Make More Rain : compensation, cash flow issues

Associate Salary Increases & Firm Margins

Admin — Thu, 04 Sep 2008 17:20:23 GMT

It should come as no surprise to anyone that the most recent wave of associate salary increases have helped to erode law firm profit margins. Whether the wave begins in west coast technology firms, or east coast financial capital firms, its effects are felt beyond big law in the mid-size and regional firms headquartered in the mid-west and southeast. And, with 80% of law firm expense tied up in compensation and occupancy, the impact can be devastating. What is more surprising is the response of law firm leaders in this new economic environment. Reactions run the gamut from slash and burn tactics to taking it on the chin and silently watching margins erode. Formulating a balanced strategy and resisting the urge for an emotional response is critical. Consider the following.

First, is increasing associate salaries is an appropriate response to increased competition for the best talent in your market or just a follow the leader reaction? Associate salary increases typically begin in markets where competition is fierce for not only attracting the best talent, but also keeping that talent as the reality of billable hours requirements hits home. Increasingly, associates are not willing to trade work life balance for a big paycheck. This attitude is not pigeonholed in the bottom half of the law school classes, but pervades throughout. Are there other work life benefits your firm can offer to entice top talent?

Secondly, recent surveys suggest the demand for legal services have declined in the first two quarters of 2008, and making sure your lawyers are properly utilized is essential to maintaining profitability. As margins become slimmer, there is no room for unproductive associates taking up space. But are associates really the problem? Most associates have little control over the projects they are assigned and virtually no ability to generate new business. They, like everyone else in the firm, rely on the rainmakers to generate enough billable hours to support the business. Before taking a defensive posture and eliminating positions, look for ways to improve your business development efforts. Are you effectively cross-selling your services to existing clients? Do you place enough emphasis on developing new business and in the right sectors?

Lastly, in today’s competitive marketplace, passing increased costs on to your clients is rarely an option. Even in big law, where clients were thought to be less price sensitive, general counsels are scoffing at increased rates as a result of higher associate salaries. Can you blame them? That doesn’t mean you have lost the ability to control your average rates. The next time someone asks you for an alternative billing arrangement, consider the request an opportunity to control your own destiny. Look for ways to strengthen the value proposition, improve practice management at the matter level, and increase leverage.

Can you avoid the impact of associate salary increases? Not likely. But focusing on the positive economic aspects of your business, rather than going on the defensive, may help you roll through the downturn and leave you prepared for the eventual upswing.

- Rick Rawls

Measuring Your Law Firm's Billing Cycle

Admin — Fri, 25 Apr 2008 07:00:14 GMT

One of the observations in the 2007 Law Firm Economic Survey by LexisNexis and a focus of the 2008 Survey (in progress) relates to cash flow. According to the 2007 Survey, all firms had a slow billing cycle. On average it took firms 170 days from providing a service to collecting payment on it. In non-service industries that would be a recipe for bankruptcy. Law firms enjoy high margins, so once the firm initially weathers the 80 or so days before the cash starts coming in, it can survive the slow cycle. Unless the cycle stops.

How will you know when clients stop paying? How long do you have until your cash flow reduces to a trickle? Measuring your billing cycle times is critical in answering these questions.

Long billing cycles hide what may be slowly killing your firm - inefficiencies, declining business, etc. If you aren't measuring your performance in converting work to cash, you may not know that your firm is in a crisis for several months, wasting valuable time to act.

Below is an example chart that shows how you can measure the billing cycle by just tracking your unbilled fees, billed fees, and collected fees.

To determine unbilled fees, take your work in process that is currently unbilled and not subject to mark-down (to the extent known) for the prior "rolling" 12 months. Do the same for fees billed and fees collected. From that you can determine your average days to bill, days to pay and average AR days fees outstanding. Lowering any of these numbers will increase cash flow and provide additional liquidity to the firm.

The above takes a look at the billing cycle from the firm perspective. You can also do this analysis on a timekeeper or practice area. Tools such as Juris' Active Information can not only track your billing cycle but can also drill down into the "why", exposing inefficiencies that are hampering your ability to maintain liquidity and giving you an opportunity to act to increase cash flow before it slows.

Click on the graphic above to download a spreadsheet to use with your firm's numbers. You must be a registered user to download content.

