Make More Rain : law firm bus model, subscriber content

Uncollected Law Firm Fees related to Business Model

Admin — Wed, 19 Sep 2007 17:33:00 GMT

The Law Practice Business model illustrated below is an important tool for forecasting and estimating per-partner income. It is the standard by which one firm can be compared financially to another. While the model explains the key factors influencing partner income, it ignores the timing difference between doing the work and collecting the result of that work. For a firm with an ongoing moderate growth and consistent billing and collection practices, the omission of the timing factor may not be material. However, it is important to note that the cash distributable to the partners is influenced by more than just the five variables (leverage, price, productivity, realization, and margin) used in the Law Practice Business Model. An increase or decrease in either unbilled fees (Work-In-Process) or billed but uncollected fees (Accounts Receivable) can have a material impact on funds available for distribution to the partners.

Both work-in-process (unbilled fees) and accounts receivable (billed but uncollected fees) need to be on management’s radar. Let them get out of control and distributable income will take a hit; reduce them through improved procedures and partners will take home a bonus.

The role of work-in-process related to distribuable income was covered in the prior post Unbilled Law Firm Fees (Work-in-Process). This post will address accounts receivable. According to the Juris Law Firm Economic Survey for 2005, the average midrange law firm has 76 days of billed but uncollected fees receivable from its clients. From experience, we know that the likelihood of collecting those receivables decreases over time. Deals get made to encourage clients to finally write a check. Those last in line for payment are the most likely to suffer bad debt losses. Clients less inclined to value services provided months ago can demand an adjustment prior to payment.

As in the case of work-in-process addressed earlier, there two approaches to measuring the firm’s billed but uncollected fees (accounts receivables):

For internal management purposes, the best tool is an Aging. For example, what percent of the firm’s receivables is less than 30 days old, 60 days old, and 90 days old and more than 90 days old? How quickly a client pays its bills is often influenced by practices and procedures within the law firm, which can differ from attorney to attorney. Thus, in addition to firm-wide aging information, firm leaders need aging information by office, practice class, billing attorney and individual client and matter.

Surveys and benchmarking services tack the metric Fee Days Outstanding or Days to Pay as the indication of a law firm’s collection efficiency; therefore, in order to gauge a firm’s performance relative to the completion, it is important to track Days to Pays for comparative purposes. Since most midrange law firms report fee revenue on a cash basis, the metric normally uses fee collections for a twelve month period divided by 365 to arrive at the value of one day's billings. That divided into the dollar value of billed by uncollected fees (Accounts Receivable) yields the number of Days to Pay.

Dashboards like that shown below from Juris provide a continuous field-of-view over key performance metrics that influence law firm financial performance including those for accounts receivable and work-in-process. Dashboards can be tailored to each responsible leader in the firm. The managing partner can have a firm view while a particular billing attorney’s dashboard might be limited to client/matter and operations for which he or she is responsible. The key to dashboard technology is that when metrics are off target, the responsible individual can drill down from the dashboard to detailed information as needed to identify the problem point and take corrective action. The top-down view provides the busy attorney with instantly digestible information for continuous situational awareness and with power drill-down business intelligence to reach actionable information.

Shortening the collection cycle has a significant positive impact on distributable income to the owner/partners. Improving performance first takes measurement. Measurement needs to be backed up with planning, goal setting and holding people accountable. For a check list of ideas to speed up the billing and collection process, read the prior post, What to do When Clients Don’t Pay?

All billing systems will provide law firm leaders with aging information in some form. On the other hand, Days to Pay is often not available as a standard feature. Your vendor may, however, offer custom features for an additional fee. If not, you may wish to use the attached copy of the spreadsheet shown below to measure and keep the Days to Pay metric front and center on a monthly basis.

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

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

Law Firm Economic Outlook for 2008

Admin — Tue, 18 Sep 2007 17:20:10 GMT

Larry Bodine has joined the chorus warning of a coming recession with a post titled Get Ready for the Recession—Part 2. In his post Doom and Gloom for the legal profession—it’s coming, Gerry Riskin provides detailed warning signs that there is trouble ahead.

