Make More Rain : law firm bus model, planning

The Windy City hosts the 2009 Redwood User Conference

MichelleStPierre — Thu, 10 Sep 2009 14:52:00 GMT

This post is guest authored by Chris Katchuk who is working hard to help organize the 2009 Redwood User Conference in Chicago from September 22-23. There is still time to register to attend, follow the link at the end of the post. Whether you are a first...(read more)

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

Does A Cult Of Personality Dictate Your Firm Strategy?

Admin — Fri, 23 May 2008 07:00:53 GMT

David Maister wrote an article in 2007 related to the conditions that confront firms who face strategic changes (Are We In This Together? The Preconditions For Strategy). In it he wrote of four types of personalities:

Type 1 is the solo operator who values independence, wants to make little investment in the future, but is willing to bet on his (or her) ability to catch fresh meat each and every day. I call this the Mountain Lion approach. “Pay me for what I do today (or this year.)”
Type 2 is the individual who prefers to act in coordination with others, but doesn’t like to invest (or defer gratification) too much. I call these people (collectively) the Wolf-Pack. “If we act together we can kill bigger animals, but it had better pay off soon or I’m joining another Pack!”
Type 3 is the individual who wants to be independent, but is interested in building for the future by investing time and resources to get somewhere new. Such people remind me of Beavers building dams to provide a home for their (own) family.
Type 4 are individuals who want to be part of something bigger than they can accomplish alone, and have the patience, the ambition and the will to help the collective organization invest in that future (He references humankind, Ants and Bees as possible personifiers - I'll stick with Ants).

One of the things that draws me to this article is that I can identify people in the firm in which I worked in all the above types. The Mountain Lions were the highest producers and top originators; the Wolf-Pack were those who lived off the fat of the Lion's spoils and could churn out work; the Beavers were those who just did the work and quietly practiced law; the Ants were those who just went along with what was decided and never had much input or care into the direction of the firm.

The dynamics led Lions and wolves to form alliances and complain of the ants. In spite of the work ethic of the ants, they lost clients, had poor billing practices, and always ended up being the worst performers in the firm.

Thus, most initiatives failed in our firm. When decisions needed to be made, lions and wolves teamed up against ants. The lack of unified purpose left a conference room thick with self-preservation and under-the-breath animosity. Maister summed it up nicely:

It is hard to identify and create buy-in for what “we” (i.e., the firm) should do if there is no strong sense of “we” — a mutual commitment and sense of group loyalty and cohesiveness. Similarly, it can be meaningless if the members of the firm are not committed to go on a journey together into the future.

Problems result when a cult of personality forms around some in the firm (typically the lions). Left unchecked, the lions gain an air of invincibility and management becomes practically impossible. On the other hand, poor performers are a drag on the firm and lack of accountability can tear apart a firm. The only impetus to change can end up being a a dip in profits and/or a lion or wolf going to another firm. Both of these events are bad times to begin a discussion of change.

It would be unwise to deny that changes need to be made to adapt to the changing economy. There is little reason to expect the economic down cycle to end soon. The real estate boom is being replaced by the volatile commodities boom (energy and food). Globally, businesses are transitioning into "defense mode"; ie, shrinking investment, laying off employees not directly related to long-term strategic goals, hoarding money. Law firm cash flows lag, on average, 160 days. You may not feel it today, but soon your cash flow will be affected.

How will your firm adapt? There are many blogs talking marketing and business development ideas. This month alone there are several who have discussed marketing and client development:

Bruce Marcus, May 17th: NO PAIN, NO GAIN (Is The Marketing Return Worth The Risk?)
Kevin O'Keefe, May 22nd: Effective presence marketing via blogs and social media
Bruce MacEwen, May 12th: Who's On Your "Red Team?"
Tom Kane, May 20th: Full-Time Client Feedback Person - The Next Trend?

