Law Practice Management Asked and Answered Blog

Category: Law firm management

Dec 17, 2013

Law Firm Management – Managing in a Time of Shrinking Demand and Excess Capacity

Question:

Our Chicago law firm of 17 attorneys – 12 partners – 5 associates – is entering its second decade. While we were extremely successful during our early years, the last few years have been a challenge. Since 2008 we have been holding our own and doing okay. We have not laid off any attorneys but the partners are making less money than they made three or four years ago. Billable hours and production seems to be down? Do we have a work ethic or motivation problem? What can we do to get the attorneys producing more billable hours? I would appreciate your thoughts and any suggestions that you may have.

Response:

This is an issue that many firms are experiencing. Here is what I am seeing in firm after firm:

  1. Lower billable hours – in some firms hours are 100 to 200 hours less per attorney than they were a few years ago.
  2. Lower or stagnant collected fee revenues.
  3. Increased expenses
  4. Lower or stagnant profits and profit margins resulting in depressed partner earnings.
  5. Lower associate turnover (due to economy and employment situation for lawyers – many associates are staying put – getting raises – resulting in higher production cost structure)
  6. Declining realization rates. (Firms that had realization rates in the 90% range have seen their realization rates decline into the mid 80% range.)

Several of our clients recently found that they were barking up the wrong tree. They assumed that the lower billable hours and productivity was a result of associates and partners not working hard enough and were searching for compensation approaches to motivate the attorneys to work harder. Further analysis however revealed that the real problem was reduced client demand and excess lawyer capacity. As a result approaches were taken to:

  1. Find ways to use the excess capacity rather than lay off lawyers completely. (This was considered a last resort)
  2. Rather than working less – non-billable hours were specifically targeted in individual attorney personal business plans with specific goals in marketing and other firm related activities to develop firm infrastructure, systems, and marketing intended to increase demand for the firm's services. 
  3. Fiefdoms were broken down and attorneys and staff were cross-trained in other practice areas so that more key personnel could achieve full utilization of 1650-1750 billable hours.
  4. Work hours were reduced for newer attorneys and staff that could not achieve full utilization.
  5. The firm expanded into additional geography areas with cost effective remote intake offices and new service offerings. 

Examine your financials and talk with you people so that you can discover the real problem – work ethic, motivation, compensation, or client demand and lawyer capacity. Once you discover the real cause of the problem you will be able to think you way to the solution.

Click here for our blog on financial management

Click here for our blog on profit improvement

Click here for articles on other topics

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

 

 

Sep 22, 2010

Characteristics of Successful Law Firms – Basic Building Blocks – Block 5 – Planning

For the past four 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, management, and partner compensation blocks have been discussed. 

The fifth basic building block is planning. Successful firms have a long range business or strategic plan in place.   

Based upon our experience from client engagements we have concluded that lack of focus and accountability is one of the major problems facing law firms. Often the problem is too many ideas, alternatives, and options. The result often is no action at all or actions that fail to distinguish firms from their competitors and provide them with a sustained competitive advantage. Ideas, recommendations, suggestions, etc. are of no value unless implemented.

Well designed business plans are essential for focusing your firm. However, don’t hide behind strategy and planning. Attorneys love to postpone implementation.

  • Elements of an effective business plan should include:
    • Decision as to direction of the firm
    • Data collection and review
    • Data collection and review
    • Action plans
    • Implementation and follow-up mechanisms

    Failing to plan is planning to fail.

    Click here to read my article on the topic.

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

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

    • Sep 14, 2010

    Characteristics of Successful Law Firms – Basic Building Blocks – Block 4 – Partner Compensation

    For the past three 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 building, and management blocks have been discussed. 

    The fourth basic building block is partner compensation. Successful firms have a good partner compensation in place. Partners frequently advise us in confidential interviews that they are more dissatisfied with the method used to determine compensation than with the amount of compensation itself.

    How much and how partners are paid are probably the two most challenging management issues that law firms face. Many law firms are struggling with compensation systems that no longer meet the needs of the firm and the individual partners. Failure to explore alternatives to failing systems often result in partner dissatisfaction leading to partner defections and disintegration of the firm.

    In many law firms compensation systems have been counter-cultural and failed to align compensation systems with business strategies. As more law firms move toward teams many are incorporating new ways to compensate partners in order to develop a more motivated and productive workforce. Team goals are being linked to business plans and compensation is linked to achieving team goals. Such systems reinforce a culture that significantly advances the firm’s strategic goals.

    People tend to behave the way they're measured and paid.

    What gets measured and rewarded – is what gets done.

    However, be advised that compensation does not drive behavior – it maintains status quo. Motivation requires leadership which can have a greater impact upon a firm than anything else.

    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.

    Click here to read my article on the topic

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

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

     

    Sep 08, 2010

    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 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)

    There is a difference between management (governance) and administration.

    Partners and law firm owners should be focusing their time on the management issues rather than administration.

    Management includes:

      – Productive activities, including those of individual lawyers and the firm as a whole.
      – Quantity, quality, and economic soundness of the work.
      – Development of lawyers and future leaders of the firm.
      – Formulation of policies that will determine the firm’s character
      – Financial planning, both short-term and long-range.
      – Marketing and business development.
      – Partner compensation and profit distribution systems

      – Other decisions requiring partner approval

    Almost everything else is administration.

    Hire an office administrator, manager or assistant for the administrivia matters so the partners can focus on the management concerns of the firm.

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

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

     

     

     

     

     

    Almost everything else is administration.

    Hire an office administrator,office manager or assistant for the administrivia matters so the partners can focus on the management concerns of the firm

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

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

     

     

     

     

      

     

     

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