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May 14, 2009

Two Attorney Compensaton System

Question:

Our firm has been getting by for 18 months since start-up.  We are starting to get some repeat business and I think we on our way.  However, my partner looked at the numbers for 2008 and realized that she made about a third more money last year, both in terms of actual dollars for her work and in terms of origination. Our actual hours were roughly even, but there might have been some slighter disparity.  Now were are having that first talk about changing from the straight 50-50 split to the perhaps the other extreme of "each woman for herself" (after jointly paying basic expenses).  What are your suggestions?

Response:

I have reviewed your comments. In small firms the best systems are those that are simple, easy to understand, and easy to implement. Often two partners start out on a 50%-50% arrangement and the arrangement eventually has to be changed when and if their situations change that has a major impact upon their overall contributions to the firm. (Notice I used the word contributions – not necessarily – fees collected).

However, until level of contributions change – I have often seen 50% arrangements work well in small firms that are looking to build a Firm – rather than simply their own practice and earn as much money as they can for themselves. When level of contributions change – in a healthy partner culture – the partners will be able to talk to each other and sit down and discuss an alternative arrangement that makes sense for them.

I encourage firms to look beyond single year timeframes – typically 3-5 year cycles. Sometimes in healthy firm cultures one partner may need to carry the other partner for awhile. For example, an attorney with a PI plaintiff practice may have wide swings and may need to be carried in lean times – but when the big fee comes in both share in the benefits. In other situations billing cycles mandated by clients, etc. can impact timing of collections. In your firm – it may be a little early yet to have a true picture concerning contribution. Sounds like you are both putting in about the same time investment in the firm and commitment even though one's numbers are higher. Is one of you managing the firm or doing other activities that still benefits the firm?

You must ask yourselves what kind of firm you want to be – team-based firm or group of space sharers or partnership of individual firms. Eat-what-you kill compensation 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 both of you. 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.

In the long term the highly successful law firms will be those that are team based that where the partners look beyond their own self interests and have a "firm first" attitude.

I think you need to have an open exchange about what kind of firm you want to build and the commitments each of you are willing to make to achieve that. You need to decide what you consider to be contribution and value to the firm – fees generated, fees originated, primary attorney fees, marketing, firm management, etc. If those commitments are in general alignment – they maybe you should stay on the 50-50 split for awhile longer. Another option would be to stay on the same split – but create a special bonus pool – say 25% of income that could be allocated on a discretionary basic for unusual accomplishments, etc. Of course you would have to agree on who gets how much. Another option would be to have a base draw and then either a formula or discretionary bonus pool for distribution of the excess.

The general trend in compensation systems in larger firms is toward more subjective based system rather than formula. However, many smaller firms do still use objective or formula based systems.

 

I hope this helps.

 

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

May 14, 2009

Strategic and Long Range Planning in Solo and Small Law Firms

Question: I am a solo attorney with no other personnel at the present time other than virtual employees. I hope to add a staff member later this year or early next year. I am frustrated with the success of my practice and feel that I am lost and have no sense of direction or plan for the future. I have been to seminars that talk about the need for a long range plan but it seems that the mechanics of the process is geared to firms that have other partners. How can I best go about long range planning?

Response: Long range (strategic) planning is hard to do by yourself. It is not just the plan that you end up with that is important – it is the planning process itself – done over an extended period of time – that yields out-of-the-box-thinking and real results. Brainstorming needs to take place and you need to work on your plan over say a four to six month period of time.

A strategic plan is different than a business plan. A business plan is a firm startup plan and often used for evaluating whether to startup a business and for securing financing or capital. Typically the audience is primarily external. A strategic plan is for internal use and thus is more of an outline of the firm's mission, vision for the future, long range goals, objectives to be measured in the short term, issues and obstacles that must be confronted, strategies, and specific action items with timelines and milestones. The plan should be short 10 pages or less and should have an implementation focus. Accountability should be part of the plan.

We have numerous solo and sole owner law firm clients that have successfully implemented long range strategic plans. Often we have worked with our client firms on such projects as a part of our six month business coaching program. In this way we are able to do a little each week with the client and serve as an accountability partner.

Click here for an article on planning

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

Apr 13, 2009

New Firm Start-up Where Should I Begin

Question: I am an attorney that has been in practice for 10 years with a large firm (200+) in the mid-west. I represented fortune 500 clients in the area of business and commercial transactions. I was a non-equity partner in the firm. Recently I was let go due to the economy and I have no idea when or whether I will ever be called back to work. For three months I have been applying for positions with no success. I am considering starting my own solo practice. Where and how should I start?

