Make More Rain : blog, policies/ procedures

Why the Year End Collection Push is Not a Best Practice

Admin — Tue, 09 Sep 2008 16:38:57 GMT

It is that time of year again, at least for the early starters, when the legal industry begins its preparations for the year end collection push. The push has become an industry standard and buzz word over time. Each year countless hours are put into collecting massive amounts of receivables every December in order to meet targeted numbers. Although it is a foregone conclusion that there will be a year end push for most law firms, is this really a best practice?

The “ideal” approach with respect to legal industry inventory management is to have a continual billing and collections push year round, so everyone can enjoy the holiday season without worrying about making a budgeted target for collections. Although ideal, given the history of the industry, this is unfortunately a practice that will take time to implement. Even if that happens, the remains of the year end push might still have legs. For most firms both lawyers and, more importantly, their clients are used to and expect a year end push. It is a behavioral pattern that is established and therefore not going away anytime soon. That said there are negative ramifications to such a practice and a few firms have recognized this and smoothed out their collection pattern.

Client Behavior

The first obvious detriment to a year end collection push is the impact on client behavior. If clients expect a year end collection push then they are less apt to pay within a consistent, timely manner. Some clients even have said to relationship attorneys who have tried to smooth out the process, “Why pay now if I know you are just going to look for more in December.” In fairness to the client I would probably hold on until December as well. For example, if my mortgage company let me pay all of my mortgage payments in December, I would do so - which brings me to my next detriment of the push, the Time Value of Money impact.

Time Value of Money

A dollar today is worth more than a dollar tomorrow, so everyday a firm does not collect on a receivable they are foregoing the opportunity of re-investment. In my previous mortgage company example, I would take all of the money I owe the mortgage company invest it in some sort of portfolio that would give me a return on that money which would go straight to my pocket instead of the mortgage company. That is the same thing that occurs with the year end collection push within the legal industry: Investment income is left on the table as receivables age.

Aging Inventory

The next 2 problems are more internally focused within each firm. Not only can the collections push can have a negative impact on client behavior, it can as well with attorneys . A colleague of mine wrote a blog back in June on “Valuing your Firm’s Inventory” which I encourage everyone to read as it outlines how, as receivables age, the likelihood of realizing the original amount of those receivables diminishes. Since attorneys also exhibit the behavior of letting work age before it is billed, and billings age before they are collected, the probability of billing or collecting the original work/bill amount goes down.

Other obvious detriments include the ability to know where you are to your budgeted numbers as the year goes along, and how to budget for next year given a lack of information on your collections; a final drawback of the year end collection push is the impact on the age of your inventory. In the graph below, you can see three years worth of inventory pushes. There is a significant drop in balance each December (as depicted in the bar graph), but you can also see a spike in the age of inventory. Why does this occur?

I ask many of the firms I work with and they almost always point to the answer: At year end, with pressure to make budgeted goals, most of the collection effort is on receivables that firms know they can collect and are more recent in nature. Therefore, the older inventory that has been aging over the years continues to get older and may get to a point where it is completely uncollectable. This is an unfortunate side effect of the collection push and one that should be accounted for in any inventory management strategy.

Although I have gone over many reasons why the year end collection push is not a best practice, I am not blind to the fact that it is not easy to make a quick switch to a continual inventory management process. So given that the “ideal” practice is not a readily accessible current option, are there things firms can do to prepare and approach the year end billing and collection push to try to maximize its result while working on the before mentioned strategy shift ? The first suggestion is start billing early –nothing earth shattering. With most firms you see an upward trend in periodic billings in October and November. That trend should start in the 3^rd quarter, and those firms that have a more gradual collection slope in the last few months also have an increased slope in billings from August until November. The easy explanation to this is that billing is a more controllable portion of the inventory cycle than its counterpart. In the example below, you can see such steep a slope in each of the prior 2 year end pushes where as in the last year that billing was much more gradual and steady as the end of the year approached.

The natural benefit is that by getting the built up WIP out the door in a timely manner will give you the ability to focus on collections for a longer period.

The firms that I have worked with who have had the most success with respect to WIP management are those that have some stipulation on billing in a timely manner when it comes to their partner compensation. Knowing that many firms cannot simply switch their compensation system on a dime, this type of action is not widespread, but it is a proven method. Each firm has seen an improvement in inventory management when a portion of partner compensation has been tied to that driver. “Compensation” in this regard can be defined as a direct input into the partner compensation equation or, alternately, can equate to monetary “fines” for late billing and/or collections.

It may be inevitable within current industry conditions that December will be the month with the most collections. Again, it is in the best interest of the firm to change the status quo and begin collecting earlier and in a timely manner. Not only will you be able to have a better idea of where you will stand to budget sooner, but it will set your firm up for budgeting the next year. Still, if focus can be put on opportunity balances (those that have aged past an expected pay time) early in the process it may help avoid the side effect of the ever aging inventory. Those older balances can have the focus early on and perhaps generate collections while in December the focus can shift to the more readily available receivables.

I certainly hope that as time goes along the year end collection push will lose its luster as a buzz word and be replaced with continual inventory management. At the end of the year the firms that take this to heart just may see increased realizations, additional investment income, and perhaps most importantly a little more piece of mind that you are on target and can enjoy the holiday season.

- Posted by Russ Haskin

Law Firm PEPP "Bubble" To Burst?

Admin — Fri, 09 May 2008 07:00:24 GMT

Since 2000, law firm PEPP (profits per equity partner) have increased on average 11% for Amlaw 100 firms and 8% for Amlaw 200 firms. Some observers fear that, like other markets that have sustained growth periods at or near double digits in the past 10 years, the law firm partner profit "bubble" may soon burst as well.

Looking at Amlaw 200 data, PEPP increased by 2% in 2001. In 2002, the increase was 7%. 2003 saw an increase of 11%, 8% in 2004 and 2005, and 10% in 2006.