2007 is going to go in the books as another good year for most law firms. However, the bust in the sub-prime market and resulting credit collapse brought the good times to an end for others. The dot com experience and the current sub-prime bust are proof again that law firms heavily dependent on a few clients or single industry are at risk. It is important to consider the susceptibility of firm practice areas and major clients to the particular kinds of risks we face today.

2008 appears to be problematic. We know what goes up comes down--recessions happen. 2008 could be the year. They say “What doesn’t kill you makes you stronger”. That saying has a ring of truth to it for those who go through a recession successfully. Recessions can be a time of opportunity and increased market share, if one is prepared and plays it right.

In times of uncertainty, you should avoid overextending the firm in terms of debt, merger activity, or overreaching in terms of talent additions. Use the time to consolidate your gains, strengthen your law firm financial health and improve operational performance. You should emphasize improved planning, workflow efficiency, and tweaking the firm’s performance metrics. Focus on improved effective rates, better scheduling and delegation. Speed up your billing and tighten collection efforts. Get rid of people you should have already let go—those who are not making a positive contribution to the firm’s goals and objectives. Use this period to replace any remaining legacy systems. You don’t want to depend on systems that lose support during a recession or are operationally unsoundly. Nor do you want to have the competitive disadvantage of being behind your peers. Convince you partners that they can win by being conservative with partner distributions in order for the group to hold back some rainy day funds for the uncertain period on the horizon.

Most of your competitors will cut back on firm travel, advertising and capital expenditures. That early reaction to a down turn is usually followed by a cut back in hiring, then a reduction in support staff and finally a cut back in legal talent.

The smart people go into a recession with dry powder and they increase expenditures on advertising and other business development activities. They have positioned the firm to take advantage of opportunities created by the disadvantage of others. They make moves that strengthen and grow their firm while others are eating their own flesh, cutting back and shrinking.

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.

Unbilled Law Firm Fees (Work-in-Process)

Admin — Thu, 13 Sep 2007 17:27:50 GMT

Maister’s Law Practice Business model is an essential tool for forecasting and estimating per-partner income. It is a tool for expressing the firm’s financial targets and measuring progress against them. It is the standard by which one firm can be compared financially to another.

As important as Maister’s model is, however, it doesn’t tell the whole story. For example, while not used in Maister’s model, unbilled fees (work-in-process) and billed but uncollected fees (accounts receivable) have a controlling influence on partner distributions and should be consistently tracked. Reduce either and per-partner distributable income goes up. Yet, because most law firms use the cash method of accounting, both work-in-process and accounts receivable are off balance sheet. Like the old saying implies, both are often “out of sight, out of mind." As a result, both categories of uncollected work value receive too little management attention.

This post will deal with unbilled fees, aka work-in-process, WIP or inventory. The typical law firm has 60 to 80 days of unbilled fees in its inventory, making it one of the largest assets of the firm. It is earning nothing. It is a wasting asset! Unbilled fees become less valuable with every passing day. We know from our own experience and from the experience of other businesses that the likelihood of collection decreases with time.

The striking thing about this valuable asset left to waste on law firm’s shelves is that there is little reason for it; nor is anyone happy about it. There is no reason a law firm cannot bill timely for work performed where work is provided on an hourly basis. Likewise, except for pure contingency work, there is no reason a law firm cannot bill progress payments for work performed on a flat fee or other alternative arrangement. On the client side, no one is happy about getting a bill for work performed months prior. Tardy billing frustrates the corporate client. Rather than celebrate the free loan from their law firm, they scoff and joke at the lackadaisical and un-businesslike billing practices.

Speeding up the billing process serves everyone’s interest and puts more income in the pockets of the partners. Doing so takes management attention and that translates into planning, setting goals, measuring performance and holding people accountable. The first step is measuring the firm’s current level of performance.

