Make More Rain : management, law firm managment

Closing the Barn Door

Admin — Fri, 06 Mar 2009 01:06:00 GMT

It seems like every article, blog, lecture, or memo now starts out with the words, “In these economic times,” and then goes on to explain what should be done. In fact, I am sure we could find many articles starting out with some slight variation of this premise reading back a few days in this website. While many of the business practices and choices currently being made are a direct result of the poor performance of the economy in general, from a management consulting standpoint, there is nothing like necessity to make people actually take notice of good ideas. I would surmise that if you are using the current market conditions to employ a sound business decision, you are probably well behind the curve. A good idea today was probably a good idea 2 or 3 years ago in the days of double digit growth.

Of course I am being somewhat facetious and coldhearted. Many of the decisions made today are both painful and undesirable to all involved, but necessary due to existing conditions. That does not change the fact that, in the past, there were many ideas that could have been taken advantage of in order to improve the well-being of individual firms while they still had the option.

Suggestions on how to increase profitability and streamline efficiency have always been out there, but in good economic times it hardly seems necessary to make a change to a practice that could create more work and stifle growth in the short term for potential long term gain and stability. Just ask my wife, who has insisted for years I either paint or replace the railing on my front stoop. Why would I when, in my opinion, the railing looked fine? While there were a few cosmetic blemishes, they were barely noticeable unless you were specifically looking for them. However, as if tempting the inevitable, I leaned up against the railing last month and fell into my holly bush. Sure, my parable of reckless abandon with marital bliss and home repair may seem silly but I knew that eventually the unpainted sections of wood were suspect to rot. I also knew what my wife said made sense but it would have taken time and money, both of which I did not want to spend.

I bring this up because I was recently speaking with an individual at a firm I have worked with quite regularly over the years; they thought the idea of me thrashing about in a holly bush quite amusing. This firm has been quite successful in past years and while they understood the concept of cross selling work and that introducing additional partners to certain client relationships would potentially yield more work overall and lead to greater client retention, this firm was satisfied with their current profitability strategy did not think it necessary at the time to encourage this behavior within their firm.

I can’t say I blame them, after all “if it ain’t broke, don’t fix it,” right? Well, we won’t know for sure, but I do know that double digit growth is no longer on the horizon, or even in the rearview mirror. This client, like many others, is struggling to keep certain practice groups viable due to lack of work and significant client attrition. As for myself, I have a new vinyl railing that doesn’t need to be painted, a neatly trimmed holly bush, and am revisiting the list of home repairs given to me by my wife a few years ago.

--Derek Schutz

Derek Schutz is the Director of Programs for the Business of Law team at Redwood/LexisNexis.

Strategic Leverage: Just as Important as Ever

Admin — Wed, 25 Feb 2009 20:54:00 GMT

It is part of my job to make sure I am up to speed on all the economic movements of firms here and abroad as this economic downturn has not trickled down but headed full- fledged into the legal industry. Each day I read article after article about associate and staff layoffs at firms of various sizes and peer status. In addition I attend conferences and listen to Managing Partners, CFOs, and other C-level staff address how to combat this downturn through various actions used to cut costs. At most conferences there has been an inevitable line of presentations on reducing overhead along with addressing the headcounts of staff and salaried timekeepers. If I have to hear about controlling space planning and technology expenditures anymore I think my head might spin.

I speak with CFOs all the time and the prevailing theme is that budgets have been cut so much recently that the line is very thin on providing appropriate support to the primary operations of the firm. I am not saying that these measures of analyzing overhead aren’t important. In fact I agree they are and should be done on a consistent basis, not just when there is an economic downturn.

Most consultants I have spoken with all agree, if you had no strategic plan in place before the recession you are probably too late. Since many firms fall into that category they have fallen into an immediate cost cutting tactical strategy that almost completely focuses on the easiest things to cut (staff, associates, technology, etc.) In some cases the staff and associate cuts are valid in that the recession has produced a prime opportunity to do what was probably overdue in eliminating poor performers. For other cases it is the perceived method of addressing what aims to be a possible rough year or two. Unfortunately I feel that this method of reducing costs is shortsighted and evasive of one of the key detriments to firm performance within an economic downturn, underperforming partners.

