Make More Rain : blog, firm culture

Heller in the Cellar

Admin — Wed, 05 Nov 2008 00:38:15 GMT

I read this article on the downfall of Heller Ehrman with great interest. What this doesn’t say is that Heller was a firm who last year had profits per partner in excess of $1,000,000, and in 2004 was ranked 2^nd on the American Lawyer’s A List. The key takeaways are that weak leadership, and the resulting lack of direction and ability to make key decisions, doomed the firm. The dissolution of the firm was brought to bear by lenders who called in loans when the firm’s partnership numbers dwindled below what was allowed in financial covenants. In essence, a “bank run” ensued with partners leaving, which caused the banks to act. (The current financial crisis likely did not help).

There are other firms who are similarly exposed, and while law firms generally don’t have a lot in the way of “retained earnings,” it does not mean that their financial health should not be scrutinized. Fixed costs, equity partner contributions, and debt financing are all things that can bring about the end of a firm in challenging times if managed inappropriately. As a managing partner at the conference I attended last week said, “lawyers often vote with their feet.” That’s what happened here. In my view, this shows the delicate balance firms must face in building consensus while still being able to make tough decisions. Increasing profits year over year certainly helps.

- Bo Yancey

Law Firm Talent Management Doesn't Stop with Recruiting

Admin — Thu, 30 Oct 2008 21:57:09 GMT

Without question, gaining an understanding of the characteristics of successful lawyers within individual firms can help firms to make wiser recruiting investments. The “Moneyball” project worked on by Kerma Partners and Lexis Nexis’ Redwood Think Tank focused on the characteristics of lawyers before they entered the law firm studied. Valuable information for the firm to have? Certainly, if thoughtfully incorporated into a recruiting strategy.

However, recruiting the best candidates for success within a firm’s culture is only part of the story. What’s the strategy to develop these associates after they are hired? The most qualified new lawyer can be mismanaged (or unmanaged), whittling away at the likelihood of success. The good news is that regardless of the candidate’s development before being hired, his/her development is largely within the control of the firm.

While the recent spotlight on analytics around recruiting efforts is very positive momentum, a firm really should not focus on a recruiting strategy without building a complementary development strategy. Over the past year, the Think Tank has been studying what differentiates successful lawyers once they begin their careers. In the handful of firms we’ve looked at, we have seen a (varying) correlation to success for attributes such as the type of exposure an associate receives, the clients they work with, and the volume of work they perform. Look for an article summarizing these results in the near future. As with the Moneyball conclusions, it will be important for firm managers to view information about the success of their own lawyers in the context of their own firm’s culture.

I welcome feedback and ideas for attributes to test as we continue to apply real analytics to the issues surrounding talent management in law firms.

-Kris Satkunas

Moneyball Indeed!

Admin — Wed, 29 Oct 2008 23:13:18 GMT

Buzz abounds concerning the recent “Moneyball” project completed by the Redwood Think Tank and Kerma Partners. A lot of the reaction seems to focus on trying to apply the results for a specific firm to the industry as whole. This misses the point entirely.

The basic premise of the study is that there is value in breaking away from recruitment as usual. Spending millions of dollars to recruit the same small pool of candidates everyone else is targeting is not efficient. Within the context of a broader set of talented, accomplished law students, traits should emerge from deeper study that allow firms a more focused approach. Firms who develop the sort of self-awareness a study of this type creates have an opportunity to create substantial competitive advantage in their ability to attract the candidate lawyers (entry-level and lateral) best suited to long term success in and for the firm. On the flip side, retention rates (and the cost of associate attrition) should be dramatically reduced.

With regard to the question about the application of these conclusions industry-wide, there are a number of important points to draw. First, a sample size of 1 is far from telling. In fact, I would expect to find a number of firms for whom the conclusions drawn would be exactly opposite of those for this first firm. Of course, this is not to say that interesting trends won’t emerge as the study is expanded; they will. Which ones, however, will only become clear with a greater sampling. Secondly, and I believe most importantly, the point of the exercise is to not really one of knowing which candidates will make the most successful lawyers generally but specifically, in the context of the firm’s culture, business and experience. This point cannot be overstressed. Yes, we may find that some traits can be correlated with expected success in the profession. That said, any particular firm may find this trait to be unimportant in its context or even negatively correlated. The power of the Moneyball study resides its law firm specificity.

-Norm Mullock

Does A Cult Of Personality Dictate Your Firm Strategy?