This increase doesn't only apply to Amlaw 200 firms. Looking at the differences from 2005 and 2006 for the top respondent firms in the Law Firm Economic Survey by Juris Inc. and LexisNexis, respectively (the only two years available), firm PEPP increased 11%. It is likely that most firms in the mid-market and small market increased incomes by respectable if not similar percentages over the same period.

What can you do to prepare for a stunt in the growth (or decline) of PEPP? Bruce MacEwen posted an article May 5th on his blog Adam Smith Esq., titled A "Bubble" in PPP? that looks at some short term ideas to help "mitigate the downward trend" and predicts a change in the las firm business model over the long term:

Short term ideas:

Redeploy lawyers in troubled practice areas to healthier ones;
Use the opportunity of "shared pain" with your key clients to get closer to them;
Adroitly stand by while the normal waves of attrition take their toll;
Build or at least safeguard capacity in selected practice areas that you anticipate will emerge strongly from the downturn;
And always, always, keep a sharp eye on costs--although, truth be told, you don't have much material flexibility here. You're not moving your offices to Brooklyn and you're not paying less than market for partners and associates.

Long term predictions:

the billable hour, lamented by many but eliminated by few, will eventually replaced with a more "value-based" model, though MacEwen stresses that he is not "holding [his] breath" on this;
the traditional associate/partner model changes to include more non-equity partners and more contract attorneys;
at least fundamentally, "the core processes by which law firms manage cases and deals must and will change" (ie, more project management, more team philosophy centered around practice groups to become more efficient).

Ultimately, MacEwen believes that due to increased demand (at least for Amlaw 100 firms), finding work won't be the problem. However, he sees the traditional model as being unsustainable based on the limits placed on things such as productivity (>2,400 hours?), rates (>$1,000 per hour?)and realization (>100%?). Because of this, if PEPP does suffer a downturn for an extended period of time, the long predicted changes to law firm dynamics may happen.

If this occurs in large law firms, it is incumbent on smaller firms to adapt quickly. The predictions above are all point towards efficiency that allow firm profits to increase through efficiency rather than increased rates and worked hours. Much has bee written about the "unmanageability of law firms". Despite this, firms have continued to make exceptional profits - due in no small part to their enviable margins. With good management, law firms can see profits that far exceed anything that firms receive currently. And if partner profits start decreasing, your firm will be in crisis - just as it is not a good idea to go to the grocery store on an empty stomach, it isn't a good time to contemplate an overhaul in processes during a crisis.

Much of the allure of smaller firms is quality service at a lower price. Some large firm partners charge rates in excess of $1,000 per hour. If large firms realize they can offer similar services at lower prices and still increase profits, smaller firms can be squeezed out of the marketplace.

Think Walmart. As Walmart entered the scene, small businesses were unable to compete based on their lack of purchase power. Walmart could offer more product selection at a lower price. Home Depot and Lowes did the same to small hardware stores. The small shops that survived did so by using their secret weapon - customer service and personal engagement. Still, you won't find many of these shops who don't struggle on a monthly basis and have to watch as their clients often come to them for advice, then go to Home Depot to buy the big-ticket items.

For small and mid-size firms to compete in this changed environment, they will have to embrace workflow efficiencies that meet or exceed that of the larger firms - and use their "secret weapons" of personal engagement with clients and responsiveness. However, without the fundamentals of an efficient business in place, your firm will suffer under the weight of your processes.

There will always be individual clients available, but more dependable sources of income often come from business clients and their leaders. These clients are already demanding more cost certainty. If larger firms are able to provide this value to business clients first at a price that isn't so different than yours, your firm may be in trouble.

The time to act is now.

Partner Cost and Client Profitability (Part II)

Admin — Tue, 06 May 2008 07:00:21 GMT

This is the second 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. This article is focused on pitfalls of some firms' methodology in allocating costs to partners.

Some firms have chosen to exclude costs all together from billable hours worked by partners. Generally it has been requested for one of two reasons: the firm would like to keep actual partner compensation out of the profitability model (a closed compensation system), or the firm is thinking about a P&L model where partner compensation is simply a distribution of firm profits. While this methodology does accomplish those goals, from a client profitability perspective, it introduces its own set of issues.

What results is a model where client profitability is maximized by only using partners to perform the billable time. In the example below, there is a timekeeper with a 66% profit margin and two partners, both with 100% margins. Any hour that the Associate performs for a client will in essence drag down that client’s profitability and a matter manager might be tempted to use a Partner where an Associate would suffice in an effort to ‘game’ his clients profitability. This is contrary to the proper use of leverage and economic theory which would have the partners working on tasks for which lower level timekeepers are not qualified such as originations and the management of matters and attorneys. For this reason alone, there needs to be some cost associated with each billable hour of a Partner’s time, if not for any other purpose than to represent the opportunity cost of them not performing these other tasks. Besides, every firm that we have encountered expects their partners to perform a certain quantity of billable hours for their clients which would imply that some of their compensation should in fact be allocated to the client.

Role	Compensation	Std Rate	Cost Rate	Profit Margin
Rainmaker	$1MM	$250	$0	100%
Dept. Manager	$500M	$200	$0	100%
Associate	$80M	$100	($44)	66%

Another methodology that has been requested in an effort to support a closed compensation is what we call a fixed (or capped) partner cost. In this scenario, every partner is given the same direct costs. Aside from the privacy of actual compensation, firms make their case by stating that above a certain point, all partner compensation is for contributions besides the billable hour. However, since billable rates vary significantly even in the upper echelons of partners, it is hard to justify those hours having the same cost rate. Regardless, like the methodologies we have already examined, this too creates some unfortunate outcomes.

