Law Practice Management Asked and Answered Blog

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Aug 22, 2018

Law Firm Retreat Follow-up and Implementation

Question: 

I am a partner in a eighteen attorney firm in Milwaukee. Over the years our firm has held firm retreats, but the results have been disappointing – a lot of talk and little action. We have the same problem in our monthly partner meetings. We spend a lot of time in meetings – discussions and decisions made but little implementation. This week we are having a partner vote to decide on whether to have a retreat this year. Frankly, I will vote against it and I think it will be a waste of time. What are your thoughts concerning law firm retreats?

Response: 

I understand your frustration and concern. Many law firms have had similar experiences with retreats. Good ideas and decisions but no follow-up or implementation once the retreat is over. Often retreats are too loose with no structure or leadership.

Insure that the firm appoints a qualified retreat leader either from within the firm or someone outside the firm that has experience leading or facilitating retreats. Identify specific objectives and desired outcomes during the retreat planning phase and design in how follow-up and accountability for implementation will be achieved. Be sure you come away from the retreat with a specific plan for follow-up action on every problem discussed. For example, if you decide to start a talent search to fill specific position, or if you have assigned several partners members to work further on specific problems and report the results, it is important that individual assignments and target dates for reporting and completion be made explicit. Determinations of this kind should be recorded and made part of the minutes of the retreat. Further, a system of follow through meetings to assess progress is advised, in order to maintain the momentum achieved at the retreat.

Many law firms benefit considerably by incorporating specific retreat decisions into a twelve month plan and schedule of activities to meet firm objectives. Planning of this kind typically results in significant firm progress, even though there may be initial resistance to these efforts by some firm members.

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

Aug 01, 2018

Law Firm Merger or Of Counsel Arrangement and Due Diligence Information from Larger Firm

Question: 

I am a solo practitioner in upstate New York and I hope to retire three years from now and move to Florida and spend my retirement years there with my family. I have been talking with a larger firm, twenty-attorneys, in Albany that has an interest in me either merger my practice with their firm or joining as Of Counsel. My plan would be to work three more years, gradually phase back, and transition clients and referral sources.

I have had several meetings with the partners in the firm and they are now asking me for detailed due diligence information – tax returns, financial statements, etc. I have no problem providing these documents however I was wondering if I should be asking them for information. What do you think?

Response:

I believe that you are entitled to similar due diligence information from the other firm. You need to see what you are getting into.

Usually the smaller firm gets less – but they should share some information with you as you have with them.

I would ask for the following from them (or discuss with them):

  1. Five years profit and loss statements, balance sheets and tax returns.
  2. Lawyer and staff headcount for each of those five years.
  3. Current hourly billing rates.
  4. Description of practice area mix of clients by dollars collected – practice type and office location.
  5. Description of how the firm bills (hourly, flat rate, contingency)
  6. Copy of all leases (office space, equipment)
  7. Copy of malpractice insurance policy and last application.
  8. Salaries and benefits for equity and non-equity partners.
  9. Any governance plan or agreements.
  10. Copies of all partnership agreements or operating agreements for all business entities.
  11. Any documents pertaining to the retirement of partners including information as to obligations for partners who have already retired and those nearing retirement.
  12. Compensation data for equity and non-equity partners.
  13. Copy of the written compensation plan for equity partners if one exists or if not a discussion of how the compensation system works.
  14. Information on the line of credit and copies of all debt agreements.
  15. Copies of third party vendor agreements (equipment leases, subscriptions)
  16. Copy of the firm’s present malpractice insurance policy and most recent application.
  17. List of benefits provided.

I presume that you all have discussed any potential client conflicts of interest, etc.

You need to zero in whether the arrangement is going to be a merger or Of Counsel arrangement. If the arrangement is to be an Of Counsel arrangement the firm will be less likely to be willing to share all the information on the list and you will have less need as well. However, I believe you should at least have the basic financial and compensation information.

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

 

Jul 19, 2018

Law Firm Structure and Elevating Associates to Partnership

Question: 

I started my firm as a solo nine years ago in New Orleans. My practice focuses on maritime defense litigation. Over the years I have added associates and currently I have six associates working for me. I am overwhelmed with work – from the legal work that I am doing in addition to the business development and firm administration. My thought is that I should consider restructuring the firm by making some of my associates partners so I can offload and share some of the administrative responsibilities. I would like your thoughts. What are other firms in my situation doing.