Though counterintuitive to some, maintaining or even increasing spending on business development during market downturns can lead to more profitability (RVs, Bananas and Recession-Proofing the Law Firm, Marketing Advice for Lawyers During Economic Down Cycles). One thing should be certain: maintaining the status quo should be off the table.

Anthony Cerminaro (BizzBangBuzz) wrote of a top ten list of obstacles to making changes in his post Overcoming Resistance To Change:

Procrastination;
Well-meaning naysayers and apologists;
Fear of failure (defeatism);
Impatience;
Waiting for the whole plan to be in place;
Lack of self-confidence or cultural intimidation;
Inflexibility or lack of adaptability;
Trying to do it all yourself;
Lack of forethought or concentration;
Lack of necessary skills or talents.

His post also provides suggestions to overcome the above.

To effectively create positive change in your firm, you must first determine what changes need to be made. This requires a thorough understanding of your current position and requires some forethought into what should be your firms strengths and weaknesses going into the next few years. Then a plan needs to be devised that will address the weaknesses and take advantage of the strengths based on the opportunities showing up in the marketplace. Measurable performance indicators need to be established that further your plan. Then the difficult part: gaining consensus.

The dynamics of your firm will dictate the direction you go and the ability to form a consensus to act. The degree of success in getting the lions and wolves on board will determine whether the plan will ever gain favor. The degree of accountability placed upon everyone may end up being the deciding factor.

Partner Cost And Client Profitability, (Part IV)

Admin — Tue, 20 May 2008 07:00:39 GMT

This is the fourth 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. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. The third article, titled Partner Cost And Client Profitability, (Part III) , is focused on basing a partner's direct cost on a "minimum margin percentage". This article is focused on a related methodology: using a "minimum margin dollar amount" to allocate partner direct cost.

Thus far, we have evaluated a number of methods of allocating partner direct costs (compensation) to a client. Since firms have differing long and short term goals, levels of partner compensation, and thought processes about client profitability, we have concluded that there is not one perfect solution for this question, but instead a handful of recommended options.

Minimum Margin $ (or fixed margin $ for firms with closed compensation):

Very similar to the Minimum Margin %, this methodology differs only in that the threshold is set as a dollar value instead of a % of standard rate. Some firms we interviewed think about partner profitability in dollars, stating as an example that each partner should have an annual margin (standard revenue less direct costs) of $100M on their bRate MinimumMargin Minimumillable time (hourly margin is an option as well).

In the example, again we have the same partners but now each is given a minimum annual margin of $100M (or $56 per hour based on 1800 std hours). Since the Rainmaker and the Dept. Manager have fully loaded margins much less than this amount, they are set to the minimum while the Jr. Partner remains at his full compensation level. Notice that with this methodology, while both the Rainmaker and the Dept. Manager are at the minimum threshold, they have different Direct Margin %. While the dollar margin is the same, the higher rate timekeeper has a lower margin %, thus encouraging a billing attorney to use the more junior (or lower cost lawyers) on their matters.

Role	Comp	Std Rate	Minimum Yearly Margin	Minimum Hourly Margin*	Cost Rate*	Direct Margin
Rainmaker	$1MM	$250	$100M	$56	($194)	22%
Dept. Manager	$500M	$200	$100M	$56	($144)	28%
Jr. Partner	$150M	$150	$100M	$56	($83)	44%

*Assumes 1800 standard billable hours expectation

Advantages of the methodology:

It ensures that every partner has a positive margin associated with his/her hours when valued at standard rate. While one may purposely choose to lose money on specific matters through discounting, there should be margin on every hour of time when valued at published rate.
It is simple. Firm leaders need only to decide on one variable that can be based on firm analytics and margins for other titles (e.g. income partners or senior associates).
It is based on the partner’s published rate. While total compensation can rise and fall with firm profits, this relative cost will not fluctuate and this method is in line with thinking about compensation for a partner’s work effort.
The most highly compensated partners will be forced to the minimum margin ensuring they appear less profitable than junior partners, therefore supporting a leverage model.
Multiple partners hitting the minimum margin level will have different margin % if they have different standard rates, further promoting a positive leverage model.