Leverage Rules When It Comes to Partner Earnings

Admin — Tue, 22 Aug 2006 17:49:17 GMT

A picture says a thousand words. The above chart based on a soon to be released Juris, Inc. survey of 2005 law firm financial performance confirms, once again, the important role that leverage plays in determining law firm partner earnings. The first quartile represents the top 25 percent of midsized law firms as measured by per-partner income. The first quartile earned more than twice the per-partner income of the next highest group. That top segment of law firms earned more than eight times that of the lowest quartile.

By now, the impact of leverage in determining per-partner earnings is well known and understood. So, it is surprising that 75 percent of midsized law firms are not successively implementing the strategy.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

The Funny Thing About the Brits' Move to EWYK

Admin — Tue, 27 Jun 2006 17:52:29 GMT

Adam Smith, Esq. notes a Legal Week article that reports that the Brits are moving away from varieties of lockstep compensation systems toward the American Eat-What-You-Kill system. They are doing so at the very time that the former colonies are facing up to the weakness of EWYK.

What is their motivation? True, the lockstep compensation has some weakness of its own. But one of the motivations has to bring a smile to your face. The U.K. is about to pass legislation banning “age” discrimination against the young!

There is an old saying that youth is wasted on the young. Youth has the desire, but seniors have the income and net worth. The Brits would change that. Makes you wonder who is in charge in Parliament…

The Adam Smith post goes on to review the advantages and disadvantages of lockset compensation methods. While EWYK carried to the extreme can be counterproductive, a tolerant lockstep can be just as destructive.

PS: The Brits are really on a tear to change things and that includes considering law firm ownership by non-lawyers. David Maisters wrote a long post back in February explaining why law firms aren't "equity" or owner focused. Maybe the Lord High Chancellor should take a read. Of course, the real motive may be to allow the entry of financial institutions and others into the business of providing legal services

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Rebates As Alternative to Discounted Legal Fees

Admin — Wed, 10 May 2006 17:23:00 GMT

Occasionally, circumstances arise that warrant providing a client with a special negotiated deal. One firm we work with had done so with a particularly large client. Part of the negotiated engagement terms was that the discount applied to each particular bill only if it was paid promptly. The discount, however, appeared on the bill showing the net as the amount due.

As you might have guessed, over time the client’s payment pattern slowed down. Eventually, the law firm discovered the client was taking in excess of 60 days to remit payment for services billed. Yet, they always took the discount.

The Juris Client Services team working with the law firm recommended changing from a discount to a rebate arrangement. Under the rebate arrangement, the firm would bill the client at gross (the undiscounted amount). Periodically, the law firm would issue a rebate to the client for the bills that were paid within the negotiated terms.

The rebate approach, which is common in commercial circles, makes a lot of sense as an alternative to the discounted fee approach. It puts the law firm in control to assure that the client is delivering on their part of the negotiated bargain.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Law Firm Managing Partner Compensation

Admin — Tue, 09 May 2006 17:16:18 GMT

A law firm that fills its managing partner position as a right of passage or as a place to park a mediocre partner does a disservice to all partners.

It takes effective management for long-term success. Without effective management, a law firm can only be accidentally successful for some period of time. When something goes wrong (and eventually it always does), the consequences for the poorly managed firms are likely to be fatal. Given the fact that every partner’s income and personal wealth is at risk, managing partners should be selected for their executive skills, and their compensation should reflect the value of the job.

Richard Gray addresses the issue of managing partner compensation in the March/April issue of Law Firm Inc. Gray states that, “It goes without saying that the managing partner's compensation should bear a reasonable relationship to the individual's historic compensation level--and, in all likelihood, should be somewhat higher. No one should take a pay cut to become a managing partner.”

Gray emphasizes that while the managing partner should be among the highest paid partners, he/she should not be the highest. “In accounting, investment banking, and even professional sports, the chief executive is paid well, but the highest pay is reserved for the ‘producers’. Law firms should follow this model, too.”

Personally, I would modify Gray’s statement that “…the highest pay is reserved for the producers” to read, “…the highest pay is reserved for the firm’s star producers.”