There are two approaches to measuring the firm’s inventory of unbilled fees:

For internal management purposes, the best tool is an aging report—for example, what percent of unbilled items are less than 30 days old, 60 days old, 90 days old and more than 90 days old? The managing partner will want that answer on a firm-wide basis with the ability to drill down to the same information by location, practice class, billing attorney, client and matter.

Externally, surveys and benchmarking services tack the metric Unbilled Days as an indication of a law firm’s billing efficiency. Since most midrange law firms report fee revenue on a cash basis, the metric normally uses fee collections for a twelve month period divided by 365 to arrive at the value of one day's billings. That divided into the dollar value of unbilled fees (WIP) yields the number of unbilled fee days.

Your law firm’s business system should be able to track both unbilled days and the aging of unbilled items for you. To keep billing efficiency in the eyes of the firm’s managers, including practice area leaders and billing attorneys, both unbilled days and aging metrics can be included in dashboards custom designed for each law firm leader. Dashboard technology, like that available from Juris, provides continuous “situational awareness” over each individual’s area of responsibility. When top level area measurements indicate a problem, the responsible individual can quickly drill down to identify the problem point and take corrective action.

The Excel® spreadsheet below illustrates the computation of Unbilled Days. A copy of the spreadsheet is attached for your use if your accounting system lacks the capability to measure and keep the metrics front and center on a continuous basis.

Shortening the billing cycle has a significant positive impact on distributable income to the owner/partners. While every law firm is different, the average firm has 72 days of unbilled work. Reducing the bill time in half would free up cash for distribution equal to more than a month of fees! With faster billing, adjustments will also decline since client appreciation for work is highest at the point the work is performed. That appreciation declines with the passage of time. Fewer adjustments increases margin and that means a permanent year-after-year increase in per-partner income Steps to speed up billing often result in other indirect financial benefits, including increased productivity (utilization) from better time tracking methods, lower overhead due to increased accuracy and improved administrative practices, greater client satisfaction with the firm’s billing and communication process, etc.

I have attached an Excel template should you wish to use Excel to track unbilled days for your law firm.

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

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

Managing Uncollected Law Firm Fees and Expenses: Work-in-Process and Receivables

Admin — Fri, 13 Apr 2007 17:21:00 GMT

Ed Poll, who hosts the blog LawBiz, had an excellent article on effective collections in the April issue of The Bottom Line, published by the California Law Practice Management and Technology Section.

He started his article with a reminder that when the 300-lawyer global law firm of Altheimer & Gray was forced into bankruptcy several years ago, the firm had $30,000,000 in outstanding accounts receivable. Their days to collect billed fees were almost twice the average. Ed doesn’t mention the amount of uncollected funds tied up in worked fees and incurred client expenses that had not even been billed at the time. Those unbilled amounts probably represented another $15,000,000 or more.

The danger of under-managing both work-in-process and accounts receivable exposes most midrange sized firms to an inappropriate risk.

Specific measures and procedures need to be in place to assure that services and client expenses are billed promptly and, once billed, are subject to proactive and aggressive collection efforts. Collections should not be left up to the responsible attorney. Collections should be managed by the firm. The job of accounts receivable management should be clearly assigned and within the administrative or accounting area versus the professional side of the law firm. This subject has been covered in several prior posts including the post titled What to Do When Clients Don’t Pay?

While detailed procedures and policies should be in place for the management of both accounts receivable and work-in-process, law firm leaders should track key metrics involving these important (unusually off balance sheet) assets of the law firm. As with any key metrics, the firm should set targeted goals, track performance against the goals and against benchmarks for peer level firms. When the metrics vary from expectations, those variations should result in top management action.

Two important metrics are Days of Unbilled Fees and Expenses and Days of Billed but Uncollected Fees and Expenses. These two important metrics are also referred to as:

Unbilled Days , Work-in-Process Days, and WIP Days
Uncollected Days, Days Outstanding, Accounts Receivable Days and AR Days

Taken together, the aggregated is sometimes referred to as Fees and Expenses Not Converted to Cash.

Some firms and surveys will exclude expenses and report only days of unbilled fees and days of billed but uncollected fees.