The biggest concern with this methodology is the reversed leverage that it creates (similar to having no costs at all). In the example illustrated below, we see a firm that has chosen $270,000 as the partner direct costs. Any partner whose compensation exceeds this threshold has their compensation limited and as a result, all have a $150 cost rate for their time. The result is that the highest rate timekeepers have the highest profit margin, 40% in the case of the Rainmaker, while those with lower compensation, like the Jr. Partner, have minimal (or zero) profit margin for their work. Certainly, the cost to the firm for these 3 timekeepers is not the same.

The alternate version (and preferable to the former) is to use the dollar amount as a limit to partner compensation and not a flat amount for every partner. In the example below, we see the Jr. Partner whose actual compensation is below the $270,000 mark. In the fixed methodology his profit margin is 0% but if it were capped, his direct costs would be his actual compensation and therefore would have a more favorable profit margin of 44%. This still does not relieve the cost similarity between the Dept. Manager and the Rainmaker but it is a slight improvement over having all partners at one cost rate. Of course this methodology does not meet the requirements of a closed compensation system (unless the firm is primarily interested in the privacy of Sr. Partner compensation).

Role	Compensation	Std Rate	Fixed Cost	Cost Rate	Profit Margin
Rainmaker	$1MM	$250	$270M	($150)	40%
Dept. Manager	$500M	$200	$270M	($150)	25%
Jr. Partner (Fixed)	$150M	$150	$270M	($150)	0%
Jr. Partner (Capped)	$150M	$150	$270M	($83)	44%

The next installment will focus on better ways to calculate partner cost in measuring client profitability.

The End of Generally Accepted Accounting Principles?

Admin — Fri, 18 Apr 2008 07:00:17 GMT

In the April, 2008 issue of CFO magazine, the cover story reads: "Goodbye GAAP: It's Time To Prepare For the Arrival Of International Accounting Standards". These international standards, called the International Financial Reporting Standards (IFRS), are being sought to replace generally accepted accounting principles (GAAP), an evolving set of accounting standards in the US since the Securities and Exchange Commission (SEC) was established in the 1930's.

What started as a reconciliation of the two is now seen as "more of a takeover than a merger of equals - many who favor a single global standard hope to wipe out GAAP altogether".

Grant Thornton has a paper outlining the major differences between GAAP and IFRS that can be viewed by clicking here. James Turley, Chairman and CEO of Ernst & Young, also makes an argument for the move to IFRS that was published by the Wall Street Journal in November of last year.

How does this affect firms who are currently not even using GAAP? Many small and mid-size firms have historically kept their books on a cash basis. In the 2007 Law Firm Economic Survey by LexisNexis, the failings of cash basis accounting were exposed - in particular, the lack of reporting on work in process gives firms only half of their financial picture. And, based on the respondents in the 2007 survey, there is no correlation between per partner income and cash basis accounting. The fallacy of having to report to the IRS on an accrual basis if you reported internally in this manner were reiterated.

Many of the requirements of GAAP and IFRS apply only to publicly traded companies. This lack of mandate is tempting to law firms, who are not forced to change their accounting methodology. However, one of the main management priorities respondents in the 2007 survey reported was better benchmarking. What are other firms doing? How do we compare?

Using tools such as Lexis® Insight helps. But these tools are meant to be starting points for analysis. As Stephen Collins noted in the Introduction of the 2007 Survey:

"Without applying the accrual concept, law firms can't reliably forecast cash flows or anticipate funding needs. The unrealized value of unbilled fees and accounts receivable are clouded. In fact, cash basis accounting may contribute to the industry-wide experience of very slow cash flow cycle times. Key financial metrics such as realization cannot be accurately measured by matching the appropriate revenue to the related adjustments. As a result, many firms are losing significant amounts of fee revenue to adjustments and they don't even know it it."

For nearly 80 years, the answer was generally accepted accounting principles. It appears that due to the expansion of free trade agreements and globalization in general, there may be a new standard. For firms who want to improve profitability and are looking to move from cash basis accounting to accrual to help measure performance, take heed.

How To Compensate A Rainmaking/Investor "Muted" Partner?

Admin — Tue, 15 Apr 2008 07:00:49 GMT

A reader emailed me with a question related to the compensation of a non-practicing equity partner whose responsibilities include only the investment of capital in the firm and bringing in new clients. The firm has a niche practice and is looking to expand. Their plans require more capital than the existing partnership can manage. They are in a position to bring in another partner who will be responsible for infusing additional capital in the firm. The partner will also do some rainmaking. The new partner will not be responsible for any management or production and will not be expected to manage any of the clients in which he brings.

Because of the rainmaking responsibilities, I wouldn't classify the partner as a "silent partner". However, since the partner won't participate in the day to day management of the firm nor will be responsible for any production, it may be better to classify him as "muted".

I asked several attorneys I knew and didn't get very good answers. Thus I am taking the question to More Partner Income readers. What ways would you suggest this firm compensate an equity partner whose responsibilities are only investment in the firm and rainmaking?

Law Firms Pass On Arbitration In Employment Disputes

Admin — Fri, 04 Apr 2008 07:00:36 GMT

In an article for the upcoming issue of the National Law Journal (NLJ) posted yesterday on their site, law firms are not taking their own advice when it comes to arbitration clauses in employment disputes.

Is this a case of what's good for the goose isn't good for the gander? Why would arbitration be a good idea for other businesses but not good for law firms? The answer brings into question the utility of arbitration.

The arguments for arbitration come from those who have been burned in litigation. Litigation can have you sitting in front of a jury that likely has no experience in the subject matter at hand and may in fact have motives other than the subject matter at hand to deliver a large award to a plaintiff. Arbitrators, on the other hand, are picked from within the industry from which the dispute arises and ostensibly provide a more fair, though equally binding, resolution at less cost than litigation. Where litigation can hinge on perception, arbitration decisions are meant to be grounded in experience-laden fact.

