Make More Rain : blog, margin

Cash Flow An Important Metric For Law Firms

Admin — Thu, 10 Apr 2008 07:00:03 GMT

No matter how much you work, until you convert it to cash it is worthless. The average days in the law firm cash flow cycle (from worked to collected) is 169 (source: 2007 Law Firm Economic Survey from LexisNexis). Shortening your cash flow cycle has a positive impact to liquidity and thus your cash flow cycle should be measured.

There are two metrics that need to be measured: days to bill and days to collect. Determining these numbers on a timekeeper level identifies those timekeepers who are efficient and those who aren't. The opportunity then is to set a standard and work towards compliance by all timekeepers.

What is this standard? It depends on the area of practice. Many insurance companies just won't pay under 60 days of accepted electronic invoice and will only accept these invoices quarterly. In this case, 150 days isn't so bad. Some areas of law (many domestic relations situations come to mind) should, by default, be prepaid. Any work in process should be billed immediately and applied against the prepayments. In these cases a cash flow cycle of 60 days should be cause for concern.

Tools such as Juris from LexisNexis' Active Information can help you track this key performance indicator so that you can improve your liquidity.

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.

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.

Is the "LendingTree" Mentality Stronger Than Building Relationships?

Admin — Fri, 07 Mar 2008 08:00:38 GMT

You may have seen the commercial: The banker bumps into his client who tells him that he is taking his business to LendingTree.com. The banker, surprised, says, "But we've been your bank for 20 years." To which the client replies, "Oh, since your bank is in the network, you get a chance to compete too. And, so you know, I am pulling for you." With a condescending slap on the arm, he finishes: "Good luck, buddy."

The idea, of course, is that the competing banks will give the client the lowest price and thus the best deal. Relationship means nothing. Is that truly representative of the way business works?

I don't think so. Any marketing professional will tell you that client development is nurturing and maintaining relationships. Without relationships, you can't hold on to business. However, there is no denying the rise in competition in gaining legal services based on price. The key, I believe, is to prove that the value of your firm is better than the value of another firm. How you do that will prove to be the difference between increasing your client base and losing opportunities.

Here are some ways that your firm can show value:

Showcase your talent. You have superior talent - make sure others know. Have attorneys write articles, speak at seminars, write blogs - market their talents to the widest audience.
Never Eat Alone. Attorneys should be entertaining clients and prospects whenever they are not doing billable work. Industry conventions, meetings, etc, should always have representatives of your firm in attendance.
Highlight your commitment to quality service. Take a page from value-billing firms: highlight in your bills the fact that calls were returned promptly, how much you saved the client, and how much you appreciate their business. Don't take their faith in you for granted.
Don't wait for your client to fire you. You don't want to be that banker. Don't wait for your client to tell you they are shopping. Conduct surveys and follow up - if a client has an issue, correct it and make sure the client knows you corrected it.
Justify your high fee. Don't devalue your services: JUSTIFY IT. Case studies, testimonials, high value cases, have them all available for clients to read. Don't be afraid to talk about your rates. Explain what goes into them. Many clients lament fees because they don't know what the dollar figure represents. Explain, with confidence, the investment you have in technology that gives your firm a competitive advantage to better represent them and helps contain costs so that you can be more efficient. Show how the investments you make have a direct effect on the quality of services you provide. Make sure they know what the fees represent: the culmination of dedication to the highest quality legal services by someone who cares about them personally and professionally.

What other ways can attorneys build and maintain relationships with clients so that they don't shop around for the lowest price?

Eight Legal Technology Trends For 2008

Admin — Thu, 06 Mar 2008 08:00:56 GMT

Dennis Kennedy, in an article published February 27, 2008 on llrx.com, writes of eight trends in technology that will impact the legal industry this year. Although he predicts a "sleepy year for legal technology", Kennedy believes "[f]irms that are good at technology will take advantage of opportunities to widen their technology advantage over their competitors and position themselves well for the time when economic recovery comes."