The Excel® spreadsheet below illustrates the use of Excel to tract AR days. The average number of AR days (days to collect) for midrange sized law firms is 76 days according to the Juris Law Firm Economic Survey for the year 2005. All firms can increase income through faster billing and collecting. Click on the graphic below to download an Excel template should you wish to use Excel to tract AR days for your law firm.

For work in process days, the Excel sheet shown below illustrates how to compute and tract “Unbilled Days”. The average number of unbilled days for midrange sized firms based on the Juris Law Firm Economic Survey for the year 2005 was an astonishing 72 days. Every firm can benefit by making faster billing a priority.

Click the above model to download an Excel template should you wish to use Excel to tract WIP days for your law firm.

PS: The Juris Law Firm Economic Survey for 2006 is currently underway. You can participate on line at http://www.jurisinsight.com/2006survey/. Participates receive a free copy of the published survey results and analysis.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-374,
e-mail info@juris.com or go to www.Juris.com.

Juris Business Intelligence Suite for Law Firms

Admin — Thu, 12 Apr 2007 17:31:18 GMT

Last week on April 6, 2007 Juris, Inc. announced release of Juris Active Information—a suite of management reporting, business intelligence and decision support tools for the law firm. Active Information will help law firms move from a rearview mirror management reporting process using only printed static reports to a real-time information distribution and analysis model. With Active Information, law firm leaders will have the information and tools to make decisions that can change the outcome and increase partner income.”

The Active Information Suite consists of three components—Reporting, Business Intelligence, and Budgeting and Forecasting. The first module, Reporting, is currently available. Business Intelligence and Budgeting & Forecasting are scheduled for release in July 2007 and October 2007, respectively.

Active Information’s Reporting component revolutionizes how law firms develop, distribute, and use information for decision making. Each individual in the firm can decide exactly what information they want, how they want to see it, and when they want to receive it. With Juris Active Information, management reporting will no longer be limited to traditional reports of simply columns and rows. Firms will now be able to incorporate dashboards, images, charts, and graphs into their reporting models. Moreover, management information will have utility beyond simply reading a report. Active Information content can be used to navigate or drill down to detailed information underlying the management report. Content can be manipulated and extracted into other applications such as Microsoft® Excel to allow for quick and easy analysis.

According to Stephen Collins, Juris CEO, “Backward looking traditional reports leave an information gap. You know where you have been, but it’s too late to do anything about it. Juris Active Information will close that gap. It moves the Event Horizon for law firm leaders—providing actionable targeted information in time to change the outcome.” Collins continued, “A key element of making information useful for decision making is ensuring the right people get the right information in a format that facilitates their decision making process. With Active Information, each decision maker can receive important information in a format unique to their needs and it’s all distributed automatically.”

The Business Intelligence module includes a custom dashboard designer, business metrics library and metrics designer plus a link to Juris® Insight(SM) for incorporating continuous peer group benchmarks into the firm’s reporting systems. It also includes a separate data warehouse for enhanced reporting performance and customization. The Budgeting and Forecasting application adds the capability for complex budgets with multiple forecasts that are incorporated into the tracking and reporting stream of the law firm.

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

Law Firm Business Management, Getting It Right

Admin — Mon, 26 Feb 2007 19:58:03 GMT

It has been six months since I posted a review of the Law Practice Business Model. Since that is the heart of this blog, it is time to do so. David Maister introduced the Law Practice Business Model expressed as a mathematical formula when at the Harvard Business School. It was first published in the July/August 1984 issue of The American Lawyer magazine. Maister's formula is as follows:

NIPP = (1 + L) x (BR) x (U) x (R) x (M), where,

NIPP = Average partner income

L = Leverage (ratio of associates to partners)

BR = the “blended” hourly billing rate

U = Utilization (client hours recorded)

R = Realization (revenues divided by “standard value” of time recorded)

M = Margin (partners' profits divided by revenues)

The model expresses the fundamentals that determine law firm profitability and it is a sound road map for effective day-to-day financial management of the firm. It is easier for most of us to follow and understand Maister’s model illustrated in a more traditional financial statement format versus the mathematical style. Consider the model as illustrated below (click on it to download):

Maister’s model is an essential tool for forecasting and estimating per-partner income. It is a tool for expressing the firm’s financial targets and measuring progress against them. It is the standard by which one firm can be compared financially to another.

