Make More Rain : leverage, planning

Planning Concepts and a Sneak Peek at the LexisNexis Redwood Planning Application

MichelleStPierre — Thu, 10 Dec 2009 14:45:00 GMT

Planning Overview The LexisNexis Redwood Planning application is a sophisticated management tool that uses a firm's profitability model to look at client planning and alternative choices in the staffing and pricing of new matters as well as the consequences...(read more)

Role of Leverage in the Law Practice Business Model

Admin — Wed, 05 Sep 2007 17:43:24 GMT

Leverage refers to the use of non-equity fee earners, mostly associates and paralegals, to expand the capability of the firm and thereby increase the income that can be earned by the equity partners. Without leverage, per-partner income is limited to what the partners can bill for their own work. Leverage is achieved by using non-partner fee earners working under the partner’s supervision. Leverage is expressed as a ratio-- for example, if there are two associates for each partner, the ratio is 2-to-1. Leverage is one of five key performance drivers determining the earnings of law firm partners—Leverage, Rate, Utilization, Realization and Margin.

The above mathematical expression illustrating how the five factors impact partner income was first published by David Maister. It is easier to understand when viewed in a more traditional financial statement format:

In the above table, twelve partners share the results of 42 legal professionals (12 partners and 30 non-partner fee earners). The leverage is 2.5 (30 non-partners divided by 12 partners)

The importance of leverage as a driver of per-partner income is illustrated by the following chart taken from the Juris Law Firm Economic Survey for 2005.

The chart divides surveyed law firms into quartiles based on income per partner. The first quartile represents the top performing 25 percent. Those firms earned more than twice the per-partner income of the next highest group.

Effective use of leverage requires prior experience in order for the supervising professional to efficiently instruct, train and mentor the less experienced assigned professional staff. Thus, the opportunity a firm has for leverage will vary with the type and maturity of practice. As a practice area emerges, there are no precedents, no forms, no prior experience, and no accumulated work product. Solutions in such emerging areas have to break new ground. These growth areas typically command the highest fees and clients seek out the law firm because of the firm’s reputation for creativity and for having a smart professional team. Professional work in these trailblazing areas is performed with very little or no leverage. Firms accumulate experience as a practice area matures. They develop work product and increase their ability to use less experienced staff for an increasing portion of the work. Clients seek out these firms because of their successful prior experience handling similar cases. Competition drives prices down. Leverage becomes a more important strategy for achieving a competitive per-partner level. As the practice continues to mature, it will evolve into its transactional phase where the work becomes routine. Prices decline to their lowest level. High leverage combined with high utilization becomes necessary for sound financial performance.

Today most midrange firms are involved in mature and transactional practice areas. Partners have to handle multiple cases or matters at a time. The more effective the partners are at using associates and paralegals to do the work, the higher the firm’s per-partner income will be. Firms that are less efficient at using associates and paralegals will have a lower partner Income. Inefficient acquisition and/or use of leverage in a mature practice area threaten the very continuity of the firm.

Considering the role of leverage in driving partner income, it is surprising that 75 percent of midsized law firms have not successively implementing the strategy. Where AmLaw 200 firms have about three associates for every partner, midsized firms average only a 1-1 ratio. Most do not adequately utilize the small leverage they do have. Partners are logging more billable hours than their associates. Rather than bringing in new business or training others, they are piling up their own billable hours. The result is what you would expect. Midsized firm partners make less income than their counterparts in larger law firms.

The two most noticeable, but related, controllable factors contributing to low leverage are:

Compensation plans that reward partners for doing their own work, and

Partners devoting too little time to new business development

Like the other five variables in the Law Practice Business Model, leverage is too important to leave to an accident of events. It is a strategic issue. The firm partners need to understand the right leverage level for their firm based on its opportunities and income goals of its partners. To find out what can be done, use surveys or benchmarking services like Juris Insight to find out leverage levels being achieved by top performing comparable firms. Second, decide the competitive per-partner income appropriate for your firm. Work with the Law Practice Model to find the achievable mix of price, volume, leverage and margin that will produce your goal level of income.

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

Increase the portion of time partners devote to business development—set individual goals, measure performance and hold people accountable.
Change the firm’s compensation plan to (a) favor supervision versus hoarding of work and (b) replace continuing origination credit with more immediate short term rewards for new business
Centralize the scheduling of non-partner legal talent to eliminate the hoarding of idle resources and to emphasize professional development through work assignments
Improve recruiting to hire more associates and paralegals. Increase lateral hiring to add experienced associates
Reduce the number of partners through retirement and attrition
Lengthen the path to partnership. Raise partnership criteria.
Create or expand layers (titles) of permanent leverage— paralegals, staff associate, senior associate, executive associate, senior council, non-equity partners, etc.
Invest in better business systems to provide business intelligence information. Managing leverage like other key performance indicators takes planning, setting goals, measuring performance and holding people accountable. For that, you need the right tools.

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.

Spinning Increases Law Firm Income

Admin — Fri, 31 Aug 2007 17:24:00 GMT

Allison Wolf’s post, the fine art of delegation, is an insightful interview with Adam Pekarsky about the influence of leverage and delegation on partner income. “Spin” is the term Fraser Milner Casgrain LLP uses for work ones pushes down in the organization.

