Law Practice Management Asked and Answered Blog

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Sep 08, 2010

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Characteristics of Successful Law Firms – Basic Building Blocks – Block 3 – Management

For the past two weeks I have been discussing the characteristics of successful law firms and introduced the following basic building blocks that successful firms typically have in place:

• Partner Relations
• Leadership
• Firm Management
• Partner Compensation
• Planning
• Client Service
• Marketing

Partner relations and the leadership building blocks have been discussed. 

The third basic building block is management. Successful firms have a good governance and management structure in place and effectively manage the firm. A major problem facing many law firms is the lack of long range focus and the amount of partner time that is being spent on administrivia issues as opposed to higher level management issues. Time spent in firm governance and management, if properly controlled, is as valuable as, if not more valuable, than the same time recorded as a billable hour. (client production time)

 

 

 

Aug 31, 2010

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Characteristics of Successful Law Firms: Basic Building Blocks – Block Two – Leadership

Last week I discussed the characteristics of successful law firms and introduced the basic building blocks that successful firms typically have in place. These are:

• Partner Relations
• Leadership
• Firm Management
• Partner Compensation
• Planning
• Client Service
• Marketing

Last week we focused on partner relations as a core foundational building block.

The second basic building block is leadership. Successful firms have good leadership in place. This may be a single individual or a core group of individuals. Leadership does not always come from the formalized management structure of the firm.

Leadership is one of the major problems facing law firms. Leaders are needed for managing partner posts, executive committee chairs, and practice group heads.  

Leadership behaviors include:

• Developing people
• Being able to influence others
• Encouraging teamwork
• Empowering people
• Using multiple options thinking
• Taking intelligent risks
• Being passionate about work
• Having a strong clear vision.

 

Leadership skills will need to be included in compensation systems.

Seven traits of effective leaders include:

1. Make others feel important
2. Promote a vision
3. Follow the golden rule and establish trust
4. Admit mistakes
5. Criticize others only in private
6. Stay close to the action
7. Walk the talk.

Leadership is what makes things happen and propels the firm forward, facilitates new directions and attainment of strategic goals, and provides the firms the resiliency needed in today's challenging competitive climate.

Law firms without leadership are easy to spot. They are the firms that are "stuck-in-a-rut", unable to reach agreement or concensus on new ideas, stagnating profitability, partner defections.

Firm must pay attention to this key area and develop leaders for all roles mentioned above.

Click here to read my article on leadership

I will address each of the other building blocks in upcoming postings.

John W. Olmstead, MBA, Ph.D, CMC
www.olmsteadassoc.com

 

 

 

Aug 23, 2010

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Characteristics of Successful Law Firms: Basic Building Blocks – Block One

Question:

My partner and I just started our firm two years ago. We have one associate attorney and one staff member. As we grow our firm what should we keep in mind so we don't repeat some of the mistakes that I have seen in other firms that have not been successful?

Response:

I often refer to what I call the Basic Building Blocks of Successful Law Firms which are:

• Partner Relations
• Leadership
• Firm Management
• Partner Compensation
• Planning
• Client Service
• Marketing

Lets take the first one – Partner Relations. This is the foundation (bedrock) of a successful firm. A successful firm has a healthy partner culture – a good marriage. In such a culture partners share common vision and purpose, respect one another, shoot straight with each other, and have difficult conversations and discussions when needed and deal with issues and problems. In many firms this is not the case and these firms often are characterized by the following:

• Partner Defections
• Firm Splits and Break-ups
• Personal Fiefdoms
• Maverick Partners
• Hoarding Work
• Lone Rangers

Such firms are often doomed from the start. Firms that don't get this foundational building block right will build a firm on a shaky foundation. Before forming a partnership – go slow and get to know the other lawyer or lawyers and insure that the marriage makes sense, that you share similar goals and values, that you will be compatible, and you will be good partners. Once you have made the commitment – communicate, communicate, communicate and deal with issues in real time.