As important as Maister’s model is, however, it doesn’t tell the whole story. Law firm leaders have to be just as concerned about metrics that measure unbilled fees (work-in-process) and billed but uncollected fees (receivables). The managing partner has to be concerned about metrics that are not reflected in the financial numbers but will impact those numbers in the future. For example, are we opening new matters faster than we are closing old ones? Are the partners meeting their individual marketing goals? Is client satisfaction on track or veering off course? Maister’s model may not be the whole story, but it is at the heart of the story.

You can recreate the model for your firm (or for a single practice class) in much greater detail once you understand the model. The model will show you what happens when you change any of the factors that determine profitability. Try it. Change any of the factors to see the effect on per-partner income. For example, assume you make changes in how your fee earners track time worked and those changes result in increased utilization from 1831 hours to 1900 hours per year. Likewise, change your blended rate and gauge the impact. When working with the model, don’t forget that the margin percent will increase when you make improvements that do not increase cost. Picking up an hour per week in extra billable time per timekeeper because of improved accuracy doesn’t increase cost. That means the increased revenue drops directly to the bottom line, increasing the margin percent.

If you need help computing any of the metrics used in the model, refer to the previous posts linked below:

What Is Utilization?

What Is Blended Rate?

What Is Realization?

Measuring Law Firm Collection Realization

Measuring Law Firm Margin

What Is Leverage?

While not used in Maister’s model, unbilled fees (work-in-process) and billed but uncollected fees (accounts receivable) have a controlling influence on partner distributions and should be consistently tracked. Reduce either and per-partner distributable income goes up.

Measuring Law Firm Work-in-Process Days

Measuring Law Firm Accounts Receivable Days Outstanding

Measurement alone will improve performance, but combine measurement with goals and plans to achieve those objectives and the whole ball game will change. Planning, goal setting, measuring, and accountability go hand in hand with increased management and teamwork. The resulting culture in such law firms sets those firms and their performance completely apart from law firms who are not similarly engaged. Manage your firm by focusing on the indicators (the model components) that will lead you to higher partner income. Open the attachment (click graphic above) for a sample spreadsheet that will let you see the effects of changing key components of the model.

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

Law Firm Business Model Is A Must Tool for the Managing Partner

Admin — Thu, 21 Sep 2006 17:33:04 GMT

We are moving into the period when law firms begin planning for the coming year, 2007. It is an appropriate time to revisit the heart of this blog, the Law Practice Business Model. David Maister introduced the model expressed as a mathematical formula when at the Harvard Business School. It was first published in the July/August 1984 issue of The American Lawyer magazine. Maister's formula is as follows:

NIPP = (1 + L) x (BR) x (U) x (R) x (M), where,

NIPP = Average partner income

L = Leverage (ratio of associates to partners)

BR = the “blended” hourly billing rate

U = Utilization (client hours recorded)

R = Realization (revenues divided by “standard value” of time recorded)

M = Margin (partners' profits divided by revenues)

The model expresses the fundamentals that determine law firm profitability and it is a sound road map for effective day-to-day financial management of the firm. But unless you were a math major, the presentation is hard to follow. What is easier to follow and understand is the same model illustrated in a more traditional financial statement format versus the mathematical style. Consider the model as illustrated below (click to download):

Law Firm Business Model
Financial Statement Format

As important as Maister’s model is, however, it doesn’t tell the whole story. The financial manager has to be just as concerned about metrics that measure unbilled fees (work-in-process) and billed but uncollected fees (receivables). The managing partner has to be concerned about metrics that are not reflected in the financial numbers but will impact those numbers in the future. For example, are we opening new matters faster than we are closing old ones? Are the partners meeting their individual marketing goals? Is client satisfaction on track or veering off course? While the Maister model is not the whole story, it is at the heart of the story.