According to the NLJ story, however, only 10% of 200 law firm respondents to a 2003 survey had "mandatory arbitration in place". I assume this means that equity partners were bound by it through the partner agreement and that other employees were bound by it as a condition of employment, though it isn't specified in the article. One reason cited is that arbitration clauses may have a detrimental effect on the workplace. Said a partner with DLA Piper, "Your attorneys can perceive that you are materially changing their position vis-a-vis the firm and attempting to circumscribe the rights they might otherwise have."

I believe that statement holds true to any situation where arbitration exists, not just when applicable to law firms. Any other reason to not have them? The article paraphrased a partner in the New York office of Greenberg Traurig, writing "Arbitration [] no longer offers the benefits of a speedier, cheaper resolution, as proceedings have become bogged down in discovery and quasi-motion work that mirrors litigation."

If that is truly the case, then arbitration has a gloomy future indeed, and not just with law firms. I brought up the article to an attorney I know who defends clients in arbitration and he told me some of his concerns with it:

Arbitration has become very inefficient, with no control over evidence admission (ie, evidence can come in at any time);
The arbitrators do not have the same fear of appeal that judges do and thus are unafraid to ignore precedent;
The quality of arbitrators has declined.

This indicates some serious problems with the arbitation system for dispute resolution. As the attorney I spoke with said, "Our clients used arbitration to get away from runaway juries. Now they are going back to the courts to get away from runaway arbitrators".

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.

9 "Sure Bets For The Future" Attorneys Should Watch

Admin — Thu, 03 Apr 2008 07:00:20 GMT

Nothing in the future is certain, except taxes, death, and that the world will implode from global warming or some other threat that replaces it. That notwithstanding, Harvard Business Online is boldly proclaiming 9 "sure bets for the future":

1. The Almighty Dollar will share its throne with an Omnipotent Euro.
2. Some currently unregulated financial markets won’t stay that way.
3. Energy will cost a lot. All businesses will have to operate under some form of carbon constraint.
4. China’s and India’s share of world markets will grow. A group of 100-million-population countries, like Turkey and Mexico, will grow faster.
5. Spanish and Arabic will become more important business languages
6. Multiculturalism and multiracialism will reshape cultural identity in both the U.S. and Europe. The Plato-to-Nato story will no longer define America’s manifest destiny, if any.
7. Even as intellectual property becomes more valuable, IP rights will erode.
8. Creative business people will invent new frauds.
9. The aftershocks of the Internet Big Bang will continue. Media will converge. Prices will fall. Devices will proliferate. Profits will be redistributed more often than cards on boys’ night out.

Particularly important, if they come to fruition, are those "bets" dealing with regulation, energy costs, business languages, IP rights, and the deflation of the internet economy.

Regulations (typically poorly drafted whether intentionally or not) are treasure troves for litigation and thus opportunity;
Rising energy costs will impact profits, but again, will be opportunity for those who specialize in related areas of law;
Business languages will impact costs of doing business and what markets you target;
IP rights erosion will impact that area of law;
Technology deflation will benefit firms who invest in it.

Read more here: Nine Sure Bets For The Future

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.

Developing A Goals-Based Strategic Plan With Financial Focus

Admin — Wed, 02 Apr 2008 07:00:42 GMT

Goals-based strategic planning takes a different tact than a "basic" strategic plan in that there is a singular focus by which the firm sets goals. Focusing on financial goals is more manageable and attainable than the comprehensive strategic plan, but requires attention and accountability nonetheless. Aspects of goals-based planning include:

Identifying key performance indicators that affect profitability
Developing goals for each indicator
Develop a budget based on the goals
Forecast earnings based on the budget
Measure and adjust

Identifying key performance indicators that affect profitability - The key drivers to profit include leverage, rate, realization, productivity, margin and cash flow. Firms may also want to include other indirect drivers such as client development (relationship building), "firm citizenship", etc. that may not have a direct impact on profitability, but are part of the core values that the firm holds.

Developing goals for each indicator - goals are particular to each fee earner but in total should reflect the financial targets for the equity partners. Each goal should reflect the capabilities of the fee earner and the realities of the market. For example, productivity targets may reasonably be set to 1,800 hours per year but setting the hourly billing rate at $350 may be unreasonable for a second year associate who works exclusively in insurance defense. Set goals that are attainable.

Develop a budget based on the goals - Budgeting simply states your goals in a measurable way. Fee earner budgets measure your productivity; client budgets measure your efficiency; expense budgets measure your spending.

Forecast earnings based on the budget - Forecasting models your budgets so that you can predict the results. It isn't enough to just state goals. Forecasting allows you to see what the bottom line will be if you meet your goals. If the bottom line isn't what you wanted, adjust the budgets until the forecast is agreeable. Most businesses forecast annually with quarterly reviews. During the quarterly review, the forecast can be adjusted based on the actuals. If business is thriving, you can increase your forecast - if business is down, you can reduce the expectation set in your annual forecast.

Measure and adjust - like anything else you implement in the firm, you must measure performance and be willing to adjust if needed.

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.

Developing a "Basic" Strategic Plan For Law Firms

Admin — Tue, 01 Apr 2008 07:00:14 GMT

The Free Management Library has some good information related to developing a strategic plan. The site lays out several models that can be implemented for both profit and non-profit businesses. The focus of this post is the "Basic" strategic plan. This is also the one that most firms use when developing a strategic plan. The process includes:

Identifying your core purpose or "mission statement"
Determining the goals that align with that purpose
Determine the methods you will use to reach those goals
Create action plans to implement these methods
Measure, adjust and modify as needed.

Identifying your core purpose or "mission statement" - this is the part that starts and sometimes ends the process. Firms can easily get bogged down in determining the language for the firm's "mission". If you look around at other's mission statements, you can find that they pretty much say the same thing - client-driven, quality, service, honesty, integrity, seeking justice, etc. Be careful how you draft your mission statement - you will be judged by the words you choose; by your clients, your employees and your competitors. The mission statement is the "big picture" so it needs to encompass everything you want to accomplish with the strategic plan. Answer these 4 "whats" (adapted from The Lawyer's Guide To Strategic Planning by Thomas C. Grella and Michael L. Hudkins) and compress it into a single statement:

What areas of practice are our focus?
What is our goal in representing clients?
What market segment do we serve?
What are our core values?