Admin — Fri, 23 May 2008 07:00:53 GMT

David Maister wrote an article in 2007 related to the conditions that confront firms who face strategic changes (Are We In This Together? The Preconditions For Strategy). In it he wrote of four types of personalities:

Type 1 is the solo operator who values independence, wants to make little investment in the future, but is willing to bet on his (or her) ability to catch fresh meat each and every day. I call this the Mountain Lion approach. “Pay me for what I do today (or this year.)”
Type 2 is the individual who prefers to act in coordination with others, but doesn’t like to invest (or defer gratification) too much. I call these people (collectively) the Wolf-Pack. “If we act together we can kill bigger animals, but it had better pay off soon or I’m joining another Pack!”
Type 3 is the individual who wants to be independent, but is interested in building for the future by investing time and resources to get somewhere new. Such people remind me of Beavers building dams to provide a home for their (own) family.
Type 4 are individuals who want to be part of something bigger than they can accomplish alone, and have the patience, the ambition and the will to help the collective organization invest in that future (He references humankind, Ants and Bees as possible personifiers - I'll stick with Ants).

One of the things that draws me to this article is that I can identify people in the firm in which I worked in all the above types. The Mountain Lions were the highest producers and top originators; the Wolf-Pack were those who lived off the fat of the Lion's spoils and could churn out work; the Beavers were those who just did the work and quietly practiced law; the Ants were those who just went along with what was decided and never had much input or care into the direction of the firm.

The dynamics led Lions and wolves to form alliances and complain of the ants. In spite of the work ethic of the ants, they lost clients, had poor billing practices, and always ended up being the worst performers in the firm.

Thus, most initiatives failed in our firm. When decisions needed to be made, lions and wolves teamed up against ants. The lack of unified purpose left a conference room thick with self-preservation and under-the-breath animosity. Maister summed it up nicely:

It is hard to identify and create buy-in for what “we” (i.e., the firm) should do if there is no strong sense of “we” — a mutual commitment and sense of group loyalty and cohesiveness. Similarly, it can be meaningless if the members of the firm are not committed to go on a journey together into the future.

Problems result when a cult of personality forms around some in the firm (typically the lions). Left unchecked, the lions gain an air of invincibility and management becomes practically impossible. On the other hand, poor performers are a drag on the firm and lack of accountability can tear apart a firm. The only impetus to change can end up being a a dip in profits and/or a lion or wolf going to another firm. Both of these events are bad times to begin a discussion of change.

It would be unwise to deny that changes need to be made to adapt to the changing economy. There is little reason to expect the economic down cycle to end soon. The real estate boom is being replaced by the volatile commodities boom (energy and food). Globally, businesses are transitioning into "defense mode"; ie, shrinking investment, laying off employees not directly related to long-term strategic goals, hoarding money. Law firm cash flows lag, on average, 160 days. You may not feel it today, but soon your cash flow will be affected.

How will your firm adapt? There are many blogs talking marketing and business development ideas. This month alone there are several who have discussed marketing and client development:

Bruce Marcus, May 17th: NO PAIN, NO GAIN (Is The Marketing Return Worth The Risk?)
Kevin O'Keefe, May 22nd: Effective presence marketing via blogs and social media
Bruce MacEwen, May 12th: Who's On Your "Red Team?"
Tom Kane, May 20th: Full-Time Client Feedback Person - The Next Trend?

Though counterintuitive to some, maintaining or even increasing spending on business development during market downturns can lead to more profitability (RVs, Bananas and Recession-Proofing the Law Firm, Marketing Advice for Lawyers During Economic Down Cycles). One thing should be certain: maintaining the status quo should be off the table.

Anthony Cerminaro (BizzBangBuzz) wrote of a top ten list of obstacles to making changes in his post Overcoming Resistance To Change:

Procrastination;
Well-meaning naysayers and apologists;
Fear of failure (defeatism);
Impatience;
Waiting for the whole plan to be in place;
Lack of self-confidence or cultural intimidation;
Inflexibility or lack of adaptability;
Trying to do it all yourself;
Lack of forethought or concentration;
Lack of necessary skills or talents.

His post also provides suggestions to overcome the above.

To effectively create positive change in your firm, you must first determine what changes need to be made. This requires a thorough understanding of your current position and requires some forethought into what should be your firms strengths and weaknesses going into the next few years. Then a plan needs to be devised that will address the weaknesses and take advantage of the strengths based on the opportunities showing up in the marketplace. Measurable performance indicators need to be established that further your plan. Then the difficult part: gaining consensus.

