Make More Rain : forecasting, productivity

For Long Term Increases To Income, Partners Must Delegate Work

Admin — Mon, 17 Mar 2008 07:00:09 GMT

I spoke Friday at the ABA Techshow on profitability and the key drivers of partner income. At the end, I posed some questions to the audience to facilitate discussion on the findings of the 2007 Law Firm Economic Survey. One of the questions I asked was "why would firms have low associate utilization?" A partner in the audience responded, "Partners don't trust them to do the work."

That is a common answer I hear from partners. However, without fully utilized associates, firms can't leverage. Leverage affects the growth of the firm and there was a strong correlation between leverage and income by respondents of the 2007 Survey. The challenge for small to mid-size law firms is finding ways to increase associate utilization so that the firm positions itself to leverage. If trust is an issue, then confront it. Mentor associates so that you can trust them to do the work as you would.

An article written by Allison Wolf in her Lawyer Coach Blog titled The Fine Art Of Delegating was the basis of a post by Tom Collins in August, 2007 called Spinning Increases Law Firm Income. Both Wolf and Collins stress that partners who aren't "spinning" work to associates need to face the reasons that prevent them from delegating - don't let the reasons be an obstacle.

Wolf writes:

Delegation is one of the lawyer behaviors that need to be rewarded by compensation committees. For a law firm to be most profitable partners are required to spin work down to juniors. Savvy compensation committees look at the combination of billable hours and spin earnings when allocating partner income.

Collins adds:

[A] firm’s compensation plan is often the reason Why Partners Hoard Work. That, in turn, leads to poor leverage, underutilization of associates and high turnover.

On the issue of trust, Wolf writes:

Successful people surround themselves with talent. Your challenge is to help develop the juniors so that they do the work as well if not better than you do.

Formal mentoring programs are still rare in small and mid-size firms, yet the need is apparent based on the findings of the 2007 Survey and from what I hear from partners. In a year where inflation may very well end up over 4% (over 1% higher than the annual average the past 10 years), firms can't rely on rate increases alone to maintain income. Develop programs to help associates manage more caseload. Give partners an incentive to delegate and mentor. Those who do will create the circumstances necessary to leverage and grow the firm, ultimately leading to sustainable increases to income.

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

Admin — Fri, 14 Mar 2008 07:00:13 GMT

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

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

Does this explanation fit with your experience?

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

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

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

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

Admin — Mon, 25 Feb 2008 08:00:13 GMT

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

Leverage
Rate
Realization
Productivity
Margin

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

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

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

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

Margin is net income divided by total fee revenue.

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

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

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

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

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

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

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

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

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

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

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

Calculating the "Time Value" of Law Firm Accounts Receivable

Admin — Fri, 28 Dec 2007 14:00:00 GMT

Lawyers are keen to know what their peers are doing. Surveys, benchmarking applications, and business intelligence tools are all geared to give the firm a competitive edge relative to what others are doing. They tell you the "what". However, these tools don't tell you the entire story. They don't tell you the "how".

Take rate, for instance. What if you were charging the highest rate of those in your demographic yet still were not the most profitable? How do you know if the rate you are charging to one client is ultimately worth as much as a lower rate billed to another client? The difference lies in the time value of your accounts receivable.

In addition to considering what the market may bear, efficient billing practices, reduced write downs, and other pre-invoice processes, you should consider the time it takes your clients to pay for your services after the invoice is billed.

For example, if two firms bill their client in the same month $5,000 for services rendered, one pays at 45 days and the other pays at 120 days, the first firm retains a higher rate and is thus more profitable. How?

Based on data from the Department of Commerce, the value of a dollar decreases by 10% at 60 days and 20% by the time the debt is 120 days old. Studies also show that there is a 90% chance to collect a debt under 60 days, but that you only have a 20% chance of collecting the debt after 120 days. Finance companies use formulas based on percentages more restrictive than the above when providing loans secured by a firm's receivables.

Taking the above into consideration, the value of services for the firm which was paid at 45 days comes to $4,500 and the services for the firm which was paid at 120 days was only $4,000. The amount paid is still $5,000, but there is a $500 difference in the "time value" of the cash received for the first firm and a $1,000 difference for the second.