I will address each of the other building blocks in upcoming postings.

John W. Olmstead, MBA, Ph.D, CMC
www.olmsteadassoc.com

 

Aug 17, 2010

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Law Firm Partner Compensation – Should We Change Our System

Question: 

We are a three attorney law partnership that does primarily business transactional work. My partner and I have been in practice together for four years. We are equal partners (50% each) as far as our partnership interests and we use these same interests for determining partner compensation. In other words we receive the same compensation. We recently have been discussing whether we should look into a different method for determining partner compensation. Currently we produce about the same level of fee revenue. What are your thoughts?

Response:

I could write a whole book on compensation systems – but here are a few thoughts:

1. Over the past 30+ years I have seen just about every form of compensation system that there is – from "even steven" systems such as yours to "eat-what-you-kill", other formula systems, profit center systems, objective systems, etc. No particular system is better than another system. It depends upon the firm – the culture – strategic goals – and the environment.
2. If the system is working – sometimes it is better to leave it alone. There is nothing wrong with an "even steven" system as long as the contributions (fee generation, fee origination, firm management, and otherwise) made by both of you to the firm are perceived as equal. Frequently, partners start out making even contributions and down the road contributions change (often due to life or family changes) and are no longer in alignment.
3. When perceived contributions get out of alignment partners are reluctant to have the candid discussions that need to occur as well as changes in the arrangement or compensation system. It could be the system – percentage interest is fine – but as contributions have changed the percentages need to change.
4. Resist the temptation to look at financial contributions in a single year. Look longer term – say the past three years.
5. Consider not just the compensation as to whether people are happy with what they are getting – but consider whether the system in encouraging the behaviors that you need to achieve firm goals? For example – management of the firm, marketing activities, mentoring and training associates and others in the firm, etc. Often we discover that firms that are not realizing their strategic goals (those firms that have such goals) – for example growth – are victims of their compensation systems. The systems are motivating "lone range behaviors" rather than firm strategic goals. Often this is the primary reason that firms decide to change their system – to transition from "long ranger" to "firm-first" team-based firms.
6. Consider bonus pools and other methods of supplementing the base system.
7. Start slow.

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

Aug 10, 2010

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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:

• How long have your lawyers been in practice? If over 10 years – you ought to be taking home $200,000+. Many lawyers aren't – but if they have tuned and focused their practices they should/could be.

• Each lawyer should be collecting $300,000+ per year in fees. If not examine case production hours, quality of cases being accepted, effective rate per hour as well as realization. (Assumes time is being kept on contingency fee cases)

• Firm's margin should be in the range of 35 – 45%. (Net Income – excluding owner salaries divided by Gross Fee Revenue)

• Is the firm (a high volume low dollar PI firm) investing 8-10% of fee revenue on marketing? Many high volume PI practices are spending much more.

• Are you measuring the ROMI (return on marketing investment)? This is critical. Not all marketing investments produce fruit – some fail. You must actively measure, manage, and fine tune marketing programs. Identify those that don't work and kill them. Dashboard reports are crucial. Measure everything – from calls and inquires and where they came from to cases signed up, dumped, etc. When cases are concluded tie the final result back to the original marketing source.

• Are you leveraging paralegals, case managers, and technology – especially if you are a high volume plaintiff practice?

• My guess is that overhead and expense is not your primary problem – it usually isn't. But examine your overhead and insure that you are using your resources wisely.

• In essence in a high volume practice – you need effective marketing to get enough cases (quantity and quantity) and you need the infrastructure to properly handle the work.

• Consider referral fees a marketing cost in addition to other marketing investments – because it is.

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

Jul 16, 2010

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Law Firm Eat What You Kill Partner Compensation Systems

Question:

We are current using an “eat what you kill” compensation system in our firm. Is this appropriate method for our firm to use?