The dynamics of your firm will dictate the direction you go and the ability to form a consensus to act. The degree of success in getting the lions and wolves on board will determine whether the plan will ever gain favor. The degree of accountability placed upon everyone may end up being the deciding factor.

Partner Cost And Client Profitability, (Part IV)

Admin — Tue, 20 May 2008 07:00:39 GMT

This is the fourth in a series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. The third article, titled Partner Cost And Client Profitability, (Part III) , is focused on basing a partner's direct cost on a "minimum margin percentage". This article is focused on a related methodology: using a "minimum margin dollar amount" to allocate partner direct cost.

Thus far, we have evaluated a number of methods of allocating partner direct costs (compensation) to a client. Since firms have differing long and short term goals, levels of partner compensation, and thought processes about client profitability, we have concluded that there is not one perfect solution for this question, but instead a handful of recommended options.

Minimum Margin $ (or fixed margin $ for firms with closed compensation):

Very similar to the Minimum Margin %, this methodology differs only in that the threshold is set as a dollar value instead of a % of standard rate. Some firms we interviewed think about partner profitability in dollars, stating as an example that each partner should have an annual margin (standard revenue less direct costs) of $100M on their bRate MinimumMargin Minimumillable time (hourly margin is an option as well).

In the example, again we have the same partners but now each is given a minimum annual margin of $100M (or $56 per hour based on 1800 std hours). Since the Rainmaker and the Dept. Manager have fully loaded margins much less than this amount, they are set to the minimum while the Jr. Partner remains at his full compensation level. Notice that with this methodology, while both the Rainmaker and the Dept. Manager are at the minimum threshold, they have different Direct Margin %. While the dollar margin is the same, the higher rate timekeeper has a lower margin %, thus encouraging a billing attorney to use the more junior (or lower cost lawyers) on their matters.

Role	Comp	Std Rate	Minimum Yearly Margin	Minimum Hourly Margin*	Cost Rate*	Direct Margin
Rainmaker	$1MM	$250	$100M	$56	($194)	22%
Dept. Manager	$500M	$200	$100M	$56	($144)	28%
Jr. Partner	$150M	$150	$100M	$56	($83)	44%

*Assumes 1800 standard billable hours expectation

Advantages of the methodology:

It ensures that every partner has a positive margin associated with his/her hours when valued at standard rate. While one may purposely choose to lose money on specific matters through discounting, there should be margin on every hour of time when valued at published rate.
It is simple. Firm leaders need only to decide on one variable that can be based on firm analytics and margins for other titles (e.g. income partners or senior associates).
It is based on the partner’s published rate. While total compensation can rise and fall with firm profits, this relative cost will not fluctuate and this method is in line with thinking about compensation for a partner’s work effort.
The most highly compensated partners will be forced to the minimum margin ensuring they appear less profitable than junior partners, therefore supporting a leverage model.
Multiple partners hitting the minimum margin level will have different margin % if they have different standard rates, further promoting a positive leverage model.

We have to address the weaknesses of this approach as well:

A firm will need to decide on the minimum margin. While strong arguments can be made for a certain threshold, there may still be dissenters.
Each partner who is affected by the minimum threshold will have the same margin (in dollars), leaving discounting as the only differentiator of profit on billable time

Like the Minimum Margin %, the strengths of this methodology prevail over the weaknesses and many firms have found this option easy to implement and easy to gain support for (due to minimal arbitrary decisions). In the final two entries, we will discuss some variations on the two minimum margin methodologies (% and $) and discuss a set of criteria to help a firm determine the pros and cons of each.

Managing Partner Forum Attendees: Business Development Most Effective Way To Improve Profitability

Admin — Fri, 16 May 2008 07:00:54 GMT

This past week, The Remsen Group held the Southeast Managing Partner Forum in Atlanta. Fifty-eight participants attended representing thirty-nine firms in the Southeastern region. According to 23% the participants, marketing and business development was the most effective way to improve long-term profitability. This eclipsed raising rates, which was rated as the most effective way to improve long-term profitability by 21% of respondents.

According to the 2007 Law Firm Economic Survey from LexisNexis, marketing and business development was second only to rates as the most effective way to improve profitability. Yet only 3% linked compensation to marketing and business development activity. It is apparent that firms consider marketing and business development as important keys to improving profitability.