The trends for 2008:

Making Better Use of What You Already Own.
Expect budgets to tighten and firms to look at what is on the shelf and spend more effort in making what they already have work better for them.

Lawyers Win Round 1 in the E-discovery Battle . . . by a Wide Margin.
E-discovery isn’t going to be nearly as big a hit inside law firms as it is inside of tech shows in 2008. "Electronic discovery remains a trickle rather than a flood in today's litigation world."

Security Begins to Matter . . . Really.
Kennedy expects clients, particularly in healthcare and finance, to press firms on security. He notes the lax policies at law firms related to sensitive data (something I too have observed). Hot topics include drive and folder encryption, remote access, and more stringent password policies. Email encryption is notably absent from this list. Speaking of email . . .

The Death Throes for Email?
Email has proven an unreliable mechanism for communication, says Kennedy. Because of the problems inherent with email (spam for example), communication tools like instant messaging and file transfer protocols will increase and use of email for quick communication and file transfer will decrease. In my opinion, the same security concerns are present in other online communication protocols, not just email. I am not betting on widespread adoption of more secure standards in the legal community in 2008, however.

Going Mobile.
For those who haven’t already moved to blackberry devices and other mobile devices, Kennedy predicts the productivity gains by those who already use the technology will lead others to adopt them. He also notes the widespread use of tools such as remote access that many attorneys now take for granted. I will add that I believe more and more firms will demand web-based applications to expand their mobile workplace.

Opening Audio and Video Channels.
In addition to the increased use of blogs and RSS feeds, Kennedy predicts a higher use of podcasts and streaming video by law firms in 2008. Several companies that cater to the legal market, including Martindale Hubbell, are implementing use of social networking tools such as this into their offerings. I think it is still a few years away before more widespread adoption by law firms, but it will certainly be something to watch.

Dancing with a Recession.
Sometimes you can talk yourself into a recession. Enough has been said about it ~~(though the media has been curiously silent lately)~~ and the indicators are still pointing downward. Kennedy predicts that firms will want to delay large investments and will look into ways to meet their needs without costly hardware upgrades. Kennedy expects Software as a Service (SaaS) and Open Source software use to increase in 2008 as cost effective ways to upgrade their technology.

Smart Ways to Work Together – Collaboration Tools.
When it comes to productivity tools, Kennedy writes, “2008 will see the growth of ways for lawyers to use technology to work together with clients, colleagues, courts, opposing counsel and others.” Kennedy, along with Tom Mighell, co-authored a soon-to-be published book called The Lawyer's Guide to Collaboration Tools and Technologies: Smart Ways to Work Together. The book can be pre-ordered by clicking here.

Read the entire article by clicking here.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Maister Offering Book Free To Managers

Admin — Wed, 05 Mar 2008 08:00:59 GMT

David Maister, management consultant and author of several books, has made an offer on his website to give a free copy of his book, Strategy and the Fat Smoker, to a senior executive or managing partner of your firm. Maister in 2006 declared that law firms are unmanageable - could his "Give a Copy to Management" campaign be a sign that he has regained some hope?

In larger firms, at least, there are strong indicators of more management - the number one indicator being skyrocketing per partner income. Law firm consultants know that the service industry model is enviable. There are no fluctuations in price due to factors beyond their control (such as gas prices). The main cost to the law firm is also a source of its revenue.

The main obstacles to improvement in management are the firm owners who don't want to follow the key drivers that affect income (usually due to entrenched "firm culture" no one is able to alter). In any other company this would be the fatal flaw that calls in the Grim Bankruptcy Trustee. In law firms, the margins are typically good enough to deceptively cover the lack of attention to these drivers until a preventable event occurs that causes a firm to split or fail.

