Make More Rain : planning, policies/ procedures

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

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.

Developing A Goals-Based Strategic Plan With Financial Focus

Admin — Wed, 02 Apr 2008 07:00:42 GMT

Goals-based strategic planning takes a different tact than a "basic" strategic plan in that there is a singular focus by which the firm sets goals. Focusing on financial goals is more manageable and attainable than the comprehensive strategic plan, but requires attention and accountability nonetheless. Aspects of goals-based planning include:

Identifying key performance indicators that affect profitability
Developing goals for each indicator
Develop a budget based on the goals
Forecast earnings based on the budget
Measure and adjust

Identifying key performance indicators that affect profitability - The key drivers to profit include leverage, rate, realization, productivity, margin and cash flow. Firms may also want to include other indirect drivers such as client development (relationship building), "firm citizenship", etc. that may not have a direct impact on profitability, but are part of the core values that the firm holds.

Developing goals for each indicator - goals are particular to each fee earner but in total should reflect the financial targets for the equity partners. Each goal should reflect the capabilities of the fee earner and the realities of the market. For example, productivity targets may reasonably be set to 1,800 hours per year but setting the hourly billing rate at $350 may be unreasonable for a second year associate who works exclusively in insurance defense. Set goals that are attainable.

Develop a budget based on the goals - Budgeting simply states your goals in a measurable way. Fee earner budgets measure your productivity; client budgets measure your efficiency; expense budgets measure your spending.

Forecast earnings based on the budget - Forecasting models your budgets so that you can predict the results. It isn't enough to just state goals. Forecasting allows you to see what the bottom line will be if you meet your goals. If the bottom line isn't what you wanted, adjust the budgets until the forecast is agreeable. Most businesses forecast annually with quarterly reviews. During the quarterly review, the forecast can be adjusted based on the actuals. If business is thriving, you can increase your forecast - if business is down, you can reduce the expectation set in your annual forecast.

Measure and adjust - like anything else you implement in the firm, you must measure performance and be willing to adjust if needed.

We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.

Developing a "Basic" Strategic Plan For Law Firms

Admin — Tue, 01 Apr 2008 07:00:14 GMT

The Free Management Library has some good information related to developing a strategic plan. The site lays out several models that can be implemented for both profit and non-profit businesses. The focus of this post is the "Basic" strategic plan. This is also the one that most firms use when developing a strategic plan. The process includes:

Identifying your core purpose or "mission statement"
Determining the goals that align with that purpose
Determine the methods you will use to reach those goals
Create action plans to implement these methods
Measure, adjust and modify as needed.

Identifying your core purpose or "mission statement" - this is the part that starts and sometimes ends the process. Firms can easily get bogged down in determining the language for the firm's "mission". If you look around at other's mission statements, you can find that they pretty much say the same thing - client-driven, quality, service, honesty, integrity, seeking justice, etc. Be careful how you draft your mission statement - you will be judged by the words you choose; by your clients, your employees and your competitors. The mission statement is the "big picture" so it needs to encompass everything you want to accomplish with the strategic plan. Answer these 4 "whats" (adapted from The Lawyer's Guide To Strategic Planning by Thomas C. Grella and Michael L. Hudkins) and compress it into a single statement:

What areas of practice are our focus?
What is our goal in representing clients?
What market segment do we serve?
What are our core values?

Determining the goals that align with that purpose - the goals are the metrics against which you will measure success. Most people think of setting long-term goals. I think for smaller firms, you should pick short-term goals with long-term objectives. This is especially true when looking at financial goals, but with any change you have to set goals that are attainable in the short term. Since strategic plans should be reviewed annually, you can set new goals next year. It is more important that they are aligned with your core purpose than comprehensive.

Determine the methods you will use to reach those goals - the methods used to reach your goals require a review of all your processes. Processes that are inhibiting your ability to reach your goals need to be eliminated. While you are at it, those processes that are inefficient should be streamlined. If you do not have a clear organizational chart, this would be a good time to develop one.

Create action plans to implement these methods - who are we kidding here? Attorneys creating action plans? It isn't hard to see why firms get lost in the process. However, you have to set benchmarks to measure success or failure. The action plan is the blueprint for success that you follow based on the processes set up to reach the goals that align with your core values. One idea for an action plan (again from The Free Management Library) requires the following to be addressed:

The goals to be accomplished;
How those results will be achieved
Who is responsible for achieving the results
When will the results be achieved (timeline)
What is the status of the goal (with an as of date)

Considering that action plans will have a short-term negative impact on productivity, many firms will not want to do this. Understand the purpose and create your own method of accountability. Some consultants do not promote action plans, but promote organizational focus to implement the plan. Additional staff are needed and focus placed on them to ensure that processes are in place and functioning. If it works, stick with it. If it falters, you need to implement things that work. How will you know if it falters? Through measuring performance.