In our 2008 Survey (currently accepting submissions - please click here if you would like to participate), we dedicate 19 questions on business development. We hope to be able to flesh out what works for firms and what isn't working to improve profitability.

In a year where the majority of economic news points to an economic downturn, how a firm invests now will determine what opportunities open for it after the economy recovers. It's worth reviewing some past posts that help firm's manage down cycles and prepare for the eventual upswing:

Another interesting statistic that follows earlier surveys is that over 2/3rds of the attendees of the Managing Partner Forum in Atlanta did not follow a firm-wide strategic plan. John Remsen, along with John Smock and Thomas Grella, Esq., have teamed up to provide a web seminar on Law Firm Strategic Planning. John Remsen is the owner of The Remsen Group, a marketing consulting firm that is focused on the law firm market. John Smock is a management consultant and partner with Smock Sterling strategic management consultants. Mr .Grella is the Managing Partner of McGuire Wood & Bissette, PA and co-authored the book The Lawyer's Guide to Strategic Planning published by the American Bar Association. The webinar is scheduled for June 10th at noon eastern. To register, click here.

New Advocate Group Targets Work-Life Balance At Law Firms

Admin — Thu, 27 Mar 2008 13:59:57 GMT

A guest blogger for JDBliss writes on March 20th about a 3L law student at Standford Law School who has built a new organization trying to influence how Big Law firms treat their associates. The law student

"was disturbed by the stories he heard from lawyer friends about 60-hour weeks poring over mind-numbing documents, young associates getting little feedback on their performance, and the small percentage of associates who made partner after years of toil."

Instead of accepting the "status quo", he started an organization focused on reforming law firms. According to the post, the group has already made an impact on firms as many have started to:

provide more flexibility for lawyers who are parents,
offer mentorship programs for newer attorneys,
change or eliminate the billable hour in favor of fee and compensation arrangements that reduce pressures on associates,
evaluate newer lawyers based on the skills they have developed rather than their longevity at the firm, and
give employees credit for pro bono service and other firm-related work such as recruiting.

Wait a second. Something is missing from the above. Where is the "reduction of obnoxiously high starting salaries for graduating law school students"? Must have been an oversight. I have little worry, though. Through the commitment of this brave group, I am certain law firms will respond by lowering associate salaries from their current ridiculous levels through the group's "influenc[ing] the employment practices of law firms by highlighting firms' commitment to their lawyers' work-life balance, to diversity, and to professional development during the lawyers' careers."

If this too is not a goal of the group, the membership of "more than 1,000 students" may have unwittingly given firms a reason to do so.

One of the above bullet points does appear, in principle at least, to validate findings in a recent Harvard Business Review article about which I wrote on March 14th. The desire to move away from billable hour requirements in exchange for other arrangments that are more task oriented fits into the HBR argument of "Gen Y"'s focus on results rather than method.

I also can't argue with the need for mentorship programs and merit-based promotion. Both of these needs help the firm increase revenue and value not only to clients but firm professionals as well.

If the group wants others to take it seriously, though, it may want to consider a few things:

If you want a work-life balance, you have to understand that your salary will not be as high. There are costs to balancing your life. Make the same argument for reducing pay for associates.
Clean up the site. I can't take seriously a movement to drive down work standards written with such a lazy approach. No capital letters starting sentences? The grammar is so bad that it reads like a rambling manifesto rather than a reasoned argument.
Highlight your pro bono initiatives and how it has affected the life of the members who participate.

I can't help but think of what those in other industries would think reading that site (besides the poor drafting). Imagine a coal miner or construction worker or any other type of industry where long hours are required reading it. Attorneys who get paid upwards to hundreds of thousands of dollars a year starting pay complaining about their plight.

As they say in the south, "bless your heart".

The Case Against Income Partners

Admin — Wed, 19 Mar 2008 07:00:45 GMT

I have suggested utilizing a non-equity partnership tier as a way to reward attorneys who are not yet ready for firm ownership. Jim Cotterman has made an argument against it. In my assessment, non-equity partnership can be a tier to place attorneys who excel in some things, such as working files, but don't have the skills to bring in new clients or matters or don't have the requisite discipline to be a firm owner. Cotterman, however argues that non-equity partner tiers can end up being dumping grounds for the mediocre.