Response: 

Years ago when I started in this business there were solo practitioners and there were multi-attorney firms that were partnerships. There were not many multi-attorney firms that were what I call sole owner firms – firms will many attorneys and just one owner. This has changed. More and more attorneys don’t want to be in partnerships with other attorneys. Sometimes this is a result of bad experiences in other partnerships. In other cases they simply want to go it alone. Also, more and more associates don’t want to take on the stress and financial obligations of partnership – they simply want a job that provides them with a decent income with work life balance. I have law firm clients with sole owners, fifteen to twenty attorneys, and fifty to seventy staff employees. These firm owners have hired firm administrators, marketing managers, and other such talent to offload the administration. While these firm owners have been enjoying the fruits of sole ownership eventually they will have to reevaluate their situation when they begin planning their succession and exit strategies.

I think you have to ask yourself the following questions:

  1. Is adding partners the best way to offload your administrative responsibilities? Should you hire a firm administrator?
  2. Are  you ready for partners?
  3. Do you have associates that meet your requirements for partner admission? Have you thought about these requirements?
  4. Do the associates that you would consider for partnership have an interest in being partners?

Give this some more thought – don’t just make partners to have partners or to have someone to handle administration.

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

 

Jul 11, 2018

Law Firm Goodwill and Valuation

Question: 

I am the owner of a six-attorney litigation firm in San Francisco Bay area. I am sixty and starting to give though to gradually transferring my interest to associates in the firm. I have heard other attorneys mention that I should get some goodwill out of my practice. I would appreciate your thoughts.

Response: 

Many law firm owners prefer to leave a legacy and keep the firm “within the family” and transition the firm to non-equity partners or associates in the firm at a discounted value and buy-in as an incentive to stay on with the firm and a reward for their years of dedication to the firm.

Some law firms – typically second generation or later firms – allow non-equity partners or associates to become equity owners with no buy-in whatsoever. The thought being that the real assets of the firm are its talent – its people and the firm’s priority is to retain and keep the best talent that it can. These firms also do not have hefty buy-outs for partners or shareholders leaving the firm other than possibly the initial founders of the firm. Over the years, such firms fund retirement through 401ks, profit sharing plans, and other mechanisms. When partners or shareholders leave the firm, they get their cash-based capital account, or share of retained earnings and their share of current year earnings.

A “founders benefit” is sometimes put in place for firm founders in which they may be paid a share of the accrual-based capital or retained earnings – WIP and A/R. They may also be paid a goodwill value as well either in the form of a multiple of earnings or a specific sum based upon a multiple of gross revenue.

The problem in many firms is that associates are still paying off student loan debts and they don’t have cash available to purchase the owners interests. As a result, if you don’t start early, the cash often has to come from future cash flows that are available after the owner leaves the firm from the compensation that the owner is no longer receiving.

You need to start early, get people committed and start selling affordable minority shares years before you retire so you can get at least half of your ownership interest paid for before you leave the firm and the other half paid out over a five-year time period.

Wait too long and your associates may feel they can just wait you out and inherit your clients without having to pay you anything.

Click here for our blog on succession

Click here for out articles on various management topics

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

Jul 04, 2018

Lawyer Performance and Setting Expectations

Question:

I am the owner of a real estate practice in Rockford, Illinois. I have two offices – one in Rockford and the other in Chicago. I started my practice twenty years ago and have had my associate for the past five years. He works in the Chicago office and I work in the Rockford office. Prior to this associate I had two other associates that did not work out. My present associate has fourteen years’ experience and worked in three other law firms prior to joining my firm.  While he has been with me for five years I am not happy with his performance. The legal assistant that works with him has advised me that he often does not come in the office until ten and often leaves in the middle of the day. Clients have complained that he does not return phone calls or emails. His production is low – his annual billable hours have never been above 1200 hours. I am paying him a salary of $98,000. I have had numerous conversations with him about these issues to no avail. Frankly, I am sick of it – I don’t trust him and things need to change. What should be my next step?

Response: 

I find that often owners of law firms and partners in multi-partner firms when dealing with associates often fail to really lay their cards on the table when counselling associates. They beat around the bush and fail to lay out expectations and consequences for non-compliance.