However, many are predicting change in the fortunes of law firms. Interest rates are above 4%. Firms who otherwise wouldn't necessarily see a difference in their bottom line by not measuring performance may soon see falling incomes and may not know about it until it becomes a crisis. The signs are everywhere and many firms are taking note. It is to these firms that Maister's book is so important a read. Tom Collins has written about Maister's book in the October 25th, 2007 post The Strategy Problem in Law Firms.

You can take advantage of this offer by clicking here. Do it quickly. The offer is only good for the first 100 eligible senior executives or firm managing partners.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

How Law Firms Can Increase Income By $100k Per Partner In 1 Year

Admin — Mon, 25 Feb 2008 08:00:13 GMT

Measurement improves performance. If you measure the following 5 key performance indicators, your profits per equity partner will increase. These drivers are:

Leverage
Rate
Realization
Productivity
Margin

Leverage in the above model is based on head count leverage. Head count leverage is the ratio of equity partners to non-equity fee earners.

Rate in the above model is based on the effective billable rate for all fee earners. You get this by adding all fee earner rates and dividing the sum by the number of fee earners.

Realization in the above model is based on the amount of fees billed against what was worked. You get this from dividing the sum of all fee earner hours billed by the sum of all fee earner hours worked.

Productivity in the above model is the sum of all fee earner billable hours divided by the total number of fee earners.

Margin is net income divided by total fee revenue.

Here is the scenario. Your firm has 29 fee earners. Eleven equity partners, eleven associates/non-equity partners/of counsel, and seven paralegals. You have a total of 50 employees including equity partners. Your effective billing rate is $275, your average fee earner productivity is 1,690 per year, your firm writes down or discounts an average of 10% of work performed (90% realization) and your cost per head is $140,903.

Based on the above, profits per equity partner would be $462,255.

Now, let's play with the numbers. First, we'll look at rate. If we increase rate by 6.5% (which was the average rate increase predicted by respondents of the 2007 Law Firm Economic Survey by LexisNexis), factor in cost inflation (currently around 4.25%), total PEPP increases to $486,314, an change of $24,059.

Factoring inflation, the increase in income is not substantial. However, it underlies the importance of increasing rates annually to avoid devaluing your rate due to inflation. The secret to beating inflation, though, isn't rate; It is productivity. High productivity creates the gap (margin) between cost (which includes inflation) and revenue. The higher your margin, the less inflation hurts you. The lower your margin, the more inflation works against you.

So let's consider productivity. If you increase billable production by 100 hours per fee earner per year (a meager 24 minutes per day based on a 50 week year), PEPP increases to $527,505, a change of $65,250 per partner!

This is one way to make a substantial increase in income with very little change in your workload. In fact, you can likely make up the 24 minutes per day by just entering your time as you are doing the work. Tools such as MyJuris Mobility take advantage of mobile devices such as Blackberry devices to recover nearly an hour per day of productive time.

Finally, we'll consider leverage. If you add two non-equity fee earners (assuming you have the business to necessitate such growth), PEPP increases to $512,686; a change of $50,431 per partner.

Best performing firms, however, do well in several indicators. If you were to combine the above, the results would be striking. If you increased rate 6.5%, added 24 minutes a day to each fee earner's billable goal, and added two associates, you would increase income from $462,255 to $609,677, a change of $147,422 per partner. The effect of compounding factors works to increase the effect of each indicator on income more than you would by increasing any of the indicators alone.

Even if you only increased rate and productivity, you would increase PEPP by $90,733. Click here to download a sample spreadsheet (you must be registered to this site to access the downloads page) and work the numbers yourself. Use it to forecast your increases and measure your performance to reach your financial goals.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Georgia Proposes Flat Rates For Representing Indigents In Capital Cases

Admin — Fri, 22 Feb 2008 08:00:25 GMT

Legislation has been introduced in Georgia to provide more cost accountability to state-funded defense of capital cases. What has caused the uproar?