We have to address the weaknesses of this approach as well:

A firm will need to decide on the minimum margin. While strong arguments can be made for a certain threshold, there may still be dissenters.
Each partner who is affected by the minimum threshold will have the same margin (in dollars), leaving discounting as the only differentiator of profit on billable time

Like the Minimum Margin %, the strengths of this methodology prevail over the weaknesses and many firms have found this option easy to implement and easy to gain support for (due to minimal arbitrary decisions). In the final two entries, we will discuss some variations on the two minimum margin methodologies (% and $) and discuss a set of criteria to help a firm determine the pros and cons of each.

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.

Law Firm Business Intelligence Systems

Admin — Wed, 29 Aug 2007 17:21:00 GMT

I am in the process of writing several posts dealing with the role of the variables in the Law Firm Business Model—some already posted and other still in process. Those variables and other key performance metrics are not only the ingredients for forward looking models, they are the indicators (the gauges) that tell law firm leaders how well the law firm is running and when intervention is needed.
Staying on top of things isn’t an easy job. It is only in recent years that law firm leaders and managing partners have had access to tools commonly used by CEOs and C level executives in the corporate world. They hold the promise of dramatically improving law firm management. They leverage technology to amplify the effectiveness of the limited amount of time busy attorney managers devote to the role of management.

We are talking about Business Intelligence (BI) systems like that now available to law firms using Juris. The most visible parts of BI systems are dashboards that provide leaders with instantly digestible information providing continuous and full field-of-view situational awareness over the law firm, practice class or area of the attorney’s responsibility. Dashboards can be customized for the roll of the attorney or manager—for the CEO, managing partners, practice leaders, billing attorneys and even working attorneys.

The ability of dashboards to convert numbers into instantly digestible information is an important innovation, but BI systems do more. They monitor activity and alert the appropriate individual when events and circumstances require their attention. They back up situational awareness and alerts with actionable information. Numbers, charts, and alerts are “active” rather that one-dimensional displays on a computer screen. By clicking on displayed information, BI systems will drill down into the information needed to take action that will change future outcomes. BI system are designed to focus attention where it is needed and then supply just the additional information needed to answer those classic “5 Whys”—What and Why?, Where and Why?, When and Why?, Who and Why?, and How and Why?.

Recently I asked some of the best minds around what they see as the biggest trend and challenge for law firms in the area of law firm management. While all the answers aren’t in yet, those that have responded point, among other things, to the improving state of management, and at the same time, they report that the next three to five years will be even more changeling for law firms. Those who fail to embrace the need for more management, better business systems and more competitive intelligence will be sorely tested.

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 Firms Are Unhappy With Financial Reports

Admin — Wed, 19 Apr 2006 17:36:00 GMT

Law firm partners need the right financial information at the right time to steer the financial performance of the law firm. Yet, in carrying out its annual survey for IOMA 2005-2006 Practice Management Reference Guide, IOMA found that partners were not happy with the financial information they were receiving. Partners’ number one wish was to receive information “earlier”.

Today’s pace of business is too fast for yesterday’s news. Most traditional law firm reporting can only help the managing partner determine what has happened after the fact. Partners also complained that information is too aggregated, too detailed or irrelevant to their everyday decision making. They want actionable information—information structured around real performance issues and areas of vulnerability. How do they get that?

First, get rid of as many reports as you can:

· Dashboards, like that available from Juris, Inc.track performance on a real time basis. They provide the attorney with situational awareness with information that, like the dashboard in your car, is instantly digestible. They include drill-down functionality for actionable information to enable the firm’s attorneys to make day-to-day adjustments in order to achieve targeted performance.