As owner of your firm you can’t beat around the bush and be sheepish concerning your expectations concerning desired performance and behavior in the office. Confront the performance or behavioral problem immediately. Manage such problems in real time. Don’t wait for the annual performance review and don’t treat serious problem as a “self-improvement” effort. Tell him how you feel about the performance or behavioral issue, the consequences for failure to resolve the issue, your timeline for resolving the issue, and the follow-up schedule that you will be using to follow-up and monitor the issue. If he must resolve the performance or behavioral issue in order to keep his job tell him so. He may need this level of confrontation in order to give him the strength to be able to deal with his issues.

Being a wimp does not help you or him. Tell him like it is and conduct a heart-to-heart discussion. You will be glad you did.

I would set a timeline for his performance improvement – say 60 or 90 days with weekly coaching follow-up meetings. Document these meetings. If he does not meet your expectations by the timeline you should terminate his employment and look for a replacement.

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

Jun 27, 2018

Elder Law Firm Expanding into Personal Injury and Other Areas

Question: 

I am a partner in a four attorney law firm in a small town south of Waco, Texas. We have two partners and two associates. Our practice is limited to elder law, estate planning, and estate administration. The practice was formed thirty years ago by the  two partners. The firm has built a strong brand in elder law and estate planning/administration and does a significant amount of business in several other counties. The firm is doing well financially. Our main problem is that we are overwhelmed with work and we need to hire an additional attorney. We have interviewed an attorney that is a partner in another two attorney law firm in the area that has some limited experience in small business corporate work and estate planning. However, most of his experience is in personal injury plaintiff, criminal, and family law.  If he joins our firm he wants to continue to develop these practice areas as well as bring his personal injury, criminal, and family law cases with him. Bringing him on board could solve our lawyer staffing issue as well as increase our business. Should we bring him on board?

Response: 

It sounds like the attorney you are considering is a trial lawyer and has limited experience in your practice areas and he wants to expand his personal injury, criminal, and family law practice. You need help in your core practice areas.

This would cause your firm to become more of a general practice firm rather than the specialty firm that you are presently. While there are general practice firms that handle elder law and estate planning/administration, more of the successful firms your size are specializing in these practice areas. Bringing these practice areas into your firm would totally change the firm’s brand, image, culture, and strategy. Marketing will be more complex. The firm will have to fund client advances for the personal injury cases. You need to revisit your strategy and ask whether you want to go this direction. Personally, I think you should pass. If you want to expand into other practice areas you might consider real estate and corporate. I have several elder law/estate planning firms that handle real estate and corporate work.

I would cast a wider net and look for additional candidates. I would start by looking for an experienced elder law/estate planning attorney. However, these attorneys are hard to find. You might have to hire and train a recent law school graduate.

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

Jun 20, 2018

Associate Attorney Compensation and Motivation

Question: 

Our firm is based in Springfield, Illinois. We have four partners and four associates. We are a general practice firm. All of our associates have been with the firm over ten years and each of them are receiving $100,000 base salaries plus discretionary bonuses. Our associates are excellent attorneys however none of them bring in any business  and their production numbers are low. Annual billable hours are below 1200 and working attorney fee collections are below $300,000. We have not given raises or bonuses for the last several years. We are losing money on some of our associates and not even covering our overhead alone making any profit from our associates. We are at a loss as what to do. Please share any thoughts or ideas that you might have.

Response: 

It would be interesting to know whether you set production goals such as billable hours or working attorney fee collection goals for your associates and if and how they are enforced. Billable hours should be in the range of 1600-1750 per year and fee collections should be $300,000+ for associates being paid $100,000 per year. It sounds like production goals either don’t exist or are not enforced.

I suggest that you look in to the cause or causes of your associates low production. Here are a few questions you should ask yourselves concerning the cause of your associates low production:

  1. Does the firm have enough work for the associates?
  2. Are the associates working enough hours? What is their work/billable hours ratio? Goal 70%.
  3. Are the associates clear as to their goals – billable hours/fee collections.
  4. Do associates have time management issues?
  5. Do associates have time keeping issues?
  6. Are there consequences for poor production?

