10. Client focus groups, insurance company councils, and other forums will be formed to open up channels of communications with clients in order to mend the tarnished client relationship and reestablish a business partnership. Innovative insurance defense firms will take active leadership roles in this endeavor.
  11. Aggressive marketing and business development strategies and plans will be implemented in order to maintain appropriate growth rates and profitability. Relationships with unprofitable clients will be terminated. Marketing with be done as a team approach as opposed to being a function done at the individual lawyer level. Both firm and individual personal marketing plans will be commonplace.

Click here for my article – Trapped In an Insurance Defense Practice

Click here for our blog on law firm strategy

 

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

Aug 10, 2010

Personal Injury Law Firm Profitability

Question:

We are a 5 attorney (all partners) personal injury plaintiff law firm in Central Illinois. We are all working hard, are extremely busy, but we don't seem to be seeing the results of our hard work in our earnings and compensation. We are making hefty marketing investments – in fact we are spending around 6% of revenue on marketing. What are your recommendations on how we can improve our profitability?

Response:

It is hard for me to comment specifically with the limited information that you have provided. There are numerous variables that need to be examined. However, in general terms:

John W. Olmstead, MBA, Ph.C, CMC

Nov 24, 2009

Getting to the Next Level

Question:

I am a member of a three attorney firm. I think that we know where we are as a firm, where we want to be, but we don't know how to get to the next level. Do you have any ideas?

Response:

Rather than following the pack – attorneys need to find ways in which their firms can "dare to be different."

Many attorneys are providing the same service – solving the same sort of legal problems for their clients using similar tools strategies/approaches. To many clients – attorneys all look the same. What can you do to stand out?

Marketing is about more than just promoting the firm to get clients. It is also about deciding on:

  1. What services to offer, where, and to whom? Sometimes less is more – by focusing on fewer areas of practice. Just because a law firm focuses on say three areas of practice – doesn't mean that it does not handle matters in other areas. It just means you are building you brand around the three core areas. These are the areas you primarily promote, speak about and write about. Broader geography?
  2. Pricing. Not just the amount to charge but how to charge. Clients are asking for budgetary certainty? Get creative.
  3. Delivery and producing the service. Are you doing all that you can using technology, staffing, work processes, etc. to minimize the cost of producing your services? If you are – aggressively promote it. Office location, client site visits, etc., all come into play here. 
  4. Promotion (which can include advertising, e-newsletters, newsletters, websites,
    networking, seminars, press interviews, social networking on the internet, etc.)

Effective marketing requires a mix of the above elements in your plan and then effectively communicated.

Many attorneys suffer from random (unplanned) acts of marketing or business development. To be effective you need to be well focused, have a plan to focus the firm's efforts, and be disciplined and make excellent use of your professional time. Often the largest marketing investment is not advertising or the cost of other marketing vehicles – it is the cost of you non-billable (or investment) time.

A business/marketing plan (10 pages or less) for the firm can do wonders.

Sit down with the other attorneys in the firm, do some brainstorming away from the office, and put a plan together. Then work the plan.

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

Nov 08, 2009

Profitability Improvement Ideas

Question: What are some ideas that our eight attorney should be doing to improve profitability?

Response:

Use the RULES formula to focus your effort.

R = Realization rate or effective rate per hour.
U = Utilization – billable hours or case production hours.
L = Leverage – ratio of partners to other timekeepers.
E = Expenses – overhead.
S = Speed – collection cycle – converting work to bills and bills to cash.

Profitable law firms have an appropriate mix of each of these profitability levers. Compare against internal and external benchmarks and determine which of the levers require attention. Usually expenses is not the primary problem – in fact many firms should be spending more in the form of investment. Usually the primary focus should be on improving:

Many firms need to increase case/matter volume through better client development and marketing to be able to obtain higher leverage ratios.