Determining the goals that align with that purpose - the goals are the metrics against which you will measure success. Most people think of setting long-term goals. I think for smaller firms, you should pick short-term goals with long-term objectives. This is especially true when looking at financial goals, but with any change you have to set goals that are attainable in the short term. Since strategic plans should be reviewed annually, you can set new goals next year. It is more important that they are aligned with your core purpose than comprehensive.

Determine the methods you will use to reach those goals - the methods used to reach your goals require a review of all your processes. Processes that are inhibiting your ability to reach your goals need to be eliminated. While you are at it, those processes that are inefficient should be streamlined. If you do not have a clear organizational chart, this would be a good time to develop one.

Create action plans to implement these methods - who are we kidding here? Attorneys creating action plans? It isn't hard to see why firms get lost in the process. However, you have to set benchmarks to measure success or failure. The action plan is the blueprint for success that you follow based on the processes set up to reach the goals that align with your core values. One idea for an action plan (again from The Free Management Library) requires the following to be addressed:

The goals to be accomplished;
How those results will be achieved
Who is responsible for achieving the results
When will the results be achieved (timeline)
What is the status of the goal (with an as of date)

Considering that action plans will have a short-term negative impact on productivity, many firms will not want to do this. Understand the purpose and create your own method of accountability. Some consultants do not promote action plans, but promote organizational focus to implement the plan. Additional staff are needed and focus placed on them to ensure that processes are in place and functioning. If it works, stick with it. If it falters, you need to implement things that work. How will you know if it falters? Through measuring performance.

Measure, adjust and modify as needed - measurement improves performance. In this case, measurement will hold people and processes accountable so that you can modify the processes and mentor the people (to the extent you can). The largest issue I have found in firms that enact change isn't necessarily the processes - people eventually get used to processes. It is the accountability. It is imperative that there is buy-in by the principals or else plans can easily falter and a large investment in time and money is wasted. If the firm is even-handed and consistent in its application of the plan, positive results will ensue.

Law Firm Strategic Planning - An Overview Of Models

Admin — Mon, 31 Mar 2008 07:00:13 GMT

When some talk of strategic planning, they are talking about retreats and consultants, about mission statements and long term goal setting. Strategic planning can be all of this - however, it doesn't necessarily have to be a complex document that takes weeks or months to develop.

In a more simpler form, strategic planning consists of reviewing the current environment, setting goals to improve it, and implementing them, measuring performance along the way. How you get from "review" to "do" is the focus of several posts this week.

There are several different "models" of strategic plans. Some listed on The Free Management Library include:

"Basic" Strategic Plan - this is the plan typically implemented in firms that invest in developing a strategic plan;
Goal-Based Model - this model is more focused on goal setting and performance metrics relating to meeting the goals;
Alignment Model - this model is targeted to driving the organization to align itself with the firm's mission;
Scenario Model - this model uses scenarios to help identify strategic issues and goals;
"Organic" Model - this model focuses on embracing the shared values and evolving the plan through the continual dialogue that will hopefully eventually increase the values that are shared.

74% of the respondents to the 2007 Law Firm Economic Survey from LexisNexis stated they did not have a written strategic plan. However, 89% of those who did plan said that there was a correlation between their plan and income. What is your firm's plan?

For a look at reasons why strategic planning has been a problem for law firms to implement, look at an earlier post on the subject: Law Firms With Strategic Plans More Profitable.

The Obstacle To Change In Law Firms

Admin — Fri, 28 Mar 2008 08:25:33 GMT

On the plane coming back from Philadelphia I was asked by a colleague of mine, Tiffany Poulton, what I thought was an obstacle to change. After a brief pause, I mentioned that perceived difficulty would be an obstacle to change. She responded, "what about fear?"

It brought to mind a book and a play I read in college. The book, Henry James' Beast In The Jungle, is about a man who spends his entire life waiting for an awful event that is to happen to him. The play, Eugene O'Neill's The Iceman Cometh, is about a group of drunks who waste their lives living in the tunnel of a pipe dream, refusing to change and face their own realities.

In both of these works of fiction, fear is the main driver inhibiting change. John Marcher, James' protagonist, is so self absorbed in fear that he can't see that he has many opportunities to free himself from the chains he has attached to his life. Only when realizing his lost opportunities does he see that the "beast" is his own lack of action that has cost him the only thing that brought him comfort in life.

In O'Neill's play, his protagonist, Hickey, has already overcome his obstacle to change, self realization (never mind that it was done by murder), and though he attempts to share that knowledge to his peers, their own fear to accept who they are prevent them from waking from the intoxicated blur of their lives. As the antagonist Harry exclaims, "Stay passed out, that's the right dope. There aren't any cool willow trees--except you grow your own in a bottle."

What is the obstacle that prevents change in your office? Is it comfort? Perceived difficulty? Or is it fear?

Why do some attorneys refuse to enter their time as work is performed? Is it that they are too busy? Or afraid of the expectation of adding another chore to their workload?

Why do some firms not establish and maintain a strategic plan? Is it that planning is too time consuming and difficult? Or are attorneys afraid of being held accountable to the results?

Why do some partners refuse to share work with associates? Is it a lack of trust? Lack of motivated associates? Client demands? Or fear that they won't be able to replace the work and thus their compensation may be adversely affected?

It's been said that the only constant in life is change. However, embracing change for the sake of it alone won't improve income. Any movement to change processes or habits should be looked at through the effects it can have to your bottom line. How would it affect productivity to require attorneys enter time as work is performed? What would happen to the relative tranquility of the firm if you implemented a strategic plan and held everyone accountable for the results? How would requiring partners to shift work to associates affect the quality of services provided your clients? How would it affect compensation?