Cotterman cites a May 2006 study, An Empirical Study of Single-tier Vs. Two-tier Partnerships in the AmLaw 200, by Professor William Henderson at the Indiana School of Law. The study documents that average per equity partner income in single tiered partnerships are significantly higher than two-tiered partnership firms. The study noted:

The higher profitability of single-tier firms appears to be a function of higher levels of prestige, which enable single-tier firms to (a) attract and retain a more lucrative client base, and (b) run a more rigorous promotion-to-partnership tournament in which associates work longer hours and are less secure in their futures with the firm.

Cotterman does believe there are certain situations where establishing income partners could be a good idea, including the reasons I mention above. How do you feel about this? In the 2008 Law Firm Economic Survey, we are asking respondents if they have a non-equity partnership system in place. With this information, we will be able to determine whether equity partners in two-tiered partnership firms make more or less than those in one-tier firms. It will be interesting to see if our results, which focus on small and mid-size law firms, mimic or contrast the findings in the Amlaw 200.

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Management ABCs: The Hawthorne Effect

Admin — Tue, 18 Mar 2008 07:00:10 GMT

A method of increasing performance is based on the Hawthorne Effect. Although several of the experiments have been downplayed by social psychologists, the effect that attention has to performance is as true today as it was when recorded at the Hawthorne Plant in the 1920's.

Basically, when attention is given to the performance of an employee, the employee's performance increases. Simply put, measurement improves performance. If you set goals for your timekeepers and don't measure them against the goals, the incentive to succeed is left to trusting individuals to meet their goals.

How well suited is your firm for a loss of a client such as Bear Stearns (or, perhaps, Lehman Brothers)? Gerry Riskin wrote in January to make your firm recession-proof. Some of the factors listed in recession-proofing the firm:

Ramp up frequency of financial reporting (monitor the firm's key finanacial metrics);
Make hard decisions humanely and fast (monitor under-performing timekeepers);
Manage internal expectations (monitor expectations to keep staff motivated and avoid "business as usual");

Each of the above requires attention. Trust alone that the individual timekeepers will respond to economic crises is a recipe for disaster. A better management model is the Hawthorne Effect. Everyone needs to be accountable for results. Let the effect of attention to performance help the firm during difficult times.

The effect of measuring performance brings other benefits. Beyond improving results, keeping attention on profit drivers has the added benefit of opening opportunities - even in bad economic times. As Riskin notes, [w]hile strategy may be more challenging during recessions, if you grasp the nettle, opportunities will arise to enhance your client mix and your talent base.

We have begun taking submissions towards the 2008 Law Firm Economic Survey. If your firm is interested in participating or if you would like more information, please contact Brian by clicking here.

Generation Y Attorneys - Is It Lack Of Motivation, Or A Difference In Focus?

Admin — Fri, 14 Mar 2008 07:00:13 GMT

While sitting on a plane on the way to the ABA Techshow, I was reading the February 2008 issue of the Harvard Business Review. An article titled, Task, Not Time: Profile of a Gen Y Job, caught my eye. I often hear managing attorneys lament the lack of motivation of associates. The article in the HBR may provide a reason for the disconnect - it isn't that young associates are not motivated, but that they may respond differently than their elders to the conventions of work. Where many look to the hours you spend at the office as a measure of productivity, the HBR article suggests that the younger generation looks more to results, or task-based productivity.

Many younger employees find they can complete tasks faster than older workers,perhaps partly because of technological proficiency but even more . . . because they work differently. They spend less time scheduling and are comfortable coordinating electronically. They resent being asked to log hours and stay in the office after their tasks are done, and the idea of face time really annoys them. [Generation] Ys love to work asynchronously - anytime, anywhere. One said during out research, "What is it with you people and 8:30am?"

Does this explanation fit with your experience?

The article suggests ways to devise a better model of how to define work:

Articulate the results you expect - and tie accountability to getting the job done;
Make physical attendance in the office, including at meetings, optional;
Gauge performance on the quality of work performed;
Help managers and employees learn to measure dedication in ways other than face time;
Use today's networking capabilities to allow employees to work from anywhere;
Support the changes by creating drop-in centers

The above also appears to support what Chuck Newton has termed the 3rd wave law firm.

First Day at ABA Techshow

Admin — Fri, 14 Mar 2008 05:40:14 GMT

Met Kevin O'Keefe today and he had Rob La Gatta interview me - it is posted here.