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

Oct 04, 2007

Suggested Practice Tips For Today

  1. Never eat lunch alone. Have lunch everyday with clients, prospective clients, referral sources or members of your team.
  2. Take our time management self test. Begin working on your problem areas one behavior at a time. Time is money.
  3. Enter you time daily into you time and billing system – both billable and non-billable – as you work. Don't go home until you have accounted for an entire day. You may be dropping 10-25% potential revenue.
  4. Look for ways to brand yourself – dare to be different. With the internet you really can expand your base beyond your local community.
  5. Set a few goals and hold yourself and your team accountable.

Nov 27, 2006

Plans and Goals For 2007

As we approach the Christmas holiday season we need to begin thinking about next year. Here are some suggestions:

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

Nov 13, 2001

How To Use Current E-Business Websites to Improve Law Firm Profits

Question:

How can the new technology help law firms improve profitability?

Response:

What Does Your Law Firm Need From the E-Marketplace: More Clients, More Business, More Income?
Electronic business to business web sites can now offer law firms the opportunity for quicker, cost effective and, more targeted client contacts. They basically do all the marketing and business aspects of client contacts while lawyers are able to do the legal part. They are geared to provide the following:

Shifting From The Old Legal Business Paradigm to The New Legal E-Market Paradigm
Everyday we read about or directly experience the rapid changes that occur in law firms, professional careers, and business cycles. Change is occurring more and more quickly! Today you see law firms downsizing, going out of business or merging with other law firms. You also observe professional lawyers experiencing a significant decrease in their income or sometimes leaving the profession and entering other career fields. Therefore, it becomes incumbent upon you to keep abreast of the changes that can critically effect law firm practices.
Comparing the old legal business paradigm to the new E-Market paradigm brings out the painful and positive realities facing many law firms today. Look at the differences below.

Factors of Old Legal Business Paradigm Factors of New Legal E-Market Paradigm
1. Advertise in phone book & other media 1. Web site distributes your services 24/7
2. Costs of a full time office staff 2. E-Market does much your office work
3. Have files full of papers 3. Become a more paperless firm
4. You bill your clients 4. E-Market bills your clients
5. You collect from your clients 5. E-Market collects from your clients
6. You deposit money into bank account 6. E-Market electronically transfers funds

You can quickly see that the old legal business paradigm is more labor intensive and costly to maintain. On the other hand E-Markets are more accountable, productive, reliable, and cost effective. They provide you with more time to practice law and less time managing office problems and costly office staff (not to mention rapid staff turn-over rates and required training). At the very least E-Markets should become a necessary adjunct to your practice because it can require minimal input from you with greater payoff.

Do You and Your Staff Have The Basic Computer and Internet Skills Necessary to Meet the 21st Century Business Challenge?
Below is a short assessment of both computer and Internet literacy.

  1. 1. Can you type at least 25 to 35 words a minute?
  2. Do you own or have access to a computer that is at least two years old and has current software for word processing, business charts and graphs, billing software, etc.?
  3. Do you have satisfactory access to the Internet by a phone line, T-1 line or DSL?
  4. Are you satisfied with your current online Internet carrier so you have minimal disruptions when you get online?
  5. Do you have an E-mail address where clients can reach you?
  6. Do you feel comfortable sending E-mails with document attachments to other lawyers and your clients?
  7. Can you open a PDF files using Adobe Acrobat Reader?
  8. Can you zip and unzip files?
  9. Do you have at least several years of experience searching the web for legal information you need?
  10. Are you comfortable asking basic questions about your computer or using the Internet when you are experiencing problems and do not know the solutions?
  11. Can you teach other lawyers or clients how to use a computer?
  12. Can you teach other lawyers or clients how to navigate the web?

Being computer literate is a necessity today. It is a new skill that must be attained by all professionals in order for them to be fully functional in their jobs and at work. They can be handicapped by not being computer literate and as a result be unable to meet the demands of the E-Markets and business to business relationships.

New Professional Skills and Competencies Needed By Today's Lawyer
To maximize and optimize your opportunity as a successful lawyer in a law firm you will need to add these skills to your existing skills.