Let’s address the shortsighted nature first. In the early 90s the legal industry felt the effects of a recession that lead to mass layoffs of associates and staff. As time passed and the economy improved those firms found difficulty in re-staffing properly for the growing legal work they were receiving. Gone were the associates who were already trained and ready to be the next leaders of the firm leaving a re-tooling effort that could have been avoided. By purging large numbers of associates it mortgages the future of the law firm, leaving a void to fill when the economy turns. This, despite the fact that when it comes to strategic leverage, a well levered firm can be much more profitable.

Strategic Leverage

Below is an extremely simplified view of the effects of leverage. Assuming 100% utilization and 1800 budgeted hours the impact of a shift in the non-partner to partner ratio of 1:1 to 3:1 clearly would reduce revenue, a point that is often used to counter the initiative of leverage, but the key statistic for the legal industry, Profits per Partner, increases. This is generally due to the higher percentage return that associates bring in. Another component that is not even captured in the model is a likely reduction in overhead. This sort of analysis should be done by firms on a consistent basis regardless of economy to find the right mix. You obviously need partners for reasons that anyone reading this blog should be aware of but leveraging is a true way to improve firm profitability. That fact reinforces the shortsighted nature of the removal of staff and associates for cost cutting purposes. You just cannot cut and cut all the way down into profitability.

Addressing the Economic Slowdown through Underperforming Partners

This leads into the other concerning trend I have seen. The legal industry is not focusing enough effort on underperforming partners. As mentioned by my colleague Bo in his forward looking view of leverage last week, smart firms are the ones who will take this opportunity to deal with underperforming partners as well as associates. But we’re just not seeing it here in the US.

I have often wondered why that is the case, but from many discussions with managing partners, the prevailing theme seems to be a feeling that by disturbing the “glue” it would show weakness and perhaps cause unrest among the other Partners. At face value I can understand, but the examples are before us where turning a blind eye to underperforming partners have contributed to successful partners actually leaving firms and causing those firms to fall into decline. I think the point is that subjectively most partnerships have a general idea on who is performing and who is not within the ranks. Technology and consulting can bring data to back those beliefs, but if nothing is done about the underperformers, the over performers may develop resentment as their pocketbooks get hit.

Within recent weeks we have seen several firms release partners in the UK. Linklaters just announced a reduction in their partnership as has Addleshaw Goddard. The Times Online recently spoke with Nigel Boardman one of the UK law firm Slaughter and May’s top partners. He had several great quotes that illustrate this need to address underperforming partners, “I don’t think it follows that a downturn in work means that you cut your associates…If you have to cut, cut your partner profits and even your partners…good lawyers are hard to find.” Mr. Boardman is addressing that thinning the junior ranks will leave firms without qualified talent as the years go by and that is not a good long term strategy.

Profitability of law firm is driven by several factors, but the seemingly elephant in the room (cutting underperforming partners) seems to be a factor that firms have difficulty addressing. It could date to years gone by when partners were considered untouchable. Yet the recessions of the past have changed that as has the changing model of the law firm. This recession is weighing on the legal industry and those firms that finally address partners and practice areas that have not been performing to firm standards and make the move to strategically shift their firm for the long term are going to come out ahead when the economy turns the corner.

--Russ Haskin

Russ Haskin is Director of Consulting for Redwood Analytics/Lexis Nexis.

The Corporate Management Structure: Viable in the Legal industry?

Admin — Tue, 25 Nov 2008 20:34:00 GMT

In a former career I consulted within the corporate world. There, the majority of companies used a management approach where levels of managers would have direct reports that would scale upwards to higher levels- essentially a vertical corporate structure. Although there has been a shift within many organizations to a “matrix” or “flat” horizontal platform, the structure of boss and direct report still exists at the core. Since I have been consulting for the legal industry I have seen similarities to the corporate structure, but there are some fundamental differences, and it has always struck me that there could be a better organizational structure within the legal industry that would provide the desirable attributes of accountability and developmental planning.