I suggest that you meet with each of your associates, address the above questions, and determine what is going on. It could be one or all of the above. If the firm does not have enough work for the associates you need to determine if partners are delegating sufficient work, whether business is down at the firm (short-term vs long-term), and whether the firm may have too many associates for the work that is available. If there is simply not enough work, has not been enough work for some time, and it is projected that the firm’s workload will be the same for the foreseeable future the firm will need to consider eliminating an associate’s position or reducing the work hours, and compensation, of one or more associates. If the work is there and associates are just not working and putting in the hours you need to insure that goals and consequences for non-performance are in place – you might want to consider changes your compensation system. If associates are having problems with time management or timekeeping conduct some training sessions and coaching.

Some firms have changed their systems whereby associates are paid a base salary plus a bonus for billable hours or collected fees over a predetermined threshold. However, incentive bonus work better when salaries are kept low. Often when salaries reach $100,000 or more additional bonuses may not motivate attorneys that are not hungry for more, are comfortable, and their priority is work-life balance.

While you must get associate compensation right in order to acquire and retain top associate talent as well as reward performance and reinforce desired behaviors, the starting point is hiring and retaining the right people to begin with.

Research from a classic business study that was highlighted in the popular business book “Good to Great” (Collins, 2001) authored by Jim Collins found that the method of compensation was largely irrelevant as a causal variable for high and sustained levels of performance. Other research also bears out that performance and motivational alignment are impacted by intrinsic and other factors other than just extrinsic factors such as compensation or methods of compensation. Over the years I have seen too many partners leave lucrative situations in law firms to join other firms for less compensation or to start their own firms to suggest that it is only about the money or compensation package.

Your compensation system should not be designed to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there. Your compensation system should support that effort.

James Cotterman, Altman & Weil, Inc., (Cotterman, 2004) contents that there are two groups of employees for whom compensation is not an effective management tool. The intrinsically motivated (6% to 16% of partners perhaps) do not need compensation as an incentive. The struggling performers (another 6% to 16%) will not react favorably to a compensation system that rewards positive behavior.

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

May 16, 2018

Law Firm Client Surveys – How to Collect and Report the Data

Question:

Our firm is a sixteen attorney firm in Chicago. Our marketing committee has been discussing implementing a client survey program. We are not sure where to start or how best to collect and report the data. Your thoughts would be appreciated.

Response: 

Surveys can be used for a variety of purposes including the following:

I assume that you are planning on doing a client satisfaction survey in order to solicit feedback on how well the firm is meeting client needs, quality of services being provided, and additional needs that the client may have where the firm can provide services.

The type of survey will depend upon whether your clients are individuals or institutional clients such as corporate or governmental. If your clients are institutional I recommend that you conduct telephone structured telephone interviews with these clients using a interview questionnaire consisting of quantitative and qualitative questions. If you have a large number of institutional clients then you may want to consider conducting these interviews with your top fifty, twenty-five, or ten top clients and use a paper mail survey or online survey for the remainder. For individual clients you may want to use a paper survey or online survey for your entire database of individual clients and thereafter a paper mail survey or online survey at the conclusion of a matter. Another option would be to survey a random sample of your clients.

Once the surveys are completed – whether telephone interviews or paper mail or online surveys the questionnaires/surveys will need to be tabulated and provided in some form of a report. Some firms use two Excel spreadsheets – one for the quantitative responses and one for the qualitative/narrative responses for interview and paper mail questionnaires.  Then averages, percentages, and other summary statistics can be calculated for the quantitative responses. If you use an online survey service such as Survey Monkey the tabulation and the statistics will be done already for these surveys. If you have a Survey Monkey account you could also enter your interview questionnaire and paper mail questionnaires responses into Survey Monkey and use it rather than Excel. If you want more sophisticated statistical analysis you might want to look into statistical software such as SPSS which is sold and marketed by IBM.

Once you have summarized analyzed the questionnaires you may want to prepare a summary report document using your word processing software. Include the tabulation, statistical calculations, charts, etc. as attachments to the report.

There are several articles on our website – see links below – that discuss client satisfaction survey programs and how to get started.