· Systems like those available from Handshake Software or from Juris, Inc. provide law firms with the option of automatically monitoring conditions and events. The systems then electronically notify the appropriate persons in the firm when events or activities require their attention. Monitored items might include, for example, low trust balances, missed payment promises, missing billable time, budget limits being approached, etc.

Second, the firm needs to decide on 10 to 15 Key Performance Indicators. “KPI’s”, that measure the health of the firm. Those indicators need to be continually tracked on a macro level.

When the KPI’s indicate that the firm is drifting off course, the administrative team needs to drill down, as needed, to provide partners with the actionable information needed to pull things back on course. For a more detailed discussion of KPI, see the post Key Performance Indicators—KPI. What are some typical KPI that should be on the managing partner’s radar screen at all times?

· Productivity or utilization: The sum of billable hours for fee earners.

· Blended rate: The dollar value of worked billable hours divided by the total billable hours worked.

· Realization: The percent of billable dollars worked that actually gets paid, i.e., what is left after write-downs, adjustments and bad debts. It is collected fees divided by the original billed value of the hours worked related to those collections.

· Margin: What is left of a firm's fees after all expenses other than partner compensation has been paid. It is the amount available for the partners. Margin is tracked as a percent of fees.

· Days of Work in Process: Worked fees not yet billed to clients divided by the average fees billed per calendar day (annualized fees divided by 365 days).

· Days of Receivables: Billed but uncollected fees and expenses divided by the average fees and expenses billed per calendar day (annualized fees and billed expenses divided by 365 days).

Third, not all measures and reports deal with the immediate financial aspects. There are other softer targets and objectives that, while not financial in nature, will influence financial performance down the road. These targets include such areas as professional development, rainmaking, client relations, etc. Goals can be as detailed as assigned individual goals for taking a certain number of prospects to lunch each month. As in the case of financial information, partners need actionable information regarding these areas to adjust or correct firm and individual behavior to keep the firm on track with its goals and objectives. Remember, goals will be taken seriously only if you measure them and hold people accountable. You have deadlines and deliverables for your clients and they measure you every day. Do the same internally.

Partners should not have to dig through reports for the information they need. They need situational awareness over their area of responsibility. They need actionable information that is instantly digestible and current as of the moment. Today they can have it! Talk to your business system vendor about available solutions and services to solve the useless reporting problem. If you would like more information about the Juris products and services addressing this area contact the Juris national sales center at 877/377-3740 or e-mail sales@juris.com.

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.

Accidentally Successful Law Firms

Admin — Tue, 15 Nov 2005 20:11:00 GMT

I recently shared the podium with Debbie Foster, president and founder of INTOUCH. She is recognized by LawCommerce.com as one of the top legal technologists in the country and speaks regularly on several topics, including Practice Management Software, Time/Billing/Accounting Software, general law practice management issues and computer management.

She began her remarks by saying that she has worked with many “accidentally" successful law firms. What she meant by that is that the partners of those firms were not paying attention to the numbers. Their only barometer for measuring success was the firm’s bank account. As long as there was money in the bank, things were okay in their book! Of course, the problem with accidental success is that there can be a train wreck coming just around the curve and they have no idea that the end is approaching.

Intentionally successful law firms pay attention to the numbers. They keep the train on track by setting goals, measuring performance against those goals and holding people accountable.

That doesn’t mean they spend time with their nose buried in reports. Quite the contrary—best management practices have replaced “reports” with “measurements”. They track 6 to 10 “key” indicators that provide them with “situational awareness”. Like the pilot of a fighter jet - everything they need is displayed in front of them. The information is actionable and instantly digestible. Busy professionals (including managing partners) don’t have time for reports. Reports are for the accounting and administrative teams so they can answer the “why” questions.