Almost every firm has department chairs or practice group leaders who are responsible for the management of that portion of the firm. In addition, the mentoring of associates is a big priority for most firms. But is it truly a boss/employee relationship? Do law firms have “management teams.”?

The idea of management teams within the legal industry is not a new idea, but it is one that has been tough to implement. In an ideal setting you would have one partner managing several associates, with responsibility for their utilization, development, and discipline. This way when an associate is underperforming there would be one partner to talk with, who should know all the ins and outs of what is taking place. That is not what we are seeing today. Generally you have an associate working on a multitude of partners’ matters. This creates various issues, among them multiple levels of discounting by responsible attorney, personality differences, and having to request additional work from multiple attorneys to meet billable hour targets. The last of these is the most troubling.

The Redwood Think Tank did a study that indicated that those associates who eventually make partner start out making or surpassing their billable hours target and continues with this trend until they are promoted. Conversely those associates that end up leaving the firm or managed out within the first 5 years start and continue not making their billable hours goal from the beginning.

These facts are pretty powerful in addressing associate development, even after the first year. I am not sold that those associates who underperform are not getting the work solely because of a lack of effort or poor performance. Perhaps it is because they were not placed in the proper environment, and perhaps having the right mentor could be the key to success. A mentor might not only provide the needed billable hours to meet goals, but also the legal and organizational knowledge to propel an associate down the partner track. The opposite is true for those associates who don’t have a sufficient mentor. Are firms losing qualified associates simply because of a substandard organizational structure?

A potentially better structure would be to have one partner feeding work and being responsible for the development of a specific group of associates. This structure might not work with many law firms, as originations and responsible hours vary by group/partner, but it does not mean that you cannot have a boss/direct report relationship. A system that allows the associate to request more work from the mentor, and the mentor using that request to go to other partners for more work if he/she does not have it available could create a more cohesive and development-friendly atmosphere.

Having a structure like this provides the ability to analyze data by mentoring partner to identify development gaps and fill them when needed. I am not suggesting that underperformance is always due to a lack of mentoring, I am simply suggesting having accountability by associate and partner so there are two points of contact.

The question remains how to make this feasible and cause a shift to the suggested structure. The first suggestion is robust time-keeping software that can break out and measure the performance of mentoring time as well as other non-billable activities. The second, and more important suggestion, is that the performance of those associates whom a Partner is mentoring should be included within the partner compensation process. For most firms the focus for partner compensation continues to be billable hour generation and collections. The idea of assigning a portion of compensation has been quite subjective. If management teams are in place, and you truly measure the success of those teams, you end up assigning a number that can be benchmarked against other teams. Placing a quantitative value on mentoring and addressing it within partner compensation would be give this process the best chance to affect real change.

--Russ Haskin

Russ Haskin is Director of Consulting for Redwood Analytics/Lexis Nexis.

Law Firm Talent Management Doesn't Stop with Recruiting

Admin — Thu, 30 Oct 2008 21:57:09 GMT

Without question, gaining an understanding of the characteristics of successful lawyers within individual firms can help firms to make wiser recruiting investments. The “Moneyball” project worked on by Kerma Partners and Lexis Nexis’ Redwood Think Tank focused on the characteristics of lawyers before they entered the law firm studied. Valuable information for the firm to have? Certainly, if thoughtfully incorporated into a recruiting strategy.

However, recruiting the best candidates for success within a firm’s culture is only part of the story. What’s the strategy to develop these associates after they are hired? The most qualified new lawyer can be mismanaged (or unmanaged), whittling away at the likelihood of success. The good news is that regardless of the candidate’s development before being hired, his/her development is largely within the control of the firm.

While the recent spotlight on analytics around recruiting efforts is very positive momentum, a firm really should not focus on a recruiting strategy without building a complementary development strategy. Over the past year, the Think Tank has been studying what differentiates successful lawyers once they begin their careers. In the handful of firms we’ve looked at, we have seen a (varying) correlation to success for attributes such as the type of exposure an associate receives, the clients they work with, and the volume of work they perform. Look for an article summarizing these results in the near future. As with the Moneyball conclusions, it will be important for firm managers to view information about the success of their own lawyers in the context of their own firm’s culture.