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Client Expense Drain on Law Firms

Admin — Mon, 24 Apr 2006 17:51:00 GMT

I had a conversation last week with a member of the Juris Client Services team who is working with several Intellectual property firms. Remarking on the recent post “Stop the Client Expense Cash Drain,”she reminded me that Intellectual property firms have a higher than average investment in client cost expense. On average, the benchmark client advance number for intellectual property firms is just over $40,000 per attorney per year. On average, a 20-attorney firm incurs $800,000 a year in expenses on behalf of its clients. Averages can understate the problem for a firm. For example, one firm she is working with has financed $6,000,000 in client expenses over the last 2 ½ years. Remember, it takes the firm on average 137 days (almost 4 ½ months) to convert worked or incurred time into revenue. Funds tied up in uncollected client expenses come out of the partners’ pockets or purse.

Our standard recommendations in this area have involved faster billing or retainers, but now there are a variety of innovative services that eliminate the need for partners to tie up their funds in uncollected client expenses altogether.

Patent and Trademark Fee Management’s innovative Cash Right Now™ system is one of those systems. With Cash Right Now™, your firm obtains “instant retainers” for payment of out-of-pocket expenses, and you get to keep your cash where it belongs—in the bank. The Cash Right Now™ system collects out-of-pocket fees from your clients the same day these payments are made by electronic collection from either a client credit card or checking account. PTFM pays your firm the full cost of the out-of-pocket fee. Your clients pay only when the fees are actually due.

For more partner income, check out the innovative services from PTFM.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Speeding Up Law Firm Billing and Collection

Admin — Tue, 18 Oct 2005 17:22:00 GMT

Shortening the billing cycle and speeding up the collection process can have a dramatic positive impact on distributable income to the owner/partners. While every law firm is different, the average firm has 78 days of unbilled work. On average, it takes an additional 60 days to collect fees once they have been billed. That is 138 days from the time services are performed until payment is deposited in the firm’s bank account—slightly more than 4½ months. Reducing the lag time in half would free up cash for distribution equal to 2¼ months of fees!

There is more. With faster billing, adjustments will decline since a large number of adjustments can be attributed to disputes over work done 4½ months ago. Client appreciation for work declines with the passage of time. Attorneys also tend to make concessions in exchange for a payment promise. Lower adjustments increase margin and that means a permanent, year after year, increase in per-partner income. Likewise, bad debts decline. Those who wait the longest for payment are the ones left trying to drink from the well after it has gone dry. The moral is "get your money as fast as possible," including up front.

Steps to speed up billing often result in other indirect financial benefits, including increased productivity (utilization) from better time tracking methods, lower overhead due to increased accuracy and improved administrative practices, greater client satisfaction with the firm’s billing and communication process, etc.

Use the checklist below as a guide for reviewing and improving your billing and collection procedures to speed up billing and collection.

Checklist for Speeding up Billing and Collections

· Negotiate trust deposits and/or prepayments together with minimum trust deposits.

· Agree on billing frequency-monthly or every two weeks.

· Use cycle billing. Assign specific clients or billing attorneys to a 4- or 5-week cycle. This spreads out the workload and evens out the cash flow.

· Set the billing period to end one to five days prior to the billing frequency. For calendar month billing, consider billing from the 26th through the 25th. Receipt of your bills will better match for typical corporate and individual bill paying procedures.

· Document payment terms in the engagement letter.

· Get agreement on late payment penalties.

· Agree as to E-mail or E-bills vs. paper bills—promote e-mail vs. paper bills. You will get payment faster while eliminating postal delays, postage cost, paper and expensive administrative handling.

· Identify the person to receive the bill (for business clients, mail to Accounts Payable or the case contact’s assistant with an “information only” copy to the case contact).

· Identify the person to contact to confirm bill receipt and payment schedule.

· Agree that on-time payment does not waive client’s right to dispute charges.

· Negotiate progress payments.

· Invest in the right tools for timekeepers and insist on zero tolerance that billable information has to be tracked and reported as worked.

· Get time in on schedule, daily, weekly, etc. This discipline needs to be a job requirement, period.

· Fee earners should be expected to submit time to accounting accurately with correct spelling and grammar. In short, editing should not be required.

· Go mobile with PDA devices, like the BlackBerry®.

· Use time tracking software that turns your e-mails, appointments and calls into time entries without the need to reenter.

· Use time tracking software that passes time entries directly to your billing system once the timekeeper deems them to be complete and correct.