In March of 2005, Brian Nichols was awaiting trial for rape in Fulton County, Ga. While changing clothes to prepare for his court appearance, Nichols overpowered a deputy, walked into Judge Rowland Barne's courtroom through the judge's chambers and shot both Judge Barnes and a court reporter. During his escape, he injured several and killed two others. The manhunt that ensured culminated in an unlikely ending: Nichols in the apartment of a drug user who was soul-searching and through an 11 hour conversation softened Nichols enough to let her leave. She called 911 and Nichols eventually surrendered without further violence.

Since then, Georgia has seen one of the longest murder trials in state history take place. Since Nichols qualifies as an indigent under Georgia law, the taxpayers are footing the bill for his defense. The Atlanta Journal Constitution reported that the cost of the trial has exceeded $2 million in defense costs alone. That has outraged the Georgia Legislature enough to change the law regarding representation of indigents in capital cases. According to the AJC:

The bill . . . could reduce the financial burden on the Georgia Public Defender Standards Council, which oversees the statewide indigent defense system. Under the bill, the council would pay for the first $150,000 paid to private lawyers defending an indigent capital case and 75 percent of the next $100,000, with the county paying the other 25 percent. Beyond $250,000, the state and the county would split defense costs.

Here's the kicker: The measure recommends that the council set contracts with flat rates for attorneys' fees and expenses in death cases. Sound like a good idea?

Perhaps if defending capital cases were akin to filing Chapter 7 Bankruptcy. However, for private sector attorneys who represent indigents in capital cases, does it remove the incentive to take on these difficult matters? Would a criminal defense attorney zealously defend a suspect for a flat rate for both fees and expenses when you have Judges saying things such as"[e]veryone in the world knows he did it" (as the New York Times reported Judge Fuller said before having to recuse himself from the case)?

Is Georgia trying to limit the representation of indigents in capital cases? Or are they only limiting the financial incentive to defend them? If it is the latter, then ostensibly an attorney may lose the zeal to defend a client once the money runs out - unless they believe that the defendant is innocent. And that might be the point of the legislation. [poll=8]

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Law Firm Pricing Management

Admin — Thu, 21 Feb 2008 08:00:46 GMT

One of the more common questions I hear asked by attorneys is how to set their rates. Many attorneys raise their rates periodically but not as part of a strategy to maintain or increase margin. Pricing management is addressed in detail in an article in Managing Partner Magazine titled Pricing Management. Noting that most firms still use a "reactive" approach to pricing, the article suggests instituting a pricing management function within the firm closely tied to the finance and marketing functions. A systematic approach is recommended that positions pricing with your strategic goals.

According to the article, firms should prioritize consideration of the price it will charge for its services and to ensure that the firm’s value and pricing propositions are constantly reviewed and improved upon, and communicated to clients at all levels of the firm. Firms should manage the pricing function around three levels: industry, practice and engagement level.

Industry Level: invest in understanding how variables drive supply and demand for legal services in your particular industry of practice.
- Systemic drivers: focus on short and long term considerations in the industry affecting client demand.
- Service delivery: leverage your firm's technology and skills as value that sets your firm apart
- Client patterns: how often they are a source of new business, how well they pay, etc.
- Talent supply: look into alternatives in how services can be delivered to be more cost effective.
- Pricing Czar: A finance director or equity partner should be dedicated to reviewing these drivers and organizing a pricing strategy and structure that meets the financial needs of the firm.
Practice Level: understand the markets that your firm and its practices operate.
- Testing client perceptions: client interviews, surveys, etc to better understand client need and provide better value.
- Discriminating among clients: develop rates that fit the client and practice area, not one-size-fits-all.
- Objectively reviewing fee schedule: periodically check market position as well as reputation of key partners by conducting blind study of key clients.
- Central pricing function supporting practice-group leaders: remove discretion in pricing except at practice group level - discounting should be first approved by pricing czar.
Engagement Level: getting the best price for each matter
- Training: partners need to understand the effect even minor discounts have on the bottom line; develop skill in communicating value.
- Tools: having proper tools to measure performance so as to maximize profitability based on comparison of historically similar matters.
- Systems: develop processes to review efficiency and improve on it to better price similar matters in the future.