What It Takes to Create a Successful Law Firm Practice
In a few words, it takes…awareness, planning and follow through to begin to expand and improve your law firm. Most human beings talk a good game about being successful, but very few ever succeed. Our society teaches us to talk about ideals, but very few live up to the expectations of our words. Human nature is such that we want and expect the best; we work for mediocrity, and settle for very little. Once we establish old antiquated habits, it becomes extremely difficult to convert to new updated habits; that is because the old habits served us well during a specific time frame, but new habits need to be adopted to serve us during current times.

Creating and Reinventing a More Successful Law Firm for the 21st Century
It will take both the understanding of the new business model, and the implementation of current computer technology to be able to use the power of the Internet to your advantage. Below is a list of action plans that you need to address:

  1. Bring in new computers with updated software that can be used by your law firm (some companies are giving their employees, as a benefit, computers for personal use to become familiar and comfortable with them).
  2. Get a provider that you can depend on when you need to get online.
  3. Provide your law firm staff with the training to use the equipment at a maximal level (this usually means 60 to 80 hours of training over a six to twelve month period, and you can also improve employee loyalty and morale).
  4. Check out current web sites for lawyers and law firms that emphasize business to business activities that will suit your law firm's business needs. (A list is provided in the next section of this article).
  5. Most importantly give yourself permission to ask "dumb" questions about computer technology and using the Internet. You will quickly find that many other people are asking the same questions as you.

A Current List of E-Marketplaces for Your Review Check out the different E-marketplaces listed below. See which ones best fit with your law firm's needs and business plan. These sites are very consumer friendly and willing to answer your questions.

iBidLaw.com -a web site that plans to go after big-ticket assignments. It is still under construction at the time of this writing.
eLawForum.com-a global business to business web site where corporations seek outside counsel by posting an RFP. Fee structures, whether fixed, contingency, or hourly, are stipulated by the corporation.
LegalPath.com-a web site that offers business to business exchange based on corporations seeking outside counsel. It currently focuses on smaller assignments in three areas: work-medical malpractice, insurance defense, and debt collection. Law firms are part of the registry and can gain visibility with prospective clients.
LegalMatch.com-The web site connects lawyers with people. Lawyers can review cases in their practice area and location and inform desired clients of their professional interest.
Lawcommerce.com-This web site is an online center for the legal profession to access. You can access forms, checklists, agreements, locate CLE training and research cases.
Niku.com-This web site helps law firms to become more competitive by exploring the full power of the Internet.
FirmSeek.com-This web site allows potential clients to submit an RFP and law firms can view these and respond to them. You can do legal research, get legal forms, and look at law firm rankings as well as see professional activities for lawyers.

Predicting The Future Labor statistics and experience tells us that professionals, including lawyers, will change jobs many times and careers several times in their lifetime. What does this mean for lawyers and law firms? Basically it means that you must constantly reinvent yourself and your law firm to stay abreast of future change.
Allow us to speculate for a minute about the future. From now till the year 2020 we are able to predict with a certain amount of confidence some of the following changes lawyers may experience in their jobs and careers.

Possible career changes where you can become a:

  1. teacher, instructor or professor,
  2. businessperson or join a business firm,
  3. legal software developer,
  4. a legal consultant for software,
  5. free lance writer, author, or columnist,
  6. politician.

Possible job changes:

  1. help others in your law firm to learn financial software,
  2. teach others in the law firm how to effectively use legal software,
  3. develop a web site for your law firm,
  4. compose articles for your web site, or publish them in the law firm newsletter or law firm journals,
  5. train lawyers in your law firm how to improve their use of current technology,
  6. work part time for a business to business web service,
  7. be the main marketing person for your law firm,
  8. develop your law firm's business plan,
  9. become a mentor and coach to others in your law firm,
  10. become an expert in global business to business relationships.

It becomes quickly evident that E-markets and E-business have a very profound effect on what lawyers will be doing in the future. Practicing law is only one option among many possibilities.

Dr. Thomas J. Venardos is an adjunct management consultant with Olmstead & Associates, Legal Management Consultants, St. Louis, MO, and President of Venardos Management Group, Organizational Performance Consultants, located in Las Vegas, Nevada. Dr. Venardos may be contacted by e-mail at tvenardos@olmsteadassoc.com.

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