When addressing concerns, be mindful of fear. Fear may be underlying every reason why the change is fought. The pipe dream of the status quo may have your attorneys in a self-absorbed state of fear of change. At all costs this must be defeated to enact meaningful processes that will increase value to the firm, its clients, and its members.

Otherwise, as is written to end O'Neill's play, "The days grow hot, O Babylon. Tis cool beneath the willow trees."

Tom Collins has written many times on the subject of change in the law firm. All of them are highly recommended. Some are linked below:

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.

Unencrypted Emails Between Attorneys and Clients May Not Be Privileged

Admin — Fri, 01 Feb 2008 08:00:00 GMT

The days of unencrypted email communications being protected under the attorney/client privilege may be numbered. The latest evidence of this comes from New York, where Judge Charles W. Ramos ruled last fall that emails from a doctor to his lawyer sent via a hospital's business email server weren't privileged after they were discovered by the hospital (source: Wall Street Journal Law Blog).

Judge Ramos rejected the privilege largely because, he found, the plaintiff didn’t have any real expectation that the messages were private. The hospital had a policy of prohibiting email for personal purposes, and that policy was disclosed to employees.

This is another shot across the bow to law firms. When courts have waived the privilege in situations like the above, it has been due to a lack of expectation of privacy. There have been similar cases in the past (Kaufman v. SunGard Invest. Sys., 2006 U.S. Dist. LEXIS 28149 (D.N.J. 2006)), In the bankruptcy proceeding In re Asia Global Crossing, Ltd., 324 B.R. 503 (Bankr. D.N.Y. 2005), the Southern District of New York held that email between an attorney and client left on the corporate email system waived the privilege. The court held found that the following four factors should be taken into consideration in that analysis:

(1) does the corporation maintain a policy banning personal or other objectionable use,

(2) does the company monitor the use of the employee's computer or e-mail,

(3) do third parties have a right of access to the computer or emails, and

(4) did the corporation notify the employee, or was the employee aware, of the use and monitoring policies?

What if the client was communicating to the attorney with encrypted email? Does that offer the client an “expectation of privacy?”

In order for a client to invoke the protections of the attorney client privilege, four elements are required:

the client is seeking legal advice;
from a professional in his capacity as an attorney;
the communication relates to the legal advice; and
the confidential communication is between the client and the attorney.

In Nat'l Econ. Research Assocs. v. Evans, 21 Mass. L. Rep. 337 (Mass. Super. Ct. 2006), the Massachusetts Superior Court held that when the employer did not specify in its manual that it could monitor email and the employee took “reasonable” steps to protect the emails (the court considered deleting the emails and running a disk de-fragmentation program sufficient), then the privilege isn’t waived. Ernest Sasso, on his firm site, wrote a comprehensive article regarding email and client confidentiality which supports the argument that encrypted email would make arguments for waiver of privilege moot. To my knowledge, the issue of encrypted mail being challenged to waive privilege has still not been litigated (please correct me if I am wrong).

If you are communicating via email to clients regarding your case, stop it now. Or, take evasive action. Use encryption in all communications with clients expected to contain privileged information. In my opinion, you have a stronger argument for an expectation of privacy even with minimal encryption (read: ease of use and implementation) than with none at all. Plus, the cost of software (for the client end) can be billed to the client as an up-front expense if the client desires to communicate via email.

The above is just a cursory look at the law to alert you to the potential danger of communicating with clients via unencrypted email. Logon to Lexis.com to research the above in more detail. And to avoid being the next victim, encrypt now.

Some encryption providers:

The above isn’t even close to comprehensive. Have your IT staff research solutions that will work with your firm.

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.

RVs, Bananas and Recession-Proofing the Law Firm

Admin — Fri, 18 Jan 2008 08:00:52 GMT

It seems every year there are those who get in front of the press and claim that there is a looming recession that is about to envelop the country and if there is no action, the depths of it will surpass our worst fears.

This year is no exception. December retail sales were down 4%, unemployment is up to 5%, and, of course, RV sales are plummeting. Yes, according to several articles, the reduction of RV sales is an accurate forecaster of recession. I am sure Federal Reserver Chairman Ben Bernanke is keeping close tabs on this key indicator.

Larry Bodine doesn't just think we are headed for economic recession - he claims that we are already there. His reasons do not include RV sales:

Housing starts are down 24% from a year ago. The median sales price of existing single-family homes has been falling all year, according to the National Association of Realtors. A person's home is the largest single asset and the source of a sense of prosperity for most Americans.
The value of the dollar is near an all-time low [ ]. The dollar is worth the same as the Canadian Loonie currency.
The price of oil spiked at $100 per barrel on January 2 and has settled at an exorbitant $92 per barrel.
The US trade deficit widened sharply by 9.3% in November to a larger-than-expected $63.1 billion. The trade deficit has widened to its highest level in more than a year.
The "credit crunch" means that investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, thereby driving up the price of debt products for borrowers. Citigroup, the nation's biggest bank, announced a stunning $10 billion fourth-quarter loss. The Kuwait Investment Authority -- a foreign country -- is expected to bail out Merrill Lynch with a $4 billion investment.
The cost of the war in Iraq over the past five years is now approaching a cumulative $500 billion, or about $100 billion per year on average.

Bodine isn't the only one (not by a long shot) ringing in the new recession. Bruce MacEwen has two posts in a row (The Upcoming Banana? and A Contrarian Bounce?) dedicated to the apparently imminent recession.

In The Upcoming Banana?, MacEwen has his own figures to back up the sure "banana" that is happening:

Morgan Stanley, Goldman Sachs and Merrill Lynch have issued "recession warnings."

The Economist's somewhat impish "R-word index," which counts how many times in a quarter the word appears in The New York Times and The Washington Post, and which accurately forecast the 1980, 1991, and 2001 recessions, is nearing a new peak.