· Administration must be thorough and accurate in new matter setup, get it right from the start (use software that automates much of the handling once a client is properly set up, i.e., prices automatically handling exceptions for you, pre-audits entries against engagement rules, produces multiple bill copies to multiple addresses for different purposes, e-billing, etc.).

o Verify the name and correct address for the payment copy of your bill, i.e., the person who will pay or process payment.

o Verify the correct address for an information copy of your bill, for example for corporate clients, send an “information only” copy to the decision maker (or case contact person) while the payment copy is sent directly to Accounts Payable.

o Set up the billing frequency (and cycle) as agreed upon.

o If bills (and/or information copies) can be e-mailed or sent using E-billing, set up for automatic electronic issue of final bills with correct e-mail address and/or E-bill formats

o Set up the correct rate (and exceptions) schedules for fees.

o Set up the correct rates (and exceptions) for expenses.

o Obtain from the engagement agreement or your client any “billing exceptions or rules” and have compliance rules set up in your billing system to avoid rejected bills and adjustments.

· Set up special billing notes in the "remarks" on the matter¾add these to your prebill format.

· Select the appropriate bill format - do they want detail? Do you need a timekeeper recap?

· Obtain the correct e-mail address and phone number for collection calls - wherever possible, calls should go first to Accounts Payable or the decision-maker’s assistant or secretary vs. the decision maker or case contact.

· Test e-mail addresses and E-bill formats before the first billing!

· Have the accounting area plan ahead - prepare a calendar of dates to run bills considering week-ends and holidays. Make it a priority and get it done.

· Run your A/R statements monthly but separately from the billing cycle.\

· Have your prebill formats set up to give the billing attorney all the information they need when reviewing the billing:

o ITD fees billed, expenses billed

o YTD fees billed, expenses billed

o Last payment amount, last payment date

o Trust balances; Prepaid balance

o A/R aging

· Do not run prebills for clients with A/R-only balances¾run only those that need actual review prior to sending.

· Run prebills (draft bills) on colored paper so they stand out and are easy to identify.

· As with time entries, prompt review and approval of prebills (draft bills) should be a job requirement with published turnaround times and performance should be measured—and billing attorneys held accountable.

· Attorneys should review bills only once, get it right the first time.

· Don’t send custom cover letters; send a status letter under separate cover.

· Implement procedures that provide for exact attorney and administrative review of initial bills to assure accuracy. Your initial bill will set the client’s expectations. Initial errors, incomplete information, deviations from the engagement rules will create an expectation that the firm’s bills require review, rejection, correction and rebilling each and every time prior to payment.

· Manage your file in real time to avoid payment delays—for example, use software that will notify when a client is close to their budget and that automatically audits time and expense entries against engagement rules.

· Attorneys should call clients and let them know what to expect if the bill is going to be higher than expected.

· Invest in software that facilitates management and editing of prebills.

o Accounting has to take the initiative to track outstanding prebills and retrieve unreturned prebills.

o Editing bills should be almost as easy as editing a document and software should handle the accounting and retain original information, changes and the final bill data.

· Use window envelopes when mailing bills

· Don’t waste a day by letting bills remain in your mailroom, unmailed overnight. Establish procedures to deliver the bills to the post office if needed.

· Be proactive when it comes to collection procedures—don’t wait for bills to become past due. Have a member of the administrative staff call and confirm receipt of the bill. The engagement letter should clearly set out payment terms and provide that payment does not waive the client’s right to dispute charges later. 80% of your excess investment in A/R is from clients paying a little late versus real collection problems.

· Invest in the right tools. Collection software will track all collection activity between the firm and its clients. That software will let you know when payment promises have not been kept.

· The time to work accounts receivable is before accounts becomes a problem, not afterwards. And the preferred way is to work them as low as possible in the organization. Use honey instead of vinegar.

o Assign someone in your administrative staff who smiles over the phone to be that nice person from the law firm.

o If you are billing individuals, have him or her call and confirm that the client received the bill. Ask if they have any questions. Remind them of the due date. If payment isn’t received within days of the payment date, call back and let them know you haven’t received the check. Ask if they mailed it. If they haven’t, ask if they will place it in the mail that day or bring it by the firm's office.

o If it is a business, try to get agreement to mail the bill directly to Accounts Payable with a copy to your case contact. Let the client know that paying the bill on time will not waive the client's right to raise questions or dispute charges once he or she has reviewed their copy of the bill. If you have to send the bill to your case contact, find out the name, phone number and e-mail address of their secretary (or assistant). Have the person in charge of dispensing honey call the secretary after the bill is mailed and ask the secretary to be sure the bill makes it to the top of the contact’s to-do stack. Let the secretary know you will call back in a few days to check on the status of payment.