Response:

 It depends. You must ask yourself what kind of firm you want to be – team-based firm or group of space sharers or partnership of individual firms. Such systems are not appropriate for law firms that want to build a firm and create a team-based practice since such compensation systems typically reinforce “lone ranger” behavior resulting in a “me first vs firm first” orientation. It is hard to build a team-based firm with such an orientation. However, some firms do not want to practice as team-based firms – they want to practice as groups of individuals. For these firms such a system may be appropriate. The challenge will be to nail down a method of allocation revenue and overhead that is fair and equitable to all members concerned. Compensation systems should do more than simply allocate the pie – they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm. Eat-what-you-kill systems discourage these behaviors.

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

Jul 15, 2010

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Getting Control of the Financial Side of Your Law Practice

Question:

I am a partner in a 14 attorney firm. Our bookkeeper has been with us for 20 years. We have a time and billing system, a separate bookkeeping system, and a separate database for clients, and something else for trust accounting. The other partners and myself do not know the name of the software that we are using, don't know how to access the software, and we have to ask the bookkeeper for any financial information that we require. We feel like "hostages". She gets offended when we ask questions. When we do receive information we don't know how to read or interpret much of the information. How can we get control of our firm back?

Response:

It is imperative that owners and partners in a law firm have access to financial information on a timely basis, understand the information, and use the information in a proactive way to manage the practice. We suggest:

The owner (or an appointed partner(s) in larger firms) obtain detailed training on the accounting software system(s) along side the bookkeeper when the system is implemented. In addition to general operation of the software, special training should also be obtained on intepretation and use of the management reports.

In your current situation – this may be a good time to consider upgrading your system and at that time obtain training on the new system, review the roles of all parties, and current procedures.

Insure that you have accounting controls in place and appropriate segregation of accounting duties.

Outline your expectations and requirements of the bookkeeper, meet with her/him, and communicate appropriately.

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

 

Jul 15, 2010

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Valuation of My Law Practice For Merger or Acquisition

Question:

I have been thinking merging or selling my practice. How do I determine what my practice is worth?

Response:

You might want to consider retaining the services of outside advisors to help you with this process. There are a variety of methods used to value law practices including:

1. Fair Market Value Methods
2. Rule of Thumb Methods
3. Price Earnings Ratio
4. Discounted Cash Flow Models, etc.

CPA practices are often valued using a rule of thumb method employing a multiplier of 1.0 to 1.5 times average gross revenues for the past five years. Thus, a practice with average billings of $400,000.00 per year might sell for $600,000 with 50% of the purchase price paid upon closing and the balance (50%) paid over a five year period based upon subsequent collections.

Law practices are more difficult to value. CPA firms often have more repetitive work from ongoing clients and less risk in the practice – say compared to a personal injury law practice. CPA firms often have enforceable non-compete agreements which are non enforceable and therefore non existent in law firms. Law firms have much more fluctuation in practice valuation and no valuation model dominates. The rule of thumb model – when used – ranges from .5 to 3.0% – and will dependent upon the amount of repeat business, extent of institutional vs indivdiual clients, and the ability to sucessfully transfer clients to the acquiring practice.

Look for ways to institutionalize your practice in a way that your practice is not "uniquely you."

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

Jul 14, 2010

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Succession/Exit Planning Questions

Question:

I am sole owner of a 8 attorney firm in the Northwest. Two other attorneys are income partners – no equity – and the other five attorneys are associates. I am just turning 50 and am beginning to think about future retirement. What questions/issues should I be thinking about?

Response:

Fifty seems to be the point at which attorneys being thinking about their retirement and their future. Some even consider and in fact make complete career changes at this point in their lives. Here are a few questions to begin thinking about:

1. Have you decided when you want to retire and leave your firm? Or do you want to work forever?
2. What amount of cash or annual cash flow do you need when you exit?
3. Do you presently have a retirement plan and how much income to you project that it will provide at different exit times?
4. To whom do you want to transfer your interest? Family members in law school, other attorneys in the firm, another firm, etc?
5. Based on future cash flow, do you know how much the firm is worth today?
6. Do you know how to best maximize the income stream generated by the firm – in the years ahead while you are still with the firm and after you leave the firm?
7. Have you been able to institutionalize the firm – or is it uniquely you?
8. Is the firm even marketable?
9. Do you have a succession/exit plan?
10. Do you have a plan for your business if the unexpected happens to you?
11. Have you taken steps to protect your family's wealth?