Now consider what this does to rate. Suppose the $5,000 represented 20 hours of work at $250 per hour. For the firm which was paid in full at 45 days, the collected rate would be $225, a full $25 less per hour. For the firm which was paid in 120 days, the rate is reduced to $200, or a $50 credit to the client per hour.

The above looks at the value of the debt owed. It does not take into consideration the chance to collect on the debt (not to mention pre-bill adjustments). If you want to forecast earnings, projections of revenue need to include the probability that the invoices will be paid. These percentages may differ from company to company. In the below graph (click on graph to download spreadsheet), I use a 95% chance to collect on AR up to 60 days. It decreases to 85% between 61 and 90, 60% from 91 to 120, and 20% after 120.

Calculating the aged receivables and multiplying the value by the percentage representing the chance to collect, your AR doesn't look nearly as nice as it does if you only consider the billed value. This combined with the decreased value of the service dollar makes for a dire forecast for those who don't take collections seriously.

The above takes a firm-wide look at receivables. You can replace the aging values with a specific client and determine whether your client is providing better or worse value for the rate charged. In this way you can determine the time value of existing client receivables.

Some may think that if you eventually receive the money, then you ultimately receive 100% of the money and the analysis above merely complicates a simple process. This line of thinking neglects to consider the time value of money. Financial institutions, insurance companies, and law firms consider the time value of money when calculating probabilities. In fact, when determining rate, firms often start with increasing their billable rates by the average percentage of inflation that may or may not be reflective of the cost of doing business in their region. It is a probability factored into the rate. Why would you not also take into consideration the negative impact of inflation on aged receivables, which is what the chart above (at least in part) represents?

Firms who don’t consider the time it takes to collect their receivables leave an important variable on the table when negotiating rates. Further, they decrease the value of their services since the debt that is collected after 120 days is likely induced by a discount if it is ever paid at all. Why spend time worrying what your billed rate is relative to others if you are ultimately going to devalue it by not seeing that the value for the work performed is retained?

Firms need to focus more attention on collections. In fact, a commitment to collecting debt within 60 days should be considered crucial to maintaining the value of the services you provide. With a monitored collections strategy, you will end up spending less in resources for future collections which will give you an effective rate increase without the client paying a penny more per hour.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center
877/377-3740, e-mail info@juris.com or go to www.Juris.com .

A Prosperous New Year For Law Firms

Admin — Thu, 27 Dec 2007 19:22:18 GMT

To Law Firm Leaders: Wishing you a Prosperous New Year

As I head into retirement and turn this blog over to those who will carry on in the years ahead, I leave you with two thoughts that, if you take to heart, will mean more partner income for 2008 and the years ahead.

I had to learn them the hard way. They are the core beliefs that have guided me throughout my business career. At least they guided me during the most successful part of that career. It took a while before I came to understand that these two certainties govern the success or failure of businesses—including law firms.

You are always judged by others
Business is a journey that involves constant change.

You are only as good as seen through the eyes of those that judge you. For a law firm, that primarily means your clients, your peers and your employees. But don’t forget all of the others that your success depends on, including vendors and service providers. The only sound business strategy is to pursue excellence. And excellence must be earned through their eyes, not yours. Excellence can only be pursued through change. You either purposely change to improve or the natural forces at work will pull you down to lower and lower performance.

Steering the course for excellence takes measurements. You have to set goals. You have to decide how you are going to achieve those goals. You have to measure your progress, make adjustments and set new goals as you continue to chase the allusive standard of excellence. It is a moving target. It takes constant innovation not to lose the race to others. Rather than stay too long with what has worked in the past, you must diligently simplify, eliminate and reinvent.

PS: Morepartnerincome.com just received Dennis Kennedy’s nod as the Best Overall Law Related Blog and also takes home the Blawggie Award for Best Law Practice Management Blog. Being recognized for your work beats a gold watch every time! Thanks Dennis.

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.