Click here for our blog on client service

Click here for our article on client satisfaction

Click here for our article on client surveys 

Click here for our article on analyzing survey results

Click here for our article on developing your client service improvement plan

Click here for our article on tips for rewarding and recognizing employees

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

May 02, 2018

Law Firm Overhead and Profit Margins

Question: 

I am an attorney in New Orleans that has been a lawyer for ten years. I practiced with a small firm for eight years as an associate and then opened my own firm two years ago. I primarily work from home supplemented with a virtual pay-as-you-go office. I do not have any staff employees. I have been approached by a fourteen-attorney firm that would like me to join their firm as an income partner. Their offer includes a salary which I feel is low and a bonus based upon a percentage after covering my salary, other direct costs, and indirect firm overhead. The overhead allocations seem extremely high to me. In my practice I am bringing in around $100,000 in gross fees and my overhead averages $10,000-$15,000 per year. My profit margin is around 90%. I feel like I am better off building up my practice rather than accepting their offer. What are typical overhead and profit margins for law firms?

Response: 

We have to be careful how we define overhead. Overhead is generally to be considered all law firm expenses less attorney salaries and sometimes less paralegal salaries. The overhead ratio would then be the overhead divided by firm revenues. Profit margin is  expressed in terms of owner (partner, shareholder, etc.) earnings. In other words what is going into the owner’s pockets in terms of salary, share of profit, etc. Owner earnings is firm revenue less all firm expenses including associate and paralegal salaries but not including owner salary or compensation. The profit margin is total expenses (excluding owner compensation) divided by firm revenues.

A desirable profit margin range for law firms is thirty-five to forty-five percent.  Some firms are able to attain fifty percent. Profit margins depend upon the type of law practice, leverage ratios (associates to partners), how well the firm is managed, etc. I have some very successful firms with profit margins as low as twenty percent but the partner earnings are very high.

Your current overhead and profit margin is not sustainable in the long-term. While you have low overhead and a high profit margin you also have low earnings. You are only earning $85,000. You will soon reach a point where in order to increase your revenues you will have to hire people, acquire office space, and buy phone systems and other equipment. When this occurs you will be in a similar situation as to the law firm you are talking with.

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

Jan 17, 2018

Attorney and Staff Performance Compensation

Question: 

I am the firm administrator for a twenty-two attorney firm, twelve partners and ten associates, in downtown Chicago. I have been with the firm for seven years. The firm pays the associates and staff a base salary plus a end of year discretionary bonus which is the same for all staff and associate attorneys. The firm does not do performance reviews and honestly I believe the raises are simply an annual cost of living adjustment and the bonus at the end of year a gift. Many of our associates and staff have been here for many years and salaries are getting out of control. We would welcome your thoughts.

Response: 

There are two basic compensation philosophies, which should be seen at opposite ends of a continuum. At one end is the entitlement philosophy and at the other end is the performance-orientated philosophy.

Entitlement Orientation

The entitlement philosophy can be seen in many firms that traditionally have given automatic increases to their employees every year. Further, most of those employees receive the same or nearly the same percentage increase each year. Firm’s and employees that subscribe to the entitlement philosophy believe that employees who have worked another year are entitled to a raise in base pay, and that all incentives and benefit programs should continue and be increased, regardless of changing economic conditions. Commonly, in firms following the entitlement philosophy, pay increases are referred to as cost-of-living raises, whether or not they are tied specifically to economic indicators. Following an entitlement philosophy ultimately means that as employees continue their employment lives, firm cost increase, regardless of employee performance or other firm competitive pressures. The firm acts as Santa Clause at the end of the year, passing out bonus checks that generally do not vary from year to year. Therefore, employees “expect” to receive the bonuses as another form of entitlement.

Performance Orientation 

When a performance orientated philosophy is followed, no one is guaranteed compensation just for adding another year to firm service. Instead, pay and incentives are based on performance differences among employees. Employees who perform well get larger compensation increases; those who do not perform satisfactory receive little or no increase in compensation. Thus, employees who perform satisfactory should keep up or advance in relationship to their peers in the labor market, whereas poor or marginal performers should fall behind. Bonuses are paid based on individual, practice group, or firm performance results.

Few law firm are totally performance-orientated in all facets of their compensation systems for staff and attorneys. However, more and more firms are breaking the entitlement mode and associate and staff compensation systems are being redesigned for that are performance focused. Santa Clause bonuses are being discarded and replaced with measurable performance bonuses. Salary increases are being tied to increases in skills, competencies, and overall performance based upon performance reviews.

Click here for our blog on compensation

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

 

 

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