Response:

Being an attorney in solo practice will be a much different experience than what you are used to. You will have to handle more of the nuts and bolts of running and operating a practice. You will not have people to do everything for you like you did in your last firm. You will need to learn how to be an entrepreneur and think like a businessman.

First, I suggest that you give some thought as to whether you have what it takes to operate your own firm and plan out your business. The best way to go about this is with a business plan. Click here for an article on the subject.

After your have developed your plan begin developing your business identity, firm name, tag line, website domain name, and related graphic package. For ideas download a copy of our Best Practices Guide.

Consider legal structure for the firm. Register with appropriate governmental and tax authorities.

Determine where you will practice, how you will staff your practice, and techology needs. Keep as much of your overhead as possible. Consider virtual employees. At first do as much work yourself as you can. Add staffing resources as your firm grows. Don’t skimp on technology.

Implement a first class website on day one.

Good luck.

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

Feb 10, 2009

Using Brainstorming Focus Groups to Take the Law FIrm to the Next Level

Question:

We have a successful practice but need to do a lot of things differently to move to the next level. How can we generate some momentum and ideas?

Response:

Our advise – why not use a few brainstorming focus groups and do some brainstorming. We find that many firms either don’t engage their people or don’t know how to engage their people. Untapped ideas are in the heads of your attorneys and staff. Using brainstorming focus groups and brainstorming techniques can help the firm improve decision making and tap these ideas.

Brainstorming focus groups are not just another firm or staff meeting. A focus group consists of  (1) people with similar characteristics, (2) that provides qualitative data, (3) in a focused discussion, (4) to help understand the topic of interest.

Size

These groups are typically composed of five to ten people, but the size can range from as few as four to as many as twelve. The group must be small enough for everyone to have an opportunity to share insights and yet large enough to provide diversity of perceptions. When the group exceeds a dozen participants, there is a tendency for the group to fragment.

Purpose

    Brainstorming focus groups aren’t decision making groups or committees. They are used to generate ideas. The actual decisions are made after all the brainstorming focus groups are completed, not in the individual groups. The brainstorming focus groups are used to gain understanding about a topic so decision makers can make more informed choices.

The Brainstorming Process

Brainstorming is a technique whereby individuals or groups generate large numbers of ideas or alternatives relating to a decision without evaluating their merits. Listing alternatives without evaluating them encourages group members to generate ideas rather than defend or eliminate existing ideas. Evaluation occurs after a large array of ideas has been generated. Principles for brainstorming include:

§  All ideas should be listed. No idea should be evaluated during the first part of brainstorming.

§  Creativity should be encouraged. Participants should think outside of the box. All ideas should be recorded, regardless of how frivolous or irrelevant they seem.

§  Members should be encouraged to offer ideas related to those already on the list.

§  Asking each participant to record and then offer five to ten ideas can help start the session.

§  Setting a time limit for brainstorming, for example, five to ten minutes, can often stimulate the rapid generation of ideas.

 

Moderating the Discussion

Consider using a moderator team: a moderator and a recorder. The moderator, typically the administrator, the managing partner, or an outside consultant,  is primarily concerned with directing the discussion, keeping the conversation flowing, and taking a few notes. The recorder, on the other hand, takes comprehensive notes, operates the tape recorder, handles the environmental conditions and logistics (refreshments, lightening, seating, etc.), and responds to unexpected interruptions.

Recording the Discussion

A recorder should be appointed and all ideas obtained in the brainstorming focus group should be recorded by either tape recorder or written notes. Written notes are essential. Often ideas are initially listed on flip charts and later converted to written notes. The note taking should not interfere with the spontaneous nature of the session. Notes should be as complete as possible.

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

Oct 01, 2008

Surviving in the Present Economy

Question: We are a 12 attorney firm located in the mid-west. We are concerned about the impact that the economy is having on our practice and the current business environment. Our business is down and we are unsure what we should be doing financially to evaluate and improve performance – and survive.

Response:

According to Thomson West PeerMonitor Index the first quarter of 2008 marked the lowest point in nine quarters. Demand for legal services is shrinking, the billable hours growth rate has been declining since the second quarter of 2007, and productivity has been shrinking since late 2006. Trends are casting 2008 to be a challenging year for law firms.