Also went to a session hosted by Debbie Foster and Steve Best. The session was about Document Management. I'll admit, document management has always been a component to me. It was really just the process of profiling documents electronically. Today, though, Foster and Best explained what differentiates document profiling systems from document management systems: forced compliance. A true document management system will force you to use their profiling system when you save a document.

Why is this important? If you are shopping for technology that will help move you more towards a paperless office, knowing the difference between a profiling system (which is predominant in the "all-in-one" case management systems), and document management (which is reserved for the "best of breed" packages), will help you avoid making a long-term investment error. You don't want to dedicate your office to a profiling system that requires them to store documents in a standardized way and then find that the system you deploy doesn't require compliance.

At the same time, if forced compliance is not what you need, then you may be wasting dollars on a product you could have had elsewhere for less.

Another Word Of Caution Regarding Inflation

Admin — Thu, 13 Mar 2008 07:00:05 GMT

This morning I am off to Chicago to attend the ABA Techshow. I am speaking on benchmarking and the results of the 2007 Law Firm Economic Survey Friday at 2:30pm central. If you are attending the conference I encourage you to drop by. I plan to do some blogging at the event as well, including recording some interviews.

In the meantime, I did a little more research on inflation yesterday and learned some interesting things. I'm no conspiracy buff, but I have to admit that connecting dots is a fun exercise.

First, the Federal Reserve just two years ago decided to stop tracking what is called M3 transactions.

http://www.federalreserve.gov/releases/h6/discm3.htm

According to the fed, it isn’t necessary. According to others, it means the fed is hiding something.

http://www.inflationdata.com/inflation/Inflation_Articles/M3_Money_supply.asp (Interesting analysis related to the Chinese buying back our debt that is being devalued daily just so we can continue to buy their exports.)
http://www.investmentu.com/IUEL/2005/20051208.html
http://www.discursivemonologue.com/2008/02/10/the-federal-reserve-m3-and-inflation/
http://www.moneyweek.com/file/5138/m3-0212.html

A House Bill was introduced shortly thereafter requiring the Fed to reinstate the policy (introduced by ex-Presidential candidate Ron Paul) - http://thomas.loc.gov/cgi-bin/query/z?c109:H.R.4892: - no legs sprouted from it.

Some are therefore calculating M3 themselves:

http://www.nowandfutures.com/key_stats.html
http://www.shadowstats.com/alternate_data

Another troubling sign is what the Fed has been doing lately to help weakened financial institutions increase their liquidity – ie, pumping money into the markets by buying up the possibly worthless mortgage notes so that banks continue to lend.

http://biz.yahoo.com/ap/080311/fed_credit_crisis.html?.v=6

The final worrying sign is the runaway bull market in oil. Oil is near $110 per barrel.

http://www.ft.com/cms/s/0/53123f5c-ef59-11dc-8a17-0000779fd2ac.html?nclick_check=1

How will this affect law firms? Well, as noted yesterday, you need to keep an eye on inflation and your margin. With high margins and low inflation, you are pretty well insulated to inflation's effects. If inflation spikes, though, all bets are off. Based on the above linked articles, however, are we (as Larry Bodine has stated several times) already in a recession? And is inflation already well above 4%?

How Inflation Deflates A Law Firm's Bottom Line

Admin — Wed, 12 Mar 2008 07:00:13 GMT

I received an email earlier this week from a reader who corrected an error I made when discussing the effects of inflation within the post How Law Firms Can Increase Income By $100k Per Partner In 1 Year. Rather than re-working the example in the original post(where few would notice it), I decided to dedicate a post to the effects of inflation on your bottom line and clarify the point, which was not in error. Considering the overwhelming negativity flowing through the minds of many regarding our current economy, a discussion on inflation's affect on profitability appears ripe anyway.

During the 1990's inflation increased an average of 3% per year. In fact, many of us have become accustomed to using the standard of 3% when adjusting any cost by the rate of inflation. From 2000-2006, inflation was even a little better, increasing on average of only 2.85% per year.

Source: www.inflationdata.com

In 2007, the average rate of inflation was still only 2.85%. However, in the last 2 months of 2007, a trend began that is continuing this year. From November, 2007 until January, 2008, inflation has exceeded 4%. On March 14, the February inflation percentage will be released. It will be interesting to see if this trend continues [MARCH 14 UPDATE: Core inflation was unchanged in February - news that, while perhaps temporary, opens the door to another interest rate cut by the Federal Reserve.]. Regardless, January's inflation was highest in the month of January since 1991.