Sullivan & Cromwell Chairman H. Rodgin Cohen said "It is hard to be an optimist," [of the outlook for M&A activity in 2008]. "With the markets where they are, it is going to be a tough year. The markets hate uncertainty, and we are in an uncertain time."

Gold and oil are both at or near all-time (inflation-adjusted) highs.

The front page of just one day's Wall Street Journal lists the following facts:

American Express drops 10% in one day after announcing increased write offs and delinquencies; Capital One, Master Card, and Discover also drop;

Retailers ranging from McDonald's to Tiffany report disappointing same-store sales;

The stock market has started 2008 with its worst year-opening slide in over 30 years; and

A Barron's roundtable questions whether the 25-year bull market is running out of gas.

The American Lawyer's most recent survey of law firm leaders (last month) was appropriately headined "Fog Advisory"—the outlook is unclear.

And, of course, Cadwalader laid off 35 finance attorneys.

With the 300 points the Dow Jones Industrial Average lost Thursday, we may be doing more than just talking ourselves into a recession. Tensions are certainly high. Jim Blasingame from the Memphis Commercial Appeal, however, has a remedy: Don't participate in the recession. Some of his ideas include eliminating operational inefficiencies, cutting costs, converting non-performing assets to cash, and pay more attention to receivables.

MacEwen, in A Contrarian Bounce? has one idea contrary to the above: Don't cut costs - invest:

Rather than tightening their belts, the aggressive firms apparently sensed opportunity and chose to invest in [SG&A, R&D and advertising] in hopes of a longer-run payoff, whereas during flush times they focused on operational efficiencies. In other words—although they always invested more than their peers in R&D—their strategy was to sacrifice short-term profits in bad times for the sake of longer-term advantage: And to more than make up the sacrifice when good times returned.

Investing rather than cutting costs is consistent with what the LexisNexis Economic Survey shows. For firms who retain earnings, recessions become opportunities to exploit the weak economy to its own advantage. The market starves for investors during economic troughs and those who can afford to invest will find great opportunities to expand. Those who choose to devour all profits in good times will be the ones struggling to keep the doors open in bad times.

It is like the politically corrected story of a brother and sister who decided to open different restaurants on the same city block. Both sold roughly the same type of food and catered to the lunch crowd. The brother was very outgoing. He always remembered his customers, greeted them happily when they entered the restaurant, came to their table to mingle with his customers, and was so liked that the place was packed all the time. The sister, on the other hand, was a quiet woman who merely went about running the restaurant and most customers never saw her. The restaurant often was practically empty and you sometimes wondered how the place was still open.

The brother's business soon failed. Though great at bringing in customers, he was a poor manager. His employees stole from him, he gave away food, and he rarely ever looked at the books. On the other hand, the sister's business grew because she kept a ledger, measured what items sold and which didn't, changed the menu to highlight items that sold better, guarded her margins and saved her money.

There is a lesson in this for law firms. I have seen many firms who have neglected their finances because the volume of business kept constant cash flow and hid structural deficiencies in their model. Does your firm give away food? Do you have attorneys well liked by their clients but under producing from a financial standpoint? Do you want to be the brother or the sister?

Firms that plan and measure performance are in a much better position to aggressively attack recessions and benefit from them. Investing in the expansion of your business is a sign of a strong company. Cutting costs is a sign of a failing one.

Don't misunderstand: you don't want to spend away your margins. Make sure there is a link between your spending and increased revenue. But don't necessarily look to cost cutting when the economy is on the downturn. As MacEwen notes, "[i]s it "risky" to increase operating expenses during a downturn? So it would seem. But the real risk may be in following the herd."

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 Management ABC's: Manage Your Associates

Admin — Wed, 16 Jan 2008 08:00:20 GMT

Management is achieving objectives through others. It's a continuing process of receiving input, processing input, taking action, receiving feedback, and repeating the process. It requires KASH in a real-time environment. It is a cycle of planning, organizing, actuating and controlling.

Prior to 1828, the path to becoming an attorney required not only to obtain a degree, but to serve several years as an apprentice before being able to practice law. President Andrew Jackson changed these requirements to break up the elitist methods of choosing attorneys (only attorneys could choose who the apprentice would be, much like real estate appraisers of today). By the end of the 1800's, apprenticeship programs for attorneys were well in decline and after the introduction of the American Bar Association in 1878, a more standardized formal process to becoming an attorney was introduced (Source: Bar Examination: Further Readings). An unintended consequence of this action was to lessen the importance of mentorship to young attorneys-in-waiting.

Today, the only qualifications (not to lessen their importance) to becoming a lawyer is a good dose of book smarts, focus and an ability to not crack under stress. Law school does much to help you think like a lawyer, but does nothing to help you act like a lawyer. Mentorship helps associates to learn from seasoned attorneys how to act as well as how to best service clients.

Management ensures that the value of mentoring is set as habit, achieving professional objectives not only for the individual, but for the firm. Unfortunately for some firms, management is treated much like strategic plans: either you spend time developing a plan but don't stick to it or you don't do it at all.

Good management starts by receiving input. Actively solicit feedback from your associates. Karen Asner wrote an article for Law.Com (Law Firm Partners Find Out What Associates Really Think of Them) regarding establishing an "upward review process":

Upward reviews give associates the opportunity to evaluate and provide input on the management and leadership performance of partners with whom they regularly work on deals, cases, committees or pro bono matters.

Law firms aiming to create an outstanding working environment for their associates and attract prospective recruits should seriously consider implementing an upward review process.

It's a good bet that associates, if put in a non-threatening environment to speak frankly, would have some pointed views on their plight. Some may be warranted; some may not, but if you want to consistently increase partner income, knowing what associates are thinking can be invaluable, especially if you are considering them as future partners. You don't want to find out after the attorney leaves how disaffected he/she was towards the shareholders. Plus, in an ideal environment, the associates are bearing the brunt of most of the work - you want to make sure they are well incented to be proper representatives of the firm, inside and outside of the office.