What are some of those key indicators that need to be on the managing partner’s radar screen at all times? Some of the logical ones include the factors that determine partner income and cash flow:

Productivity or utilization: The sum of billable hours for fee earners
Blended rate: The dollar value of worked billable hours divided by the total billable hours worked
Realization: The percent of billable dollars worked that actually gets paid, i.e., what is left after write-downs, adjustments and bad debts. It is collected fees divided by the original billed value of the hours worked related to those collections
Days of Work in Process: Worked fees not yet billed to clients divided by the average fees billed per calendar day (annualized fees divided by 360 days).
Days of Receivables: Billed but uncollected fees and expenses divided by by the average fees and expenses billed per calendar day (annualized fees and billed expenses divided by 360 days).

There may be additional Key Performance Indicators for your firm. For those additional items and for the above five items, set goals for them. Have actual performance compared to goal measured for you and the results given to you in immediately digestible form (for example, graphically). Then hold people accountable for achieving the goals.

Management Judo

Admin — Tue, 17 May 2005 17:24:00 GMT

Peter Drucker identified weaknesses the larger competitor is likely to develop. A "not invented here" attitude is likely to make the competitor slow to take advantage of new ideas or lower cost methods. The "Creamer" concentrates too long on the higher profit, upper end of the market, leaving the door open to enter the market through the lower end. The premium pricier begins to believe their size entitles them to over price the services they provide. Failure to stay in touch is likely to result in the company emphasizing its idea of quality or features ("Wrong Quality"), leaving the customer’s real wants unsatisfied or the product price too high. The "Maximizer" keeps adding features to satisfy added market elements, leaving the door open for the Niche Company that will provide a simpler or lower cost product or service that just addresses the needs of a particular market segment. These same weaknesses occur in the legal services market place. Understanding them means you can use your larger competitor’s size against them to your advantage. Or, looking inward, you can reduce the occurrence of these weaknesses within your law firm.

1) Embrace new ideas and technology to gain or keep a competitive advantage. Drucker, also, said the only sound strategy is to be on the leading edge. The problem is, once you put your services and service delivery on the leading edge, the life cycle starts to move you away from that edge; thus the pursuit of excellence requires constant innovation to maintain your edge.

2) Never forget that higher rates give you only a short-term advantage. In the long run, the market leader is the low cost producer for the services as provided. That doesn’t mean you have to be the cheapest, but if your services have no advantage over a lower priced alternative, eventually, the lower cost provider will overtake you. You must constantly lower price relative to others or enhance value of the service you offer relative to others.

3) Wrong quality is the biggest danger a market leader faces. Never forget that your quality is determined by the client. Through the client’s eyes it is not what you do, but how you do it that counts.

4) The Maximizer law firm tries to specialize in so many different practice areas that its' operating cost becomes too high and its expertise too low compared to more narrowly focused law firms.

Ways to increase Per-Partner Income

Admin — Mon, 16 May 2005 17:39:58 GMT

Any business graduate knows that the short-term approach to inadequate profits is to increase price and reduce cost. Unfortunately, that is not necessarily the long-term fix. Consider the movie theater’s escalating cost of popcorn. Volume declines, price is increased, volume declines, price is increased, etc. The result is a continued spiraling down of the business. In the case of the law firm, law firm clients have a choice. If rates rise significantly above the market, they will take the option. Second, for all practical purposes, cost in a law firm consists of people and facilities. Reduce facilities below the appropriate level and recruiting and retention of people is affected. Likewise, clients may begin to question the firm's status and position. Reduce people cost and you are engaging in "factory closings" that reduce the capacity of the firm.

The approach to raising per-partner income should be done with long-range considerations. First, determine how the firm stacks up against benchmarks. For example, how does the firm compare to its peers based on published surveys? Fix the areas where you fall short. If your collection days are longer than your peers, fix it - invest in technology and/or change procedures. If work in process measured by billing days is excessive, fix it. Likewise, if utilization is too low, find out why. If you don’t have enough work, then either reduce fee earners and staff or, preferably, get more business. If, however, the problem is under reporting of time, then implement new tools to track and report time as worked, set individual goals, track performance and hold fee earners accountable, etc. After you have taken short-term corrective steps, begin to look for long-term changes in the business that increases income without reducing the long-term value of the business.

