Make More Rain : firm culture, margin

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.