Survey Finds Reliable Forecasting Key to Improving Profits

Admin — Wed, 19 Dec 2007 14:00:00 GMT

Please notice a new change to the blog: on the right hand column there is a poll that asks a question based on a recent blog posting. Please participate - there's a story in the results.

I am also happy to introduce Amy Flaherty as a guest contributor today. Amy, one of Juris' Regional Vice Presidents, is one of our valued colleagues who always scours the internet for articles affecting the legal profession. She came across an article discussing the results of a survey highlighting the need to forecast. I asked if she would reduce her thoughts to writing and she graciously agreed:

KPMG’s recent study, "Forecasting with Confidence: Insights from leading finance functions," highlights the need for more reliable forecasting. The study found that for those companies who actively forecast, only one in five produce one which is reliable. Even so, those 4 others are still more reliable than those who don’t forecast at all.
Although KPMG’s study is not industry specific, the findings can apply to law firms as well as it could any other business. The underlying message is if you want to be able to make better decisions about future direction\growth, you need to take forecasting more seriously.

Here are some highlights and how they relate to law firms:

1. Accurate forecasting enhances value.

Firms with forecasts that came within 5% of actual results saw share prices increase by 46% compared with 34% for others. I believe this is largely due to having the right individuals analyzing accurate data and taking the time to build the forecasts. Doing so will tell you exactly what needs to happen in order to meet your financial objectives. Then you can measure against your actuals to determine whether you are on track to make your forecasted numbers. According to the Juris Law Firm Economic Survey, firms with the highest per-partner income perform well across all key performance metrics.

2. Data integrity is key to producing reliable forecasts.

Firms focus primarily on internally generated data when budgeting and forecasting. They should be using external data as well. You are limiting your analysis if only looking at your own data. Using benchmarking tools like Juris Insight® or the Juris Law Firm Economic Survey will provide you with competitive information needed to analyze numbers and produce more reliable forecasts.

3. Practice of Forecasting.

Respondents pointed to improvement in three main areas to produce more reliable forecasting:

• Automating the forecasting process with technology;
• Scenario planning;
• Rolling forecasts.

Budgeting and forecasting tools will help automate the process of forecasting by pulling in actuals from prior years and tracking prior forecasts. Then firms can test scenarios against actual as well as projected numbers. Rolling forecasts allow you to measure and adjust on a monthly or quarterly basis so that you are not only forecasting on an annual basis, but are consistently measuring your numbers and adjusting your forecasts accordingly.

4. Technology's part in forecasting.

Technology is seen as one of the key tools that could help improve forecasts. However, 40% of respondents rely solely on spreadsheets to produce forecasts. Although there is familiarity and flexibility with spreadsheets, having advanced forecasting software will automate processes and provide more flexibility, creating more reliable forecasts.

Suggestions to create more reliable forecasts:

• Use external market reports and competitive data.
• Update forecasts more frequently (58% do so monthly or more often).
• Make greater use of technology in the forecasting process.
• Hold everyone accountable for their forecasts.
• Require participation across all practice groups.

Amy Flaherty has been with Juris for over 15 years and has been a Regional Vice President for the past 5 years. Before joining Juris, Amy directed the Services and Consulting arm of Legal Works, a software integration company based out of Virginia. Amy received her undergraduate degree in Computer Information Systems from James Madison University.

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

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

A Full Time Law Firm CEO Comes First

Admin — Tue, 18 Dec 2007 20:04:19 GMT

Mark Beese, who hosts the blog Leadership for Lawyers, wrote “….mid-sized firms are hiring professional development directors to provide training and support to attorneys.” He based his remarks on an article appearing in the National Law Journal.

It is a good idea except for the chicken for the egg issue. Some midrange law firms appear to be compensating for their lack of a full time CEO or COO by adding a host of specialists to address under-managed areas in crisis. This proves the adage “it only cost a little more to go second class”. As a firm grows in size, it needs C level executives heading functional areas like Technology, Marketing, Training & Development, and other important functional areas. However, you can’t start there. First you need the head, then the arms and finally the legs.

Law firms would do well to make the first move to a full time CEO before going to the next level of management.

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.