· What happens when the honey doesn’t produce payment? That’s when your business software needs to be smart enough to automatically notify the appropriate person in the firm that their intervention is required.

Alternative Billing can make billing faster and collection time shorter. Negotiated fixed fees with advance payment and/or progress payments should be promoted by the firm. For partial work, negotiate a monthly or quarterly fixed fee billed in advance of the period. Fixed fee arrangements not only speed up collection for work performed but allow the law firm to benefit from its internal efficiencies arising from technology, knowledge management and cost of labor advantages achieved through supervised leveraging.

Under-Producing Law Firm Partners

Admin — Mon, 17 Oct 2005 17:12:43 GMT

Generally there are two sources of under-producing partners:

1. Marginally producing associates promoted because of tenure;

2. Partners who experience a life change that substantially reduces their energy, desire or capacity.

The quick answer regarding source #1 is don’t do it. The firm has an obligation to the marginal associate and to the current and future partners of the firm to counsel the marginal associate out. These individuals have the opportunity for a successful and productive career in other environments. Keep them too long and you deny them that opportunity. By doing so, the firm takes on a responsibility that it should not shoulder. If you miss the “counsel out” window by failing to face such situations early on, the firm will gradually own the problem for the duration. That is what leads to the eventual promotion. That inappropriate promotion will lead to dissatisfaction and even defections among the firm’s future best talent. If the firm has already let it happen, you must deal with it the same way you deal with the second source of under-performers.

Life takes a toll on many. In the professional world our energy is highest and our experience lowest in our youngest professional years. We are at our best and most confident in our early forties. The next two decades are treacherous waters. This is where, for a variety of reasons, some will run out of steam. Others seem to acquire new skills and capabilities that can keep them as admired and contributing mentors and ambassadors well into their senior years.

The under-producing partner can suffer from a number of causes:

_ Alcohol or drugs, including prescribed drugs

_ Physical illness or declining general health

_ Declining mental capacity

_ Depression

_ A life change in terms of family or circumstances

_ Diminished desire for the rewards of career

_ Advancing age changes the ability to contribute

_ Etc.

In the course of my career I can say from observation that few fully competent professionals and executives remain competent in their previous role past 60. In a July 2005 article, the Chicago Lawyer reported that few big firm lawyers work past 60. Those that do stay on after 60 appear to have successfully changed their role and how they contribute positively to their firms. Thus, the best way to head off the problem is the planned role change. Beginning in the late forties to early fifties, the firm should be moving partners away from practicing and toward management, rainmaking, etc.—with corresponding changes in their compensation plans.

Most consultants say the answer is not to let the unproductive situation develop. Have clear expectations of partner performance and when the bells first began to go off counseling from the managing partner or executive committee chairman must begin. The law firm can’t assume the role of psychologist, physician, priest, or brain surgeon. What it can do is approach the developing problem in a straight forward business-like fashion. It involves three steps:

1. An agreement with the partner that there is a problem;

2. Agreement on a plan to correct the problem and a target date doing so;

3. Agree on the consequences if the problem is not corrected by the target date.

If you can not get agreement that there is a problem, then the problem has no hope of resolution. Therefore the partner relationship should be terminated. In short, there is no use continuing with the status quo—it is not going to get better and more likely it will get worse. If there is an agreement as to the problem, then the firm should hold the partner accountable for following the plan. If the plan isn’t followed or the problem isn’t corrected (or the agreed-upon progress achieved), then the firm should terminate the relationship. However, the three steps hopefully will lead to a more friendly resolution—an agreement under which the partner retires or moves on to other pursuits or begins an agreed-upon path to those ends.

The above assumes that the firm’s partnership agreement provides for the termination and/or retirement of partners. Ideally it addresses the issue of performance standards and termination for below standard performance. If not, then the first step dealing with current or future non-productive partners is to change the partnership agreement. While you are at it, consider a compulsory retirement age. You could, at the same time, create a non-equity partner position with negotiated salary for seniors who have the ability and desire to stay on in roles that continue to contribute valuably to the firm. Ideally our champions will know when to leave the arena on their own.

P.S. The common name for the above three steps is “The Three Step Termination” because that is the usual outcome. Nevertheless, the under-performer deserves the chance to change. Some do. Most don’t. That is the hard reality.