I welcome feedback and ideas for attributes to test as we continue to apply real analytics to the issues surrounding talent management in law firms.

-Kris Satkunas

Associate Salary Increases & Firm Margins

Admin — Thu, 04 Sep 2008 17:20:23 GMT

It should come as no surprise to anyone that the most recent wave of associate salary increases have helped to erode law firm profit margins. Whether the wave begins in west coast technology firms, or east coast financial capital firms, its effects are felt beyond big law in the mid-size and regional firms headquartered in the mid-west and southeast. And, with 80% of law firm expense tied up in compensation and occupancy, the impact can be devastating. What is more surprising is the response of law firm leaders in this new economic environment. Reactions run the gamut from slash and burn tactics to taking it on the chin and silently watching margins erode. Formulating a balanced strategy and resisting the urge for an emotional response is critical. Consider the following.

First, is increasing associate salaries is an appropriate response to increased competition for the best talent in your market or just a follow the leader reaction? Associate salary increases typically begin in markets where competition is fierce for not only attracting the best talent, but also keeping that talent as the reality of billable hours requirements hits home. Increasingly, associates are not willing to trade work life balance for a big paycheck. This attitude is not pigeonholed in the bottom half of the law school classes, but pervades throughout. Are there other work life benefits your firm can offer to entice top talent?

Secondly, recent surveys suggest the demand for legal services have declined in the first two quarters of 2008, and making sure your lawyers are properly utilized is essential to maintaining profitability. As margins become slimmer, there is no room for unproductive associates taking up space. But are associates really the problem? Most associates have little control over the projects they are assigned and virtually no ability to generate new business. They, like everyone else in the firm, rely on the rainmakers to generate enough billable hours to support the business. Before taking a defensive posture and eliminating positions, look for ways to improve your business development efforts. Are you effectively cross-selling your services to existing clients? Do you place enough emphasis on developing new business and in the right sectors?

Lastly, in today’s competitive marketplace, passing increased costs on to your clients is rarely an option. Even in big law, where clients were thought to be less price sensitive, general counsels are scoffing at increased rates as a result of higher associate salaries. Can you blame them? That doesn’t mean you have lost the ability to control your average rates. The next time someone asks you for an alternative billing arrangement, consider the request an opportunity to control your own destiny. Look for ways to strengthen the value proposition, improve practice management at the matter level, and increase leverage.

Can you avoid the impact of associate salary increases? Not likely. But focusing on the positive economic aspects of your business, rather than going on the defensive, may help you roll through the downturn and leave you prepared for the eventual upswing.

- Rick Rawls

Management Report Do's and Don'ts

Admin — Mon, 01 Sep 2008 17:21:00 GMT

I was recently asked to speak at a conference on the topic of management reports and how firms are using them to help run their businesses. It is a topic that I have been fortunate enough to gain a lot of insight into over the years. Often I am handed a stack of reports and asked to help the firm automate them or to come up with a package of reports to use as their “reporting package”. Most firms spend a lot of time and resources building their reports to look a certain way but spend little thought into the way that they are used and the actions they expect them to drive.

Any firm can generate data, but to be able to use this data to help model, analyze, and improve their business the firm must approach reporting with a more consistent process. Currently, I see many firms looking at information that could be best described as “interesting”. Interesting information is not the same as useful information. In order to take full advantage of the information available to them a firm must:

• Understand the business drivers of a law firm
• Identify what is controllable
• Establish reasonable goals and relevant metrics

Once the proper mindset has been established and goals have been set, the law firm can move forward with building a set of reports that identifies the best opportunities to reach these targets. The most important part of developing these reports is to keep them focused on the specific drivers of the goals and not get lost in the “noise” of the data. A common misconception is that having more data available improves the management process. In fact, the danger of information overload is just as great (or greater) of a problem as not having enough data or the wrong data. As Jack Trout says in his book Trout on Strategy, “Knowledge is power only if you can separate the important from the billions of data swirling around you”.