You can recreate the model for your firm (or for a single practice class) in much greater detail once you understand the model. The model will show you what happens when you change any of the factors that determine profitability. Try it. Change any of the factors to see the effect on per-partner income. For example, assume you make changes in how your fee earners track time worked and those changes result in increasing utilization from 1831 hours to 1900 hours per year. Likewise, change your blended rate and gauge the impact. When working with the model, don’t forget that the margin percent will increase when you make improvements that do not increase cost. Picking up an hour per week in extra billable time per timekeeper because of improved accuracy doesn’t increase cost. That means the increased revenue drops directly to the bottom line, increasing the margin percent.

Learn to manage your firm by focusing on the indicators (the model components) that will lead you to higher partner income.

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.

Tracking Law Firm Key Performance Indicators

Admin — Wed, 07 Dec 2005 19:39:00 GMT

Key Performance Indicator tracking pulls the macro pieces of business intelligence together for the manager/leader. Managers who successfully lead their organization to targeted performance follow a road map. They don’t reach targets by accident. They understand that six to ten key items drive performance and determine the outcome. They don’t spend their time digging through reports to answer the question, “How are we doing?” They know the answer and know it continuously. They understand better than others how one area versus another will affect performance. They concentrate on the main things that determine the outcome.

Usually their road map is a simplified model of the organization. The image below (click on image to download) illustrates use of an Excel spreadsheet to pull the key performance information together into a simplified picture of where the firm is on its road map at any given time. The Variance from plan and Impact columns show how each area is likely to effect results for the year if the firm remains on its present course.

Keep in mind that any model is a simplification. Through simplification, the critical factors that determine income become clearer. While the result is an approximation, simplified models usually produce more accurate estimates than detailed budgets and forecasts. Why? Because the simplified models focus on what is important. Simplified models focus on the key indicators that determine the outcome.

The KPI tracker is using monthly results and, in some cases, annualized results based on year-to-date information to estimate per-partner income. The Variance and Impact columns illustrate the impact that missed targets are having on the outcome. You can use the attached spreadsheet to implement Key Performance Tracking (KPI) in your firm.

Earlier post included downloadable spreadsheets for computing the Key Performance Indicators summarized in the above KPI tracker. Consider having your accounting staff use the attached downloadable KPI tracker spreadsheet in conjunction with the earlier post for Work-in-Process Days, AR Days Outstanding, Utilization and Rate, Realization, and Margin to give you the situational awareness needed to manage the firm to on-target performance.

Measuring Law Firm Collection Realization

Admin — Tue, 06 Dec 2005 20:39:00 GMT

Effective managers keep their pulse on the numbers. Not all numbers. They watch six to ten Key Performance Indicators that provide them with the situational awareness essential to guiding the firm toward on-target performance.

Key Performance Indicators (KPI) to be tracked include Utilization (billable hours), Blended Rate, Realization, Margin plus Billed but Uncollected Receivables and Unbilled Fees and Expenses. This post includes an example of a common method for tracking realization and includes an attachment you can use to track realization in your firm.

Example (click to download):

The above schedule reflects the most common method used by firms to provide an estimate of the % of fees billed that actually get collected. Unfortunately, it is not the best practice for measuring collection realization or overall realization. The numbers are unmatched. It compares billing for one given set of hours to the collections related to an earlier set of hours.

The better practice would be to compare the collected fees to the amount originally billed for those fees. For overall realization, the best method would be to compare the value of collected fees to their value at standard value for the worked hours related to the collections, i.e., standard rates.

Not all law firm billing systems track the information required to compute realization using the best practice. Juris®, for one, does and you can view realization in a number of reports. The Combined Analysis is probably the most preferred and reflects realization in a number of ways including standard value, negotiated value and billed value. For firms without the Juris system, the attached spreadsheet will provide a less accurate, but useful, alternative for tracking realization in you firm.