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

Jun 23, 2010

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Law Firm Cost Cutting Strategies

Question:

Our firm is a 20 attorney defense firm in the Southwest. We are having a hard year and are looking for cost cutting ideas and strategies.

Response:

I am often asked to help law firms design and implement profitability improvement programs. In most of my engagements the real problem is insufficient gross income and lack of sufficient investment (spending and time) on marketing and initiatives designed to stimulate client and revenue growth. For most firms increasing revenues is the most effective way of impacting the bottom line. However, we do find that there is waste and unnecessary overhead that eats away at profits and a cost control program is also recommended and implemented. During recessionary times such as we are currently facing – drastic cost control are often the only option. Reducing overhead can immediately and effectively improve a firm’s bottom line.

 

The first step in an expense control program is to identify those areas where potential savings exist. Review your profit and loss statement. Resist the temptation to arbitrarily cutting costs which could cut the muscle with the fat and result in revenue loss as well. You have to spend money to make money – so if cost cutting is the appropriate strategy – cut the right costs. Think strategically about cost reduction.

 

After you have identified areas where savings can be made prioritize and develop specific strategies and implement action plans to achieve the savings.

Here are a few ideas:

STRATEGY #1:  Reduce Headcount

 

This is the largest area for potential savings. Downsizing is a strategy that has been used by many firms this past year. However, it can have long term negative consequences for revenue and talent management. Consider all levels – non-productive partners, associates, paralegals, and staff. Be prudent and sensitive in implementation.

STRATEGY #2:  Reduce Compensation

Obviously one way is to cut salaries – a strategy to be used as a last resort. A better approach is to reduce fixed salary (paying people for showing up) and add a variable pay component which will allow employees to earn additional compensation in the form of bonus for results achieved. Another approach is to freeze salary increases.

STRATEGY #3:  Benefits

A major area for cost savings – especially health insurance. Determine which programs are most important to employees. Do your best to protect those and reduce or eliminate programs that are less important. Consider offering more than one health insurance plan. Pay the premium for the lowest cost plan and provide options for employees to “opt up” to the better plans by paying the additional premiums. Consider increasing deductibles and requiring employees to pay a portion of the base premiums.

STRATEGY #4:  Outsource

Examine potential for outsourcing – from copy services – IT management – to your legal team.

STRATEGY #5:  Occupancy

Review your lease invoices and question increases and escalators for which you have been charged. Consider renegotiating your lease and ask for a lower rate. Reduce excess space either through a renegotiated lease or through sub-leasing.

STRATEGY #6:  Telephone Service

Scrutinize your bills and examine rate tariffs as well as items that have been tagged to your bill by third parties. Negotiate and ask refunds for any discrepancies or abuse found. We have seen firms receive thousands of dollars in refunds.

STRATEGY #7:  Virtual Office

Do you need an office at all. Many solos are working out of virtual and home offices or a combination of same. Some larger firms are reducing the size of their primary expensive downtown offices by having some attorneys work from home offices or other locations.

STRATEGY #8:  Marketing

Many firms actually need to spend more money on marketing. However, this does not mean that it should be wasted on sacred cows. Review marketing investments, eliminate feel good items, and insure that they are producing results. Reallocate funds.

STRATEGY #9:  Supplies and Other Purchases

Eliminate waste and unnecessary expenses. Consolidate with fewer vendors and solicit discounts for exclusive relationships.

STRATEGY #10:  Develop a Budget and Financial Plan

If you don’t have one – develop a budget and financial plan and work the plan.

Good luck!

 

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

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