In the end, reports need to be catalysts for action. Reports by themselves do not make any difference in performance of a firm, rather they should serve to initiate improvement. By setting up a plan from the outset and then setting up reports to manage towards that plan the firm will become more efficient and consistent in their approach. Reports do not need to be complex to be useful, but they do need to speak directly to the questions being asked, providing clear direction quickly and succinctly.

- by Derek Schutz

Valuing Your Firm's Inventory

Admin — Fri, 27 Jun 2008 17:16:24 GMT

Most law firms understand intuitively that the value of inventory (both WIP and A/R) degrades over time, but by how much and how quickly? The ability to understand and answer these two questions is the first step in preparing a realistic, forward looking valuation model; one that can identify opportunities and drive action, rather than simply report on past performance.

To begin to answer the question of the future value of current inventory, it is important to realize there are two different forces diminishing a firm’s return on work performed, and both have the same basis: time. In essence the old adage “Time is Money” is true; as time passes, your inventory becomes less valuable.

The first and most basic of the two forces is widely known and easily calculated. For our purposes, we will call it the Time Value of Money effect, or TVM. A dollar today is worth more than a dollar tomorrow. Anyone who has ever used a credit card, carried a mortgage, or borrowed or lent money in any fashion, understands this concept. However, many law firms simply disregard this as a cost against their inventory, or use such a low discount rate, as to make it negligible. When considering a firm’s discount rate, too often factors such as reasonable market expectations of returns and inflation are swept aside. In the model below we use a simple method (with two different Discount Rates) to determine the cost of time on a firm’s inventory: Amount X Daily Discount Rate X Open Days; where the Daily Discount Rate = Yearly Discount Rate/365 days.

The second, and in most cases much larger charge to your inventory, is what we will call the risk of default (this refers to both defaulting on receivables and not billing work in progress). This is the risk that a firm will not realize a portion, or the entirety, of the value of work performed. In most cases it is instinctively understood that receivables a year old are far less likely to be realized than those just billed. The same can be said for WIP. But how do we measure this concept? One possible way (and there are many) is to use available historical billing and payment patterns to develop a forward expectation curve. We can then apply this curve to our current inventory to determine the amount that is realistically likely to bill or collect. This method can be made more complex or simple depending on various assumptions and the level at which the expectation curve is developed to (i.e. practice group, type of work, client, etc) but the concept remains the same -- past performance is an indication of future performance.

In the example below, such a curve is constructed for a client based on a set period of time and then applied to four matters with outstanding A/R (a similar model can be built for the WIP side). A total of $200,000 has been billed over the life of this client, with $175,000 eventually being realized (or 87.5% seen at day 0). As might be expected, the majority of the collections (> 50%) have historically taken place within the first 90 days. The Fwd A/R Expectation Curve helps quantify the expectation of collection (or non-collection) as current A/R ages based on prior practices (i.e. at 240 days, $50,000 has been available to collect, but only $25,000 has been collected, giving us a historical realization expectation of 50%; therefore, if current A/R now ages to 240 days, we would expect to realize 50% and lose 50%). Of course, like any forecast, our model will not be 100% correct at each level of granularity, but it does provide a logical, and historically proven, method to value inventory, particularly at the firm level.

While simplified, the models above allow us a better understanding of a) how much of the work we have currently performed we expect to realize and b) the actual value of that work once we do realize it. Any questions, concerns, or comments on the above can be directed to Dschutz@redwoodanalytics.com.

Associate Attrition Skyrockets By Year 5

Admin — Wed, 18 Jun 2008 07:00:18 GMT

The Association For Legal Career Professionals recently released an Update On Associate Attrition covering the 2007 calendar year. The numbers are striking:

Overall percentage of associate attrition was 18% for 2007;
24% of these associates had been on the job for two years or less;
74% of 2007 departing associates left the firm within 5 or fewer years of their arrival.

The most cited reason for entry-level associate attrition was "pursuit of specific practice interests".