Measuring Law Firm Utilization (Billable Hours) and Blended Rate

Admin — Mon, 05 Dec 2005 19:29:00 GMT

One of the characteristics of a successful leader that has been identified through research is a solid understanding of the numbers that make or break the business. The two cornerstones for understanding and estimating law firm revenue are Utilization and Blended Rate. Utilization, frequently referred to as production or productivity, is the number of billable hours the law firm has to sell. Blended Rate is the effective rate across all fee earners that the law firm receives for those hours.

The in-tune managing partner should track overall utilization continuously to determine if the firm’s capacity is increasing or shrinking. Likewise, blended rate must be watched closely to determine if pricing practices are discounting the firm’s sellable units (hours) or if those pricing practices reflect an increase in the value of the firm’s sellable units (hours). The image below (click to download) illustrates use of Excel to track Utilization and Blended Rate.

As essential as it is to track these two key indicators at a firm level, they cannot answer the question “why”. That answer requires the firm’s accounting team to dig deeper. Blended Rate, for example, can be measured by practice class, personnel type and even by individual timekeeper or client to answer the question, “What is causing our blended rate to decline?” Likewise, utilization must be tracked on the individual timekeeper level against targets if the firm is to manage rather than just measure productivity.

The overall firm wide measurements give the leader or manager situational awareness. They provide the knowledge that the firm is on course or veering off course. With that knowledge, the manager can mobilize the troops to answer the why question and take appropriate action. Keep in mind that measurement, goals and delegation add up to increased partner income. Set goals for both utilization and blended rate and hold people accountable for achieving both.

Consider having your accounting staff use the attached Excel spreadsheet to track and report firm-wide utilization and blended rate.

Measuring Law Firm Margin

Admin — Fri, 02 Dec 2005 19:00:33 GMT

Margin is what is left of a firm’s fees after all law firm expenses other than partner compensation have been paid. It is the amount available for the partners. Margin % is the percentage of fees left after deducting those expenses.

Prudent management requires that firm expenses be watched to prevent a gradual increase that eats into partner income. It is also advantageous to compare your firm’s margin to those of comparable firms to determine if the firm’s tastes are too expensive compared to the competition. However, one of the things firms have repeatedly learned is that over-managing expenses does little to improve partner income. Management’s time is better devoted to increasing productivity (utilization), blended rate and realization.

However, planning, modeling and forecasting the firm’s financial performance requires that the manager be continually aware of the firm’s margin %. The image below (click to download) illustrates use of Excel to measure and track a firm’s margin percentage.

Consider having your accounting staff use the attached downloadable Excel spreadsheet to track and report the monthly trend for your firm's margin percent.

Measuring Law Firm Accounts Receivable Days Outstanding

Admin — Thu, 01 Dec 2005 19:22:00 GMT

In my judgment, the best measure of collection efficiency in a law firm is the measure of “Days of Accounts Receivable Outstanding”. A prolonged collection cycle ties up funds that could have been distributed to the partners as income and the delayed collection leads to adjustments and increased bad debts.

The image below (click on image to download) illustrates use of Excel to track the month-to-month trend for this measure of billed but uncollected fees and expenses.

Measurement, goals and delegation taken together add up to increased performance. The firm should set a target for “AR Days Outstanding” and assign responsibility for collection practices to achieve targeted performance. Every day you shave off of the measure of billed but uncollected funds is like adding an extra billing day to the calendar. That means more partner income.

Consider having your accounting staff use the attachment to implement this simple tracking process in your law firm.

Measuring Law Firm Work-in-Process Days

Admin — Wed, 30 Nov 2005 19:41:03 GMT

Because most law firms maintain their records on a cash basis, two key financial indicators often receive less attention than they deserve. The two items involve 1) unbilled fees and expenses and 2) billed but uncollected fees and expenses—more commonly referred to as 1) work-in-process and 2) accounts receivable. This post deals with the first of the two items, work-in-process.

In my judgment, the best measure of the firm’s effectiveness for getting bills out the door is the measure of “Unbilled Days” or what is often called “Days of Work-in-Process”. The image below illustrates the use of Excel to track the month to month trend of Days of Work-in-Process.