Source: www.inflationdata.com

Inflation has actually has been moving up since 2000, except for an interruption after the impact of Hurricane Katrina caused inflation to first spike just after the storm, then drop to under 2% in late 2006. It wasn't until late 2007 that rates returned to the 6 year trend, according to the below chart.

Source: www.inflationdata.com

Whether inflation is going to stay at plus 4% in 2008 remains to be seen, but let's just consider the effect of inflation based on the average from 2000-2007 (2.85%). In the following example, annual revenues are $1 million (for simplicity). To determine the effect of inflation on your bottom line, the scenario I am using utilizes fixed margin percentages of 10%, 11%, 15%, 20%, 30%, 40% and 50%. (Using these percentages alone make business owners of other industries indignant, as many can't imagine pulling margins of 50% - though the best performing law firms in the 2007 Law Firm Economic Survey were doing just that) As well as factoring inflation, I also factor in a 6.5% increase in revenue (based on predicted rate increases from firms in the 2007 Survey). Will this offset inflation?

Not hardly. In fact, at low margins, inflation is deadly. If margin is 10%, even with a rate increase of 6.5%, income purchase power is reduced by 22%. Even at 15% margin, your purchase power is reduced 13%. It is not hard to see how small businesses with low margins struggle to survive even moderate inflation.

With margins up to 40%, you are still losing money when revenue increases 6.5% and inflation is as low as 2.85%. However, at least when margins are 40% you are close to offsetting inflation - so long as revenue increases more than double the rate of inflation.

The above model takes into consideration a rise of expenses that includes both inflation and the revenue increase. The assumption is, as Parkinson's Second Law states, that "expenses rise to meet income". When you increase revenue, it is likely due to an investment, whether that investment is additional staff, timekeepers, technology, pay increases, etc. The numbers above change if you only apply inflation to expenses, but that would assume that you are not investing in the above to increase revenue. One way to accomplish increased revenue without additional cost is through increasing productivity, at least in the short term (for those who increase productivity will soon seek financial reward).

In the above, you can see the drastic difference taking "revenue cost" out of the equation. If you can increase revenue without adding cost, inflation is suddenly no longer a threat - all you must do is keep up with the rate of inflation and inflation is abated. In the above, you actually see a higher percentage increase with lower margin. In any event, income across the board goes up. The above, however, is accurate only in the short-term, as costs inevitably increase with revenue.

What can be concluded from this?

Rate increases must be much higher than the rate of inflation to offset its effects (ie, rate alone isn't a path to increasing income);
The higher your margin, the less inflation affects income;
Higher productivity with higher rates can substantially increase income in the short term and minimize its effects in the long run.

For subscribers of the blog, I have attached a spreadsheet with both formulas for you to use to plug in your own numbers and forecast how inflation will affect your profits in both the short run (if you budget for higher revenue without additional cost - such as increasing productivity) and the long run. To download, click here. If you haven't already subscribed, registration is free. Thanks to Joe Dwyer for his time and thoughts.

2008 Law Firm Economic Survey

Admin — Tue, 11 Mar 2008 07:00:32 GMT

We will soon start accepting submissions for the 2008 Law Firm Economic Survey. This is our 3rd year to conduct the survey and in two short years we have created the largest survey of its kind focused on the mid-sized law firm. Our survey serves several purposes, including but not limited to:

Providing a measure of annual performance for mid-sized law firms based on per-partner income;
Validating the core profit drivers that affect per-partner income;
Providing expert analysis and content for managers to help increase per-partner income.

This year we are adding a focus on client development activities. In our 2007 survey, 25% of managing partners responded that marketing and business development activities were their firm's best ways to achieve higher profitability. In the 2008 survey we are asking managing partners what marketing and business development activities they utilize and how effective each are.

We are also asking questions regarding rate as it pertains to practice area. I have had more questions regarding what firms charge for specific industries than any other finance-related question. Attorneys want to know whether they are charging the appropriate market rate for their specific industry. Since each industry can be pretty specific, we have chosen some broad practice areas that we hope will give firm leaders some insight into pricing.

We are also hoping to do more regional breakdowns by rate, utilization, margin, leverage, etc.; another area in which we receive many requests. Of course, the main focus of the survey will remain the law firm business model and the key profit drivers that affect per-partner income.