The number one item to consider is improved marketing, especially to existing clients. The second item is adjusting leverage to fit the nature of the practice. Third, is to engage in structured planning to identify the main things the firm should concentrate on to improve the business over the long term. Fourth, is to improve management with focus on the law firm business model¾leverage, utilization, rate, realization and margin. That requires a sound business system that provides the business intelligence and tools to keep the firm in line or ahead of its peers at all times.

The list below is a reminder of steps, among others, that you can take to improve per-partner income:

• A. Leverage

– Reduce the number of partners through retirement and attrition

– Improve recruiting to hire more associates and paralegals

– Raise partnership criteria

– Consider classes of partners

– Create or expand layers of permanent leverage— paralegals, staff associate, senior associate, executive associate, non-equity partners, etc.

– Invest in a better business system that provides the business intelligence information that facilitates management of associates and paralegals.

• B. Billing rates

– Increase rates to an appropriately competitive level

– Take a more disciplined approach to annually reviewing and renegotiating rates

– Raise rates in selected areas of specialization and expertise

– Identify new specialty areas, train or acquire expertise, thereby increasing value and potential for increased billing rates

– Market for better clients (usually larger legal consumers) willing and able to pay more

– Develop and enforce case acceptance standards that emphasize the value of matters undertaken

– Improve the quality of service, presentation of work product and responsiveness

– Invest in a better business system for pricing flexibility, easier price changes and improved anniversary date tracking

• C. Utilization

– Provide fee earners with better tools for tracking and reporting billable time as worked

– Measurement improves performance¾set individual targets and/or goals, then track against actual at the fee earner level

– Negotiate billing in minimal time increments

– Generate more business to support increased number of fee earners

– Intensify training of young lawyers to shorten learning curves and improve productivity earlier in their careers

– Reallocate workloads, to “even out” utilization and to avoid client hoarding at the partner level

– Employ professional administrative staff to reduce opportunity costs (lost billable hours) of partners involved in management

• D. Realization

– Shorten the billing cycle to speed up collections and reduce bad debts and adjustments

– Improve collection tools and procedures

– Implement and enforce case acceptance standards

– Invoke controls over discounting of fees at billing

– Centralize follow-up on accounts receivable

– Improve training to reduce write-offs

– Invest in better business systems to manage the collection function and to track adjustments and write-offs by those responsible

• E. Margin

– Conduct a cost reduction campaign and work with administrative staff to improve on-going cost controls

– Improve marketing, especially to existing clients to increase fee revenue

– Substitute capital for labor to improve productivity both at support staff and professional level

– Distribute workstation access to information to the professional side of the organization

– Reduce support staffing ratios through use of technology

– Plan office space to enhance work flow

– Establish systems and controls to maximize reimbursement of client expenses

– Budget and compare to actual for improved performance

– Engage in structured strategic planning to reduce the cost and impact of off-track or poorly planned activities

– Invest in better business systems that eliminate duplicate work and increase performance and efficiency of the accounting and administrative staff

Is your firm overselling itself?

Admin — Fri, 13 May 2005 18:16:19 GMT

In the INTERACTION section of the May 2005 Corporate Legal Times, Nat Slavin tells readers, "Don't Be Fooled by Law Firm Hype".

Slavan writes, “…the most important question is the one that you should be asking yourself: Is the firm overselling itself? Most likely the answer is yes. Law firms of all sizes are under intense pressure to create a one-stop shop for their clients. And they will do anything to portray themselves as such.”

This is another bit of evidence that there are two certainties in life and business - change is constant and we are always judged by others. His comments also reflect a natural tendency of your competitors to develop the Maximizer Weakness that Peter Drucker anticipates. The maximizer law firm tries to specialize in so many different practice areas that its operating cost becomes too high and its expertise too low compared to more narrowly focused law firms.