Measure, adjust and modify as needed - measurement improves performance. In this case, measurement will hold people and processes accountable so that you can modify the processes and mentor the people (to the extent you can). The largest issue I have found in firms that enact change isn't necessarily the processes - people eventually get used to processes. It is the accountability. It is imperative that there is buy-in by the principals or else plans can easily falter and a large investment in time and money is wasted. If the firm is even-handed and consistent in its application of the plan, positive results will ensue.

Law Firm Strategic Planning - An Overview Of Models

Admin — Mon, 31 Mar 2008 07:00:13 GMT

When some talk of strategic planning, they are talking about retreats and consultants, about mission statements and long term goal setting. Strategic planning can be all of this - however, it doesn't necessarily have to be a complex document that takes weeks or months to develop.

In a more simpler form, strategic planning consists of reviewing the current environment, setting goals to improve it, and implementing them, measuring performance along the way. How you get from "review" to "do" is the focus of several posts this week.

There are several different "models" of strategic plans. Some listed on The Free Management Library include:

"Basic" Strategic Plan - this is the plan typically implemented in firms that invest in developing a strategic plan;
Goal-Based Model - this model is more focused on goal setting and performance metrics relating to meeting the goals;
Alignment Model - this model is targeted to driving the organization to align itself with the firm's mission;
Scenario Model - this model uses scenarios to help identify strategic issues and goals;
"Organic" Model - this model focuses on embracing the shared values and evolving the plan through the continual dialogue that will hopefully eventually increase the values that are shared.

74% of the respondents to the 2007 Law Firm Economic Survey from LexisNexis stated they did not have a written strategic plan. However, 89% of those who did plan said that there was a correlation between their plan and income. What is your firm's plan?

For a look at reasons why strategic planning has been a problem for law firms to implement, look at an earlier post on the subject: Law Firms With Strategic Plans More Profitable.

Concentration Pays Off For Law Firms

Admin — Fri, 04 Jan 2008 14:00:00 GMT

Now that he is retired, Tom Collins is working on improving his golf game. Rather that working on all aspects of the sport at the same time he is concentrating on his short game starting with chip shots. With the importance of concentration of his mind he sent me the following post.

Time passes remarkably fast and any business, including a law firm, has momentum all its own. In other words, things are happing to fill available time. So if you want to accomplish something new or better, pick just a few things to concentrate on. Pick a lot of things and you are likely to accomplish none of them

For example, don’t plan to cross-sell everything; plan to cross-sell one thing to one category of clients. Now decide how you are going to cross-sell that one thing to that one category of clients.

What is your value proposition—lowest price, proven track record, political contacts, higher responsiveness (quality service), advanced technology, delivering cost predictability, etc?

How are we going to win the business? What key strategy or tactic is likely to produce the best result—one-on-one attorney visits, a team approach, group selling sessions, recommendations by third party, etc.?

What marketing materials or tools do you need to support the strategy?

What is the goal? Who is going to make it happen? What do they have to do to make it happen? What are the milestones for those involved? How are you going to measure results and communicate them? How are those involved going to be held accountable for their milestones and individual goals?

You can repeat the above process two to three (or even five) more times depending on the size and organization of your law firm, but concentrating your resources is the key to success. Keep in mind the Rule of the Fewest. The Rule of the Fewest is an important business concept. It arises out of the understanding that resources are always limited. “Things” not only represent a direct allocation of resources, they also indirectly impact unassigned resources. In business, concentration means the fewest of everything at any point in time—customers, products, distribution channels, transactions, etc. Concentration is “Management Candy” at work, doing the Main (fewest) things with the Minimum (fewest) necessary resources to achieve the objective.

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 With Strategic Plans More Profitable

Admin — Mon, 10 Dec 2007 14:00:00 GMT

74% of respondents to the 2007 Remsen Group Managing Partner Survey (part of the 2007 Juris Law Firm Economic Survey from LexisNexis) stated their firm did not have a strategic plan. 89% of those that did believed that a strategic plan had either some connection or a strong connection to improving profitability.

So managing partners understand that planning helps to improve profitability. Why is it that more firms don't have strategic plans?