I have attached an Excel spreadsheet that you can download (by clicking on the graphic below) and use to track the trend in unbilled days for your law firm.

Measurement, goals and delegation taken together add up to improved performance. The firm should set a “Days of Work-in-Process” target and assign responsibility for implementing and managing overall firm practices in an effort to minimize the firm’s investment in unbilled fees and expenses.

Every day you shave off of this unbilled measurement, is like adding an extra billing day to the calendar. That means more partner income.

A Law Firm Closer to Flintstone than NASA

Admin — Tue, 29 Nov 2005 20:29:54 GMT

Young law firms sometimes try to get by on a shoestring and get caught in Flintstone as they grow. One day the partners wake up and realize that they are doing things the hard way and are losing money in the process.

One of our client services people visited a firm recently that characterizes their own use of technology as closer to Flintstone than NASA. In spite of their growth, the firm still wrote checks by hand. A/R was on a spreadsheet. Vendor bills were paid as soon as received because it was the only way they could keep up with bills and clients’ expenses. There were no management reports. Everything went to an outside accountant who prepared tax returns that doubled as financial statements.

A lot of money was falling through the cracks. Staying in Flintstone wasn’t so much a matter of money as it was the lack of time to address the needs of the law firm. The partners were too busy being accidentally successful. Still, they knew they were pushing their luck. They needed better control, management information and systems in place that would improve productivity and prospects for long team success.

The message to be learned from this real life experience is a simple one - don’t push your luck. Don’t count on being accidentally successful! Invest in a law firm business system for a healthy and profitable law firm. The right system isn’t an expense. The right system makes money for the partners.

Working with the Law Firm Business Model to increase income

Admin — Sat, 19 Mar 2005 22:59:27 GMT

I began my career as a CPA with Price Waterhouse, so I can easily work with the Law Practice business model as traditionally expressed. I am, of course, referring to the formula developed by David Maister when at the HarvardBusinessSchool. It was first published in the July/August 1984 issue of the American Lawyer magazine.

Maister's formula is:

NIPP = (1 + L) x (BR) x (U) x (R) x (M), where,

NIPP = Average partner income

L = Leverage (ratio of associates to partners)

BR = the “blended” hourly billing rate

U = Utilization (client hours recorded)

R = Realization (revenues divided by “standard value” of time recorded)

M = Margin (partners' profits divided by revenues)

What I have discovered is that it is just about impossible to explain the model in classic terms to the people who most need it to steer the law firm to higher per partner profits. The model expresses the fundamentals to determine law firm profitability and it is a sound road map for effective day-to-day financial management of the firm.

What people do understand, and understand quickly, is the same model illustrated in more traditional financial statement form versus mathematical terms. Consider the model in those terms as illustrated below:

You can recreate the model for your firm (or for a single practice class) in much greater detail once you understand the model. The model will show you what happens when you change any of the factors that determine profitability. Try it. I put the above simplified model in an Excel spreadsheet that you can download here. Change any of the factors to see the effect on per partner income. For example, what happens if you make changes in how your fee earners track time worked that result in increasing utilization from 1831 to 1900? Most timekeepers do a poor job of accurately reconstructing their billable time at the end of day. Those interruptions regarding client business that occur throughout the day frequently fall through the cracks. Plug those cracks and see what happens to income. Likewise, change your blended rate and gage the impact. There is more than one way to increase your effective or blended rate. For example, you can increase your effective rate with a price increase, through better and timelier renegotiation of rates with existing clients, by changing your engagement letter to provide for minimum time increments - 15 minutes, 20 minutes, etc. When working with your model, don’t forget that the margin percent will increase when you make improvements that do not increase cost. Picking up an hour per week in extra billable time per timekeeper, because of improved accuracy, doesn’t increase cost. That means the increased revenue drops directly to the bottom line, increasing the margin percent.

Learn to manage your firm by focusing on the indicators that will lead you to higher partner income.