It also validates the Rule of the Fewest that I will discuss in a few days. Here is the rub. You can’t try to be good at everything without becoming just competent in a lot of things. When you try to promote your firm as a “one-stop shop”, experienced consumers of legal services (corporate counsels) see right through it and your credibility takes a dive.

Slavan's basic message is that bigger isn’t better. Contrary to the one-stop shop image, law firms want to portray, there is a long history of specialization in this profession. It is the rare firm that can be the perfect fit for every need. Acquisitions and expansions aren’t always good. Don’t believe the hype! Ask concrete questions about the law firm’s experience and successes dealing in the new area of corporate need. If you can’t get the answers, then go hire the firm down the street.

Your law firm has to pick its areas of concentration and those areas have to be limited. They need to be the right areas (in demand, profitable, etc.). You can add and drop areas based on emerging opportunities and changing trends but you risk your core business if you try to be all things.

Excellent law firms concentrate. They practice the rule of the fewest. They know the practice areas where they can deliver superior value to clients and they know when to recommend other excellent law firms. You build your relationship when you place the client’s interest above those of the law firm. That is delivering superior value that will keep you in the ballgame and will have the corporate world recommending your firm.

Planning Assumptions

Admin — Wed, 20 Apr 2005 17:36:00 GMT

Assumptions provide the link between the past and the future. Managers are engaged in building a different law firm for a different future. Plans are no better than the assumptions used. Assumptions are temporary estimates of the future—what will be different and how; what will not be different. Most businesses tend to skip or skim over assumptions as a part of planning, leaving the firm highly vulnerable to unanticipated, or unprepared for, changes. Assumptions are one of the principal tools for focusing on opportunities. Assumptions are inaccurate; it is the process of adjusting assumptions that yields accuracy.

This process of changing your assumptions as time removes uncertainty separates those firms prepared for the future from those surprised by it. It explains clearly why the firm’s plan must be to change the plan.

Your assumptions should include all of those things that have or can have a major impact on the firm including:

Changes in the demand for types of legal services
Major clients or practice classes
Competition - impact on rates, services, technology
Labor force - availability, salary levels, retirements, etc.
The economy - inflation, cost of critical services
Facilities and other major suppliers or resources - availability, cost, etc.
Technology developments - phone, Internet, hardware, internal systems, etc.
Government, Courts, Agencies, etc. - regulations, controls, laws that will impact the firm or clients

Cost Cutting Isn't The Answer

Admin — Tue, 19 Apr 2005 16:17:24 GMT

I am in San Francisco attending the ALA annual conference (Association of Legal Administrators). This is the best ALA since Boston. Attendance is between 1700 an 1800.

An administrator just told me that their managing partner had put a moratorium on all non-fee earner travel. They canceled the rented flowers and stopped all subscriptions and association memberships for non-attorneys.

Come on - what do they think that accomplishes other than a negative image of management and the law firm. Do they take pleasure in treating everyone else as second class citizens? That is so shortsighted, and yet it is fairly common. But it is just a lot of sound and fury accomplishing nothing. For all practical purposes, a law firm’s operating expenses are made up of compensation and rent. Cutting cost by reducing the quality of the environment and denying the administrative staff will not make a material difference except on the attitude of the people the partners depend on to keep the wheels of their enterprise well oiled. In short, this managing partner is biting himself in the you know what.

Cost cutting campaigns will not turn around a law firm in trouble. If you want to increase profitability, you need to concentrate on increasing revenue rather than focusing attention on reducing expenses. You should pursue opportunities to increase chargeable hours, to increase billing rates and to improve realization. Eliminating prerequisites, reducing personnel, holding back on salary increases, and reducing administrative staff is likely to cause more harm than gain.

Excellent managers focus on opportunities rather than problems. Pursue the right opportunities and most problems take care of themselves. Granted, there are problems that need to be solved. But they are distractions from the main objective of capitalizing on opportunities. So, choose your problems wisely and get them behind you quickly so you can focus on what you are being paid to do- identify opportunities and pursue them.