Ed Wesemann with Kerma Partners has an answer. In an article published by The Law Marketing Portal (can also be read at the Kerma Partners website after free registration), Wesemann gives 10 "inescapable truths about law firms' approach to strategic planning that make the process harder and less rewarding than it should be":

1. Law firms often have trouble agreeing on their core business objectives.

2. Strategic planning is not a democratic process.

3. Mission statements are a waste of energy and enthusiasm.

4. Strategies and tactics are confused.

5. Planning involves precluding options.

6. Too much planning effort is spent worrying about compensation.

7. The obvious is often overlooked.

8. No one is accountable for implementing the plan.

9. Plans are too aggressive.

10. Objectives are not measurable.

1. Law firms often have trouble agreeing on their core business objectives.

The problem of agreement on core business objectives found its way into a MPIE (Managing Partner Idea Exchange) breakout session in the Midwest Managing Partner Forum held in October. A partner wanted to increase the profitability of the firm but also wanted a better work/life balance. Failure to reconcile the two left the partner indecisive on how to proceed on objectives for her firm. Wesemann simplifies the objective: "[i]n any business the primary objective is to increase shareholder value." How you define value will determine what objectives you set.

2. Strategic planning is not a democratic process.

Strategic planning is about vision. Vision requires leadership. Leadership is a function of management. In the business world, a small group of leaders gain input from others, make a decision, then ask others how they should implement the process. With law firms, it is the opposite: the leaders want to work as a democracy, all want to have a say in the decision, and afterward assign a single person to be responsible for implementing the process. Assigning accountability to one individual defeats the purpose - the entire firm must be accountable for the implementation of the plan once adopted.

3. Mission statements are a waste of energy and enthusiasm.

Wesemann argues that firms spend too many hours trying to create a concise mission statement that ends up sapping the energy of the participants and turning the process into a "meaningless exercise". Wesemann suggests picking 5 or 6 statements that represent the core values of the firm. Look here for a good article on writing a mission statement by Joel Rose.

4. Strategies and tactics are confused.

Wesemann found that attorneys want to skip discussions of strategy and go straight to tactics. Strategy dictates direction. Tactics are the types of activities needed to achieve the objectives (look here for a higher level discussion of strategy and tactics). He suggests that attorneys clarify the strategy before embarking on tact.

5. Planning involves precluding options.

Planning involves precluding options, which are counter-intuitive to how attorneys think. Attorneys are taught to maintain options and they tend to bring this mindset into strategic planning discussions. Wesemann argues that each option requires resources and the more options maintained lessens the probability of successful implementation.

6. Too much planning effort is spent worrying about compensation.

Compensation discussions end up derailing strategic plans. Wesemann's suggestion? Focus on increasing the size of the pie, not what portion a person gets. James Cotterman wrote a nice article for Altman Weil's Report to Legal Management examining compensation that can be read here.

7. The obvious is often overlooked.

Firms tend to neglect the basics while focusing on the sexier issues (read: compensation discussions). Issues such as providing good service, having good work habits, charging appropriate fees, etc., should be appraised to see where the firm's strengths and weaknesses lie.

8. No one is accountable for implementing the plan.

Law firms are the best at "voluntary requirements". Wesemann argues that the success of strategic plans rely upon accountability by everyone, which means no opting out if you disagree.

9. Plans are too aggressive.

When firms finally get around to planning, they over-reach and set overly aggressive goals inevitably leading to failure. Keep the goals in line with available resources.

10. Objectives are not measurable.

One of the constant mantras of this blog is that measurement improves performance. Law firms must define what their objectives are and measure their progress towards their goal. Make sure your accounting system has the ability to measure performance in real-time via dashboards with drill-down reporting. Creating the strategic plan is only the beginning. Success of your strategic plan requires benchmarking and continuous measurement so that if your financial objectives are not being achieved, you can adjust your tactics - and stay on track with your strategy.

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 Strategy Survey Results

Admin — Fri, 21 Sep 2007 17:33:53 GMT

You really should read Rob Millard’s post Increasing the Velocity of Strategy,reporting on the results of an August 2007 Managing Partners’ Forum strategy survey. Once you do, you may want to consider a trip to New York or, even better, to London to take Millard up on his invitation below:

AN INVITATION

“The results of the strategy survey mentioned above will be presented and discussed at a Managing Partners' Forum meeting to be held at White & Case's office in New York on the morning of Thursday 18 October 2007, and in London (venue TBA) on Thursday 15 November 2007. Leaders of law and other professional service firms are welcome to attend, free of charge. Check the MPF web page for more details and to request an invitation.”

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.