According to Wolf, Pekarsky put it this way: “If partners don’t delegate the lower level work then it’s like driving a formula one race car around a Safeway parking lot.”

Too many law firm partners hoard work to the detriment of long term growth in per-partner income. Wolf makes it clear:

A lawyer who spins down the work keeps the most interesting, highly paid work for his/herself.

The lawyer who spins doesn’t have to write down bills and gets paid at a higher rate.

Another clear message is that partner compensation should emphasize the sum of partner production and spin.

I would expand on Wolf’s message by adding that a firm’s compensation plan is often the reason Why Partners Hoard Work. That, in turn, leads to poor leverage, underutilization of associates and high turnover.

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.

Role of Realization in the Law Practice Business Model

Admin — Thu, 30 Aug 2007 17:47:19 GMT

It is easy to talk about the Law Practice Business Model but not so easy to come up with representative variables to accurately predict the future or to test the impact on partner income from various changes in those variables.

Realization is no exception. There isn’t just one realization number. Computing any of them in a law firm is challenging. Realization refers to the percent of the law firm’s fee revenue remaining (realized) after the effect of forces that lower it from that which would have been realized if the firm had fully billed for all work and had done so at the firm’s standard or targeted prices. While realization is concerned with the reduction in fee revenue, it is expressed in the positive—the percent remaining. For example, if revenue losses of 8 percent occur, then the realization is 92 percent.

Rather than a single metric, realization consists of several that measures the following:

Pricing Realization: Lost revenue due to negotiated rates or fee arrangement
Billing Realization: Lost revenue due to write downs before the bill gets out the door
Collection Realization: Lost revenue due to write offs, adjustments, and uncollected amounts after the client was billed
Overall Realization: The overall lost revenue due to all the above

In building a model, one can start with the firm’s “Standard” Blended Rate and use the Overall Realization metric to arrive at Realized Fees, or the model could use the firm’s “Effective” Blended Rate and Collection Realization to arrive at Realized Fees. A complex model could include all of the interviewing metrics.

From a practical standpoint, it is easiest to work with the effective rate and collection realization. It is very difficult to accurately measure standard blended rate and most law firm systems lack the capability to identify pricing or billing realization. Thus, when law firm leaders discuss realization, most are referring to collection realization. Even though collection realization is the easiest to measure, doing so accurately is still a challenge. It sounds simple:

Just divide what you collect by what you bill

There is a problem. Because of timing differences, what the firm collects in a given period (month, quarter, year) doesn’t match what was billed in that period. For example, most collections in any particular month will be for amounts billed in several prior months. Virtually none will be for current month’s bills.

Due to the difficulty of measuring collection realization, law firms often use a simplified technique that, at best, only provides an approximation of the actual metric. The simplified approach for computing collection realization is illustrated by the Excel® worksheet shown below. In this example, collection realization is computed by using the amounts collected and the amounts billed for the most recent 12 months. Using twelve months of information minimizes the distortion due to the mismatch between bills collected and the bills being issued. However, the resulting metric will suffer from the distorting effects of the firm’s revenue growth trend. Firms with significant growth in revenue will understate realization because collections with always lag behind the growth curve. Likewise, firms with a declining revenue line will appear to be doing better than they really are. While short of perfect, in most cases, this approach will prove an adequate tool for modeling the law firm’s performance and alerting law firm leaders to a collection problem.

If you want an accurate picture of what is really happening, compute the Rolling Realization of collected bills. This approach mines your financial database for the most current twelve months, extracting only fully paid bills for the realization computation. Uncollected bills and partially paid bills are excluded from the computation. While still backward-looking, the results reflect the real realization numbers.

Across the board, most midrange law firms fail to collect a material portion of their work product. Law firms typically only realize 85 percent to 90 percent of what they bill clients. The answer to improved realization is management. First and foremost, you have to have the information you need to manage, and that should come from your law office business system. While measuring the firm’s collection realization is important for modeling, predicting the future and planning, law firm leaders will need more than a firm-wide metric to improve financial performance. They will need actionable information. The managing partner will want to drill down to realization by matter, client, working attorney, billing attorney, originating attorney, practice class, For those kinds of capabilities, the law firm will need a law firm business system with a Business Intelligence component like Active Information from Juris.

I have attached the Excel worksheet for collection realization shown above. If you want more information about Juris Active Information and its ability to tract Rolling Realization contact the Juris National Sales Center at 877/377-3740.

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.

Eight Key Result Areas for Law Firms

Admin — Fri, 12 May 2006 17:35:47 GMT

Peter Drucker identified the eight areas that every business must address through its objectives and control systems. The eight key result areas are:

1. Customer Satisfaction

2. Productivity

3. Innovation

4. Resources

5. Management Development and Performance

6. Employee Attitude and Performance

7. Public Responsibility

8. Profitability

The excellent law firm will set key result goals for each of these areas. It will develop strategies and tactics to achieve its goals. It 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.

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.