I had an experience early in my adulthood that drove this concept home in a way I will never forget. I was still at Price Waterhouse and had been married for a couple of years. I was talking to my father-in-law. He was working in his garden one early summer day. As he always did, he was wearing a suit and tie. He was a classic old-time southern gentleman and successful businessman with snow white hair. The suit and tie had become his uniform for all occasions. He was, also, one of those people who never got dirty. While not particularly careful at the dinner table, nothing ever spilled or splattered on him - sauces, gravy, soup, wine, ketchup, etc. It was as if he was Tefloned from head to foot, and that was before Teflon had been invented. I was telling him how difficult it was to live on a budget. He thought for awhile and then replied by saying, "Yes I know. I tried that for a while. Then I decided that I would just earn more than I spent."

That is what I have done ever since. That is what your firm should be doing!

Key Results Areas

Admin — Wed, 13 Apr 2005 19:42:22 GMT

It is well established that measurement improves performance. But there is a caveat. Meaningless measurement accomplishes little or nothing. Measurement must be accompanied by a target. Almost all firms go through a planning process. But what should they be planning?

There are two certainties in this world - business, like life, involves constant change and we are always judged by others. If we are not changing our business to improve it, natural forces are working to weaken it. Expenses are rising to meet income and non-billable work is expanding to consume revenue generating capabilities. The value of the law firm depends on how others judge us. How clients see the firm will determine if they will continue to use the firm’s services for future needs. Our ability to attract and retain a profitable, professional team depends on how firm employees view the firm. Our standing in the community, and before our peers, determines our ability to attract new clients. Continuity of the law firm business depends on how fairly firm partners judge they are being compensated.

The firm's planning process must look at its business in terms of the various constituents that judge the firm. Key results goals need to be established and then the firm's management reporting and control system should constantly measure actual performance against the key results goals. Measuring and reporting are not enough. Management must instill an expectation that employees and area heads are expected to make changes to move closer and closer to the goal, until it is achieved and then continue to change to maintain the goal. In short, key results indicators should become the GPS by which the business ship of the law firm is steered.

As Peter Drucker observed, excellence is the only sound strategy, anything else is merely competent and that leads to marginal. Competent is an uninspiring goal. Drucker identified the eight areas that every business must address through its objectives and control systems. The eight key result areas are: Customer Satisfaction, Productivity, Innovation, Resources, Management Development and Performance, Employee Attitude and Performance, Public Responsibility and Profitability.

The excellent firm will set key results goals for each of these areas. It will develop strategies and tactics to achieve its goal. And it will develop methods for measuring actual results against the goals with an objective of making additional changes as needed to achieve and maintain its goals.

Continuity depends on a reliable backup

Admin — Tue, 12 Apr 2005 19:11:08 GMT

As a law firm partner, your annual income is only half of the story. The other half is continuity of the law firm as a going business. If the business isn’t there, there is no annual income and a significant part of your investment portfolio is down the tubes.

Risk management is, therefore, essential for your livelihood and for the preservation of personal wealth. That is why you have professional liability insurance. And that is why you should have a disaster recovery plan.

But the weakest link in your continuity chain may be little pieces of plastic tape or disc of silicon. Partners go to bed every night betting their future on a backup process that is cumbersome and error prone and unrealizable. Forty-three percent of firms experiencing a business interruption never resume operations. I have seen it firsthand, over and over. It is a tragedy that does not have to happen.

Today’s best technology for backing up the law firm’s system is continuous on-line backup services provided over the Internet. Your data is always off-site in a secure location. It is always available from anywhere at any time. One of the major companies providing this service to law firms is LiveVault®. LiveVault’s services may be available through your business software vendor as it is for Juris users. If not available from your current vendor, you can contact LiveVault directly by going to www.livevault.com.