Checklist for Increasing Law Firm Productivity

Admin — Tue, 11 Sep 2007 19:52:37 GMT

The list below is a reminder of steps that you can take, among others, to increase fee earners’ productivity for improved per-partner income:

Employ professional administrative staff to reduce opportunity costs (lost billable hours) of partners involved in management
Stop the hoarding of work by partners with a compensation plan that emphasizes rainmaking, handing off work and delegation
Implement centralized scheduling of associates
Provide fee earners with better tools for tracking and reporting billable time as worked, including use of Blackberrys and other PDAs
Set individual fee earner targets, then track actual billable hours against those targets
Negotiate fee agreements, providing for billing in minimal time increments
Intensify training of young lawyers to shorten learning curves and improve productivity earlier in their careers
Substitute lateral hiring for law school recruiting
Add laterals with an established book of business

September 11: Never Forget

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.

It Is Time to Turn Up the Heat on Billing Attorneys

Admin — Mon, 10 Sep 2007 17:20:29 GMT

Labor Day marks the end of summer, and with its passing managing partners begin thinking about end of year issues.

It is time to turn up the heat on billing attorneys. Ideally, the firm remained focused on billing and collection efficiency throughout the year. Unfortunately, I know from experience that law firms (especially non-AmLaw 200 firms) tend to let work-in-process and accounts receivable accumulate during the year. As year end nears and partner distributions become threatened, unbilled worked that has been wasting away in the firm’s inventory finally get billed. Likewise, partners start chasing delinquent bills with determined effort.

Don’t wait any longer. Take steps now that will encourage partners to clean up old work-in-process and collect past due bills. Circulate a weekly aging report by billing attorney of both unbilled items and uncollected billed items. The comparison by billing attorney puts peer pressure on your side. At month end, you will also want to compare the current amounts to the amounts as of the end of the prior year. The difference will help bring home to partners the extent of billing and collection work that needs to be done. It is also helpful to hammer home that the increase in WIP and AR over prior year-end amounts is money that will not be available for partner distributions unless billing attorneys get busy and reduce funds they have let sit idle—unbilled and/or uncollected.

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.

Velcro Relationships Payoff for Law Firms

Admin — Fri, 07 Sep 2007 17:35:45 GMT

The term “Velcro relationships” was discussed by Julian Fenwick with Blake Dawson Waldron in an article addressing law firm marketing.

Velcro-style relationships replace the weak one-on-one client-to-partner style relationship with a many-to-many relationship. It pays off to have cross practice relationships with clients as well as relationships that are hierarchical with different levels of the firm’s attorneys and partners involved at different organizational levels within the corporate client. Likewise, we need multi-generational relationships. A long-term relationship means that the relationship must endure the handoffs from one generation of leaders to the next that will occur within the corporate client’s organization and within the law firm. One-to-one relationships are weak in the present time and fragile in the future; yet, without changes in the compensation structure of most midrange law firms, it is unlikely that the “Velcro style of relationship” will develop between the law firm and its corporate clients.

When you back off and look at one, midrange law firms have lawyers and clients. It follows that you would expect those law firms to be experts at dealing with both. Unfortunately, you would be wrong. Outside of the AmLaw 100, law firms don’t get high marks for delegation. They score even lower in the “cross selling” department. The root cause can be traced to ownership and compensation schemes that places value on the wrong behavior. There doesn’t appear to be movement afoot in the U.S to correct the situation. There is in the U.K.

First we have the ownership problem: law firm partners or shareholders do not have the same sense of ownership enjoyed in the corporate world. Midrange firms particularly eschew investment to strengthen the firm in favor of distributing annual earnings to owners. Some mechanism is needed to measure the increasing value of ownership shares in the law firm so that “ownership” has a payoff when a partner sells shares back to the firm or to others. This traditional concept of ownership is developing in the rest of the world, the UK being particularly notable. Without the ownership concept, partners are rewarded by minimizing investments that build value.

The second culprit is the scheme for distributing those annual earnings, the compensation system. Since most are skewed toward a partner’s own production (what is billed for the work done by the partner), too little emphasis is placed on business development. The compensation system encourages the firm’s partners to hoard work rather than develop non-partner legal talent through delegation and supervision. Lifetime origination credit is a common component of such plans and conveys the message that a given client belongs to a given partner. It discourages cross-selling and the one-to-one relationship with the client results in a weak bond of loyalty.

Firms are always asking, “What makes us different?” The experts keep telling us that understanding and communicating your unique value proposition is the key to securing a competitive advantage. Corporate consumers of legal services continue to say what they want are law firms that understand their business, their issues, their goals, and their core values.

If you want to stop competing against everyone else by separating your firm from the pack, start thinking about transforming your law firm. Throw out the traditional compensation system in favor of one that unifies