Though some feel trapped in their pricing scheme, firms can and should plan how they price their services. With a well-conceived and implemented pricing plan, firms can be proactive and systematic in developing a pricing structure aligned with their strategic plan.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

A Warning For Law Firms (And Business Clients) Using Facebook

Admin — Wed, 20 Feb 2008 08:00:41 GMT

There has been some discussion in legal blogs regarding the use of social networking tools such as Facebook as a marketing tool. Kevin O'Keefe notes the potential of Facebook as a growing force for lawyers and businesspeople. Larry Bodine writes [w]hy lawyers can't ignore Facebook for networking.

The Birmingham Post (UK) writes of a reason why there should be caution in using Facebook. In an article titled Facebook May Blow Up In Your Face, several potential "minefields" are noted:

Facebook is for personal use only: In its terms and conditions, it states in the first sentence under User Conduct:

"You understand that except for advertising programs offered by us on the Site (e.g., Facebook Flyers, Facebook Marketplace), the Service and the Site are available for your personal, non-commercial use only."

In the terms and conditions, every user agrees not to register for more than one user account, not to register a user account on behalf of another, or register a user account on behalf of any group or entity.
You can be banned from Facebook for a violation of terms, subject to "final and binding arbitration" under Delaware law, likely in California.
Facebook has a license to do whatever it wants with content you provide. In theory, you could upload a photograph and Facebook could sell it without you receiving a penny. If you write lengthy notes about business related issues, these could be turned into a book by Facebook for its gain, not yours. Relevant wording from terms and conditions:

"By posting User Content to any part of the Site, you automatically grant, and you represent and warrant that you have the right to grant, to the Company an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to use, copy, publicly perform, publicly display, reformat, translate, excerpt (in whole or in part) and distribute such User Content for any purpose, commercial, advertising, or otherwise, on or in connection with the Site or the promotion thereof, to prepare derivative works of, or incorporate into other works, such User Content, and to grant and authorize sublicenses of the foregoing."

Bodine cites Joshua Fruchter, in a more recent post, citing methods of using Facebook as a marketing tool. Particularly in regard to posting copyrighted content, this should be re-assessed.

Bodine and O'Keefe promote Facebook as a networking tool. Facebook does have a section for businesses called Facebook Pages that serves this purpose. However, there is no pre-screening process to ensure that the entity is in fact who it states it is (read: Wikipedia-ish). There is an additional terms and conditions (which incorporates the original terms) that doesn't negate any of the above concerns (apart from allowing commercial use). If you plan to utilize this tool, make sure you follow the guidelines of Facebook's terms and conditions. [poll=7]

Lawyer Professionalism Tied To Value Billing?

Admin — Tue, 19 Feb 2008 08:00:01 GMT

It's not that I am against value billing. I am just against the proposition that the hourly billing model is an inherent source of evil. When reading Ed Poll's post on Professionalism versus Competence, a sentence caught my eye that appears to be another slam against the billable hour.

The post is about a recent USA Today poll asking whether co-worker's rude or unprofessional behavior should be tolerated if they otherwise do a good job. Thankfully the answer was overwhelmingly no. No one wants to work with rude people.

Poll notes the new firm Patrick Lamb co-founded this year that focuses on value billing. There is much positive press when law firms move to this model so the marketing upside is a good thing. But then came this:

As more lawyers succeed in this business model, perhaps others will follow. Then, perhaps, will civility in the profession be achieved.

Am I to conclude that without this business model (value billing), civility can't be achieved in the legal profession? First, I don't want to mistake Poll's point: that providing value to clients and a team mentality within the firm adds civility to the profession. Agreed. However, how is this at odds with hourly billing? Is it because some (and unfortunately many) are sloppy in their billing process? Or worse, unfairly padding their hours?