Management of cash flow is critical. Here are our suggestions of how to examine where you are based upon receipts and your pipeline of future collections:

  1.  Monthly BillingsAre you budgeting your fee billings? Are your billing and collections on track? Are your individual attorneys and other producers meeting their revenue goals? Why not?
  2. Collections and ReceiptsAre your collections in alignment with your cash requirements for firm expenses, client advances, loan repayments, and attorney draws. Remember – the total expenses listed on the income statement does not represent all of your cash requirements. Balance sheet accounts such as partner draws, client advances, purchase of assets (equipment), and payments on loans, also involve uses of cash and must be taken into consideration. Typically, there is a lag of three months between the time of when you incur expenses and do work for a client and receive payment. Be aware of potential cash deficits.
  3. CostsHow are your actual expenses/costs tracking against your budget? Are you within your budget? If not – why? Investigate reasons. If over budget should you cut costs or is there a way to increase revenue? Sometimes you have to spend money in order to make money. What costs should be cut – and which should not? Be careful cutting marketing/client development investments.
  4. Accounts ReceivableAre they increasing or decreasing? What percent are they of your annual billings? Fifteen percent is high – five percent is within the range of acceptability. Uncollected accounts can sink the firm – stay on top of them with an effective management system. Deal with collection problems early – formulate a client acceptance/credit policy – get retainers up front – reject problem clients from the onset.
  5. Work in ProgressIs your work in progress increasing or decreasing? Why? Investigate reasons.This represents future receivables and future receipts. Are you on target? Bill immediately anytime during the month if work is completed – don’t wait until the end of the month? Bill monthly and cut-off bills by the 25th of the month so they are in the client’s hands by the 28th or 29th of the month.
  6. Unbilled Client AdvancesGet money from clients up front to cover these expenses or bill them immediately upon disbusement (if total client advance balance reached $100.00) regardless of the billing cycle established for the client’s fee billing. One exception may be contingency cases.
  7. Realization RateThe realization rate is the percentage of fees collected from the billable work of the firm’s timekeepers. Low realization rates indicates that attorneys are not effectively utilizing firm resources. Realization rates should be no lower than appropriately 90 to 95 percent.
  8. Lawyer – Client – Area of Law – MetricsExamine collections, accounts receivable, work in progress, unbilled client advances, unearned retainers, by lawyer, client, and area of law. Spot problems and deal with issues immediately.
  9. Producers Time ReportsAll producers (lawyers, paralegals, and staff) should keep time on billable and non-billable time and should enter into the computer system daily. Weekly time reports should be produced weekly and reviewed by firm management to insure that goals are being met for billable and non-billable time. Each producer should be provided with a copy of their own report weekly as well. Firm management should spot problem areas and identify reasons – i.e. – not putting in the time, lack of resources to delegate work, poor time managment or time keeping habits and practices.
  10. Trust Account BalancesReview this report weekly. If funds can be applied to work performed – transfer funds over to the firm’s operating bank account. Notify clients that need to replentish their retainers.John W. Olmstead, MBA, Ph.D, CMC

Sep 30, 2008

Communication Skills

Question:

We are a 17 attorney IP firm in the Southwest and I am the managing partner. We are having a lot of problems with poor attitude in the office, inadequate production, employee turnover, and we have recently lost a few key institutional clients. I believe that the core of our problem may be poor communication skills on the part of our attorneys? What recommendations do you have?

Response:

Poor interpersonal communications is often the root cause of many of the management problems that arise in law firms. Here are a few ideas for improving interpersonal communication skills:

  1. Develop a series – a repertoire – of oral communications styles as well as languages to use in various situations with clients, colleagues, and employees.
  2. Understand and manage your clients expectations – (1) clients true objectives for the engagement, (2) the boundaries of your role, (3) kind of information you will use, (4) your role in the engagement and the role of your staff, (5) the product/service you will deliver, (6) what support and involvement you will need from the client, (7) time schedule, and (8) frequency and form of communication.
  3. Employ effective listening techniques with your clients – (1) client face-to-face engagement debriefings, (2) client satisfaction interviews – third party, (3) client site visits, (4) opinion surveys, (5) feedback questionnaires, and (6) client panels/focus groups.
  4. Employ effective office communications systems to faciliate communications with your employees – (1) weekly/monthly staff meetings with agendas and minutes, (2) satisfaction surveys, (3) daily meeting with your assistant, (4) performance reviews tied to a performance management approach.
  5. Match communications complexity to appropriate communications vehicles (face-to-face, telephone, e-mail, memo, letter, voice mail, etc.) Example: Use face-to-face to counsel or critique employees – not e-mail.
  6. Reduce communications noise – (1) setup MS Outlook not to automatically download e-mail, (2) put cell phones on silent, (3) develop cell phone protocols, and (4) use voice mail effectively.
  7. Incorporate the six client service principles into your daily behavior – (1) feel good about yourself, (2) practice habits of courtesy, (3) use positive communication, (4) listen and ask questions, (5) perform professionally, and (6) under promise and overdeliver.
  8. Develop written job descriptions and office policy and procedural manuals.