Implementing an upward review process is only the start: next, you have to process the input. The management committee or equivalent must review the results and develop a plan of action that will address concerns and further the firm's objectives. Accountability must be delegated to every member of the firm. Clear and concise roles and goals need to be communicated.

Then you must take action. Talking about management and goals is a waste of time otherwise. Taking action means mentoring associates - not only as to how to practice law, but how to act. Mentoring is a way to reclaim the lost art of apprenticeship. Not only will it allow the partners to dictate how the associate acts, but it also creates a bond of acceptance within the firm that the associate is part of the team. That can only help in fostering trust, a central component in management.

Measurement improves results. Always measure the effectiveness of your plan by again receiving feedback. Keep the upward review process going - quarterly, semi-annually, annually, whatever time frame will maximize the effectiveness of the campaign (understanding the resource drain on the review process - you don't want to lose productivity as a result of processes established to improve productivity). My suggestion is semi-annual.

Measure and adjust, then repeat the process. Nothing is gained by doing something only once. Consistency is the name of the game if you want to affect the habits of others. Don't let up, don't get down, never give up. Over the long run, your efforts will be rewarded with a smooth running operation that will scale with your profits.

Reward Attorneys for the Commoditization of Reproducible Work

Admin — Tue, 15 Jan 2008 08:04:35 GMT

A friend of mine practices in firm that specializes primarily in transactional work. Much of the work is billed flat fee but they still track their time so the firm can determine profitability. Recorded time is set against an attorney's budgeted hours for the year so that they are credited for their flat fee work. My friend lamented associates padding their worked hours for flat fee work so they make their budget numbers. In this case, padding hours doesn't affect clients since the fee is pre-set but it does affect reporting of profitability.

Aric Press, Editor-In-Chief of The American Lawyer, wrote in the December, 2007, In-House article that 2008 may well be the year when clients start to demand alternative fee arrangements:

One of the unintended consequences of electronic billing is that clients can now easily compute and compare the cost of tasks. Soon there may be other technological threats based on knowledge management that can convert once complex acts of lawyering into rather commoditized routines.

I have been pretty adamant in my defense of the billable hour. That doesn't mean that I am against alternative fee arrangements when the use of them will improve the efficiency of the firm and thus increase profits. Recording time, regardless of fee arrangement, is still a good idea. However, sometimes it just makes more sense to bill using fixed fees for certain tasks.

Why not take advantage of this and place an internal value on the task as well? You can do this by determining the time it takes to perform the task, then mark it up to the market price (perhaps based on the hourly rate times the time it should take to perform it). When a task is routine, standardization gives firms opportunities that can revolutionize a firm's business model. Not only will attorneys have a value based on their billable hour, but certain repetitive and reproducible tasks can be valued as well. Your firm will diversify its product offerings to clients, giving them more options for services and giving you more options to strengthen the client relationship. You could ostensibly set a price list for legal products - in effect competing with the emerging online forms market.

In the example of my friend's firm, creating a standard task that is reproducible and given a proper value reduces the inaccuracies in reporting due to "padding time" by associates trying to make their numbers. In the example of the firm whose client has already placed billing guidelines on a firm, this has the equal benefit of both providing cost certainty to the client and saving the attorney from repetitive time entry.

There is also the benefit to the general practice firm. The firm can market package transaction services at a set rate, and tack on billable hours beyond the scope of the repetitive (and priced) task. Sound a bit like value-billing?

How would this work? For transactional work, it would be as simple as setting a value upon a routine task, such as creating a will. For a simple will, attorneys will determine what the variables are, determine what it has cost in the past, agree upon an acceptable price based on market acceptance and variables, then price it.

In a litigation matter, it is no different. Many firms are already required to provide budgets based on tasks for the benefit of client cost allocation. Each task that the firm performs can be priced. Litigators can anticipate the course of the suit and determine a cost for the entire matter. There should be a value placed upon every legal task, whether it be writing a status letter, reviewing a file, etc. The price can take into consideration variance in time it takes for different attorneys to perform the task. That is up to the firm to decide.

By standardizing the value of certain tasks, it also opens another opportunity for building firm expertise: giving royalties to attorneys who create reproducible work product. Firms spend years building up forms. Forms are rarely created again - they are typically modified. Yet no one gets credit for creating the forms.

By giving an attorney a royalty for a form, you encourage expertise to be passed on to the rest of the firm. You can position attorneys who have a talent for researching and integrating current law into forms as work product creators and attorneys who are better at managing relationships and matters representing clients. Both have value. Both can be compensated based on the work they perform. Form writers would receive a percentage of the cost of the task as a royalty for a certain time period whenever their form is used. Just as you should place a time limit on origination credit, you should only provide royalties on forms for a certain time.

How can this be advantageous to the firm? Several ways:

It encourages information sharing within the firm.
It compensates those who provide value to others in the firm.
It can further a strategy of increasing leverage by giving credit to partners while reducing their billable hours.
It transfers the wealth of knowledge gained at the firm's expense back to the firm.
It can aid the strategy of succession planning by providing a route to semi-retirement while ensuring that the firm maintain its areas of specialization.
It allows partners to spend more time on what they excel in most: rainmakers focused on marketing efforts and strategic planning and grinders developing work product.
It gives firms an opportunity to give associates responsibilities that will benefit the firm as well as the associate.

Of course, with any change in policy, there are uncertainties that have to be addressed. For example, what if another attorney within the firm finds a problematic provision in the form and proposes to change a few clauses? What if the attorney proposes an entirely new form? Although in theory it would be a good thing to have several different forms from which to choose, logistically it may make more sense for your firm to settle on a preferred form from which attorneys may receive a royalty. That along with determination of the royalty percentage is sure to provide lively discussion in the partner meeting.

Whatever direction your firm goes when applying new policies, it should conform with a universal requirement of periodic measurement and adjustment.