The survey will be broken down into two main parts: the first part requires financial data and will take some time to assemble since there will be questions regarding 2007 year end numbers (such as standard blended rate by equity partners, non-equity partners and associates, and paralegals). We will be conducting this part by telephone to help respondents with any questions. We hope this will also reduce the possibility of invalid responses. There have been several instances of firms having their responses disqualified due to inaccurate numbers after we were unsuccessful in our attempts to contact them to correct the responses. We believe the best time to validate responses is at the time of submission and hope the telephonic interview process will help in this regard.

The second part will be for managing partners/shareholders/directors/etc. Because this part doesn't require financial data (and thus shouldn't require assistance to complete accurately), it will be offered as an online questionnaire to encourage participation by managing partners.

The survey is geared to mid-sized firms. For us, that means firms from 5 to 100 fee earners (which includes partners, associates, paralegals and others who bill clients for their work). Although we hope to broaden the scope of the survey in the future, this year we are only accepting submissions from firms in the United States.

All respondents who complete the survey will receive a complimentary copy of our 2007 Law Firm Economic Survey and 50% off the price of the 2008 Survey. The price has not changed and is still $495, so the value for participating is approximately $750. The cost of the survey at $495 is among the lowest (if not the lowest) in the industry. Further, firms who also complete the Managing Partner section of the survey will be offered a summary benchmark comparison of their firm against other respondents. The benchmarking comparison is valued at over $1,200.

Due to the time it takes to compile the data and prepare the survey for release (which we hope will be mid-summer), we are only accepting submissions for a two month period and may stop accepting submissions at any time after we reach our target of 375 respondents. If you would like to participate in the 2008 Law Firm Economic Survey, please email me by clicking here and fill out the email request.

2008 Predictions Revisited

Admin — Mon, 10 Mar 2008 07:00:36 GMT

It is easy to make predictions, but who is brave enough to revisit them to see how well their predictions are holding up? It's time to be held accountable for my predictions and review the clairvoyant performance to date:

1.The effect of the market "correction" will lead to a rise in bankruptcies and foreclosures. It doesn't take a mind-reader to make this prediction; nonetheless, there is ample evidence of both. Bloomberg reported on March 6th that foreclosures are up as owners "give up". The Boston Globe reported that Massachusetts foreclosures were up 128% in January. The New York Times reports that bankruptcies were up 18% in February. No surprises here - clairvoyance rating: 10

2. Increase in mergers and/or lateral movement. Too early to tell on this one. Clairvoyance rating: 5

3. Business Intelligence Tools will be showcased more in tech shows. If LegalTech New York is any indicator, I am dead wrong on this one. E-Discovery won the day then. Next week is the ABA TechShow in Chicago - we'll see. Clairvoyance rating: 1

4. Election year lawsuit opportunity due to claims of voters. This one is too early to tell as well, but given the rising prospect of the Democratic Party getting mired in an election year lawsuit over the Florida and Michigan delegate disqualification debacle, I may give myself points for being in the ballpark. Clairvoyance rating: 6

5. Calls for the death of the billable hour continue, but to no avail. I have had to write in defense of the billable hour a few times this year (see posts on January 7th and February 19th) but I certainly see the value in alternative fee arrangements - so long as firms know the cost of their services. Even so, I feel compelled to respond when others claim that the billable hour is the cause of frustration with clients. I understand the desire for cost certainty, but trust is the issue to me, not the billing method. That hasn't stopped many from writing about it (see the posts for the links). Clairvoyance rating: 10

6. Lawyers won't be lacking for work in 2008 even if economy is bad. Even though Citibank and Hildebrandt claimed in their 2008 Client Advisory that firms faced a "Perfect Storm" of indicators leading to financial hard times for law firms, reality isn't abiding by their predictions - at least so far. David Lat at Above the Law ran a survey asking associates what areas of practice were hot and which were not. Not surprisingly, transactional law, particularly real estate, is lower than it has been the past 3 years. However, litigation is up, particularly commercial and patent litigation. The next highest area was bankruptcy. Clairvoyance rating: 10

Just like any forecast, circumstances dictate some review and modifications of the predictions. Measure and adjust. Since I am doing well with both #1 and 6, they stay as is. I would like to see more return on question 2, but will let it slid until 2nd quarter review. #3 is in need of some changing but I am holding on to this for at least one more show. The election year prediction should be broadened to any party litigating anything related to the election. That includes the Democratic Party if they so decide to self-destruct. Finally, the calls for the billable hour to die will never die - and neither will the billable hour - so that prediction stays as is.