Assuming this is a widespread problem, does value billing fix it? Maybe, but not by its presence alone. If you sell services at a fixed fee, you had better know the price of your services or you won't be in business long. Tom Kane explains in a recent post the importance of tracking time even if you bill at a fixed fee.

Understanding that in all but a few routine transactions there are variations in the time it takes to provide a service depending on the variables surrounding the case, you will need to account for differences in the price of particular tasks. So while on the surface everyone may be paying the same for a service, some will be paying more for a task while others pay less. It depends on how difficult the task is and how efficient the attorney.

In fact, if anything, value billing helps budgeting for lawyers since you can set goals on how many tasks you sell clients. Crafty firms can then weed out the difficult cases through case assessment to maximize profit. Finally, marketing efforts can sway those who would buy into the "value" concept unaware of the higher price they are paying for a simple legal task.

Am I saying this is how firms who "value bill" operate? No. Can they operate this way? Yes. Is that a better value to clients? No. And to answer the presumptive rebuttal, "with value-billing, if the client doesn't like the fee, we will adjust it for them" I would answer, "and how is this different from hourly billing?" I've yet to meet a lawyer that is unfamiliar with post-bill adjustments. Some attorneys have a chronic habit of reducing their fees prior to billing as well. The biggest attraction to the value billing model isn't the savings to clients (marketing notwithstanding), it's the potential for higher revenues for well-managed law firms who price margin into the fee. The value of value billing to the client is nothing more than trading actual cost for pre-performance cost certainty - that apparently can still be negotiated after the service is provided (at least when firms open the door for negotiating fees after performance).

Once again, it comes down to trust. If there is a trusted relationship between attorney and client, then attorneys shouldn't overbill their clients and clients shouldn't question attorneys' fees (after-the-fact) - regardless of the method. As Poll states in an earlier post, "there is a very small percentage of 'bad apples' in the legal profession." The devil isn't in the billable hour. It's in those bad apples.

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Law Firm Business Model: Margin

Admin — Wed, 23 Jan 2008 08:00:31 GMT

The 5 key performance indicators all law firms should measure are:

Rate
Realization
Utilization/ Productivity
Leverage
Margin

This week each day I will focus on one of the above. Today the focus is on margin.

Margin is partners' profits divided by firm revenues. It is the percentage of revenue left after all operating expenses have been paid (not including partner salaries and distributions). For previous posts on margin, look here, here, here, here, and here.

There's no secret to increasing margin. Do a good job, be fair to clients, focus on client development, bill what you are worth, never devalue your time, and make sure costs rise proportionately to revenue. You don't increase margin over the long term by cutting costs. Reducing expenses is either done to correct a past mistake in investment or to replace lost revenues. Neither are positive causes. If you want to grow, you have to spend.

The point is made in the 2007 Law Firm Economic Survey from LexisNexis as well. The firms who had the highest per partner income spent the most. The firms with the highest margins spent the most.

The firms with the highest per partner income are represented in the Q1 column. The operating margin is at nearly 51% and their expenses per head are nearly $100,000. Compare that to the lowest performing firms. In the Q4 column, margin is a paltry 29% but they saved money - only $84,000 per head cost. You can't grow with a constrictive operating budget. Note that both the best performing and worst performing firms also spent a nearly identical percentage of their budgets on technology. This could mean that technology isn't being utilized properly in the poor performing firms (due no doubt to a lack of services if experience tells me anything) or that poor performing firms are attempting to utilize technology to manage their practice. I am encouraged to think the latter and am curious as to whether those firms are improving their practice as a result. There are so many variables to successful implementation of a process, but looking at these firms in 5 years might be a good follow up.

The way to improve margins may be different for each firm depending on where they start, but there are still two constants: cutting costs do not equate to long-term increases in per partner income and measurement improves results. With any action geared to improve the financial performance of your firm, you must measure it and adjust when you get off track.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.