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

Jul 15, 2008

Is There a Number One Tip For Improving Law Firm Client Service

Question:

We recently completed an informal client survey and were surprised at some of the feedback. Our scores were lower than anticipated. Clients believe that our services took longer than expected and fees were also higher than expected. We work as dilligently as we can for our clients and I don't see how we can improve turnaround or reduce legal fees. Suggestions?

Response:

Based upon client surveys that we do for law firms we find that one of the biggest problems is that the attorneys are doing a poor job of managing client expectations. The key is to under promise and over deliver. I suspect that upon the initial client meeting you are under estimating the timeline and low balling the fee range. Increase the promise – timeline and fee range and then shoot to deliver under that range. This will do wonders for improving the client relationship.

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

Jul 15, 2008

How Large Should a Law Firm Be When It Is Time to Hire an Administrator

Question:

How large should a firm be when it is time to hire an administrator?

Response:

There is no magic size. We just completed an engagement recruiting an administrator for a seven attorney firm. We also have law firm clients with over 40 attorneys that don’t have an administrator. I believe that an administrator, or office manager, is appropriate in firms of all sizes. It is a matter of attitude and commitment on the part of the partners and whether they are willing to delegate responsibility and authority to an administrator to run the day-to-day operations of the firm. The firm should start with a job description and then decide whether the firm is willing to delegate responsibility and authority. If not, the firm should not hire an administrator.

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

Jul 15, 2008

How Do We Prepare Our Law Firm For a Merger

Question:

We are a 25 attorney firm and we are discussion the possibility of searching for merger partners? What is the process?

Response:

You start with determining your merger objectives. Why do you want to merge? What do you hope to achieve? Is merger compatible with your strategic plan? What size of firm are you considering?

Once you are sure that merger exploration – in general – makes sense – you should insure that your house is in order. In other words – can anything be done to enhance the value and/or marketability of your firm? For example:

  1. Do you have a business or strategic plan? If not – how will you convince a potential merger partner that you have a plan for the future and know where you are going? Maybe now is a good time to work on that plan.
  2. Work on and clean up your financials. Improve the financial performance of your practice. Eliminate deadwood. Writeoff uncollectable A/R and WIP.
  3. Avoid entering into long term committments that might make your firm undesirable to another firm. (new long term leases, risky client matters/cases, loans, admission of new partners, unfunded partner buyouts/retirements, etc.
  4. Enhance firm image where you can.
  5. Develop a first class firm profile.

Next, develop a merger marketing plan and begin working the plan. Try to generate enough leads that you can explore merger with several firms rather than engaging in "random merger talks" which often result in isolated merger offers with you having no framework for comparison.

Use an outside consulting firm if you need help organizing, identifying candidates, and managing the process.

Once you have merger candidates identified – the real work begins. Here is a general outline of the process:

Merger Accessment (Due Dilligence)

People

Philosophies, personalities, life styles, do the partners like each other, why does the deal make sense.

Firm Name
Conflicts
Economics
Partner Compensation System Comparisons
Retirement, Voluntary Withdrawl, Expulsion Policies
Management Structure
Practice Compability
Practice Philosophies
Work Ethic
Firm Structure
Associate Management

Merger Implementation

If the two firms decide to proceed with a merger – then the process of merger implementation begins. A merger agreement is executed and a merger implementation plan it put in place. Then you begin working the plan. If the merging firms are of similar size (as opposed to a large firm acquiring a smaller firm) a lot of infrastructure work will need to be done – ranging from IT systems, management structure, space, etc. to accomodate the larger entity.

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

Apr 08, 2008

Succession: Obtaining Maximum Value for Your Practice

Question: I am the sole owner of a 12 attorney practice. I am 55 years old and am beginning to think about retirement. The other attorneys are associates in the firm. What do I need to be thinking about in order that I can transition out of my practice and have money for retirement. While I have put some money in a 401k, I am not yet financially secure enough to retire.

Response:

You are not alone. As the baby boom generation ages – more and more attorneys are asking this question. Unless you have an appropriate Exit Planning Strategy and put in place a sound Exit Plan, it is doubtful that you will be able to cash in on the full value of the goodwill that you have created. To exit successfully you need:

You will need to consider whether you should consider merger, sale of the practice to an outside buyer, or sale of the firm to the other lawyers in the firm. You need to find ways to institutionize the firm so that in additional to professional goodwill (your personal reputation and goodwill) you develop practice goodwill (goodwill of the firm that will remain after you have left the firm). Develop your lawyers and create a desire and motivation for them to want to be owners/partners in the firm. Develop your staff and practice systems. Diversify and stabilize your client base.

If you decide to sell to attorneys in the firm – begin the process early so that most of the buy-in is completed before your actually leave the firm. The longer the planning horizon – the easier they buy-in burden will be for others

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

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