The reason for entry-level associate attrition leads me to believe that the survey is large-firm heavy. Large firms provide entry-level attorneys with high salaries and intense work schedules. Within 3 to 5 years, prudent associates should have their law school loans paid off and can now seek to practice in their own desirable area of law. In fact, the median size of the firms in this survey was 220 attorneys. Only a fifth of respondents were firms with 100 or less attorneys.

Looking at just the 100 and less category, the percentage of associate attrition was at 17%, 15% had left the firm within 2 years of being hired and 69% left the firm within 5 years of hiring year. It is too bad the survey did not track the reasons for attrition based on firm size, because I suspect that the main reason for attrition for smaller firms wasn't to pursue specific practice interests, but may be closer to the main reason cited by departing laterals: "unmet work quality standards".

There is little doubt that associate attrition is prevalent in law firms of all sizes. It is possible that the high attrition rates are reflective of the common culture. Where once a ball player would stay with the same team for their entire career, free agency now reins. Where someone would work at the same company for the greater portion of their life, now employee loyalty is considered a thing of the past. Neither sports nor businesses in general have made employee attrition a pressing issue to be resolved. When it comes to business realities (i.e., pensions) some businesses specifically don't want employees to retire with them. Why should it be a concern to law firms?

Whether or not associate attrition is important to your firm may depend on the area of law practiced. For example, a defense litigation firm that is well organized and has developed processes that manage their recurring tasks may not be too bothered by attrition, particularly if they have a mechanism for quickly training new associates. On the other hand, an estate practice that relies on many years of expertise can't afford high associate attrition.

Firms would do well to track associate attrition and determine the reasons for their departures. Although it may be in the interest of some firms to encourage attrition, in the long run firm sustenance is reliant upon the retention of quality talent.

Forecasting Collections and Inventory Management

Admin — Thu, 12 Jun 2008 07:00:51 GMT

In today’s unstable environment, driven by outside economic forces, higher associate salaries, and increased competition, law firm leaders are faced with the tough job of forecasting cash collections. Many existing forecast methodologies focus on production and collection realization. However, these models often fall short because they ignore the other drivers of collections, and do not provide any information about collections beyond the forecast period. A better model:

1) Forecasts bills and collections as they relate to inventory levels thus allowing analysis into the impact of the next period’s collection funnel,

2) Drives the forecast according to the speed of the billing and collection cycle,

3) Isolates the quality of inventory separate from collection timing by analyzing realizations at the time of collection.

A key aspect to understanding collections is to think of the process as an inventory funnel. Each month production is added to the funnel, increasing inventory available to bill and collect. At the same time, bills and collections, as well as write downs and write offs drain the funnel, thus reducing inventory levels available next period. By analyzing this inventory turnover, modelers can focus on the drivers of collections: beginning inventory, production, inventory turnover, and realizations. Consider the following example:

	Last Year		Forecast
Beginning Inventory	$50,000		$60,000
Production	$150,000		$170,000
Total Available for Collection	$200,000		$230,000
Written down/off	$10,000		$11,000
Cash Collected	$130,000		$150,000	(3)
Inventory Turnover	$140,000		$161,000	(4)
Ending Inventory	$60,000		$69,000

Inventory Turnover %	70%	(1)
Realization %	93%	(2)

1) Inventory Turnover/Total Available for Collection

2) Cash Collected/Inventory Turnover

3) Total Available for Collection * Last Year’s Inventory Turnover %

4) Inventory Turnover * Last Year’s Realization %

In this model, the total available for collection is beginning inventory plus production. By comparing the amount available for collection and the ending inventory, the modeler may derive the inventory turnover. Also, by looking at the type of turnover, collected vs. written down or off, the modeler can calculate realization. Applying Inventory Turnover % and Realization % to future inventory, produces a cash collected forecast based on all of the cash drivers mentioned above and provides a starting point for the next period.

Redwood Analytics has helped law firms forecast collections using this and other methodologies since its inception. Our Business of Law Consultants are prepared to help law firm leaders take their forecasting to the next level by sharing best practices forecasting techniques, separating inventory turnover for billing and collection cycles, and capturing the seasonality of collections. In addition, our business intelligence solution is uniquely positioned to help law firms not only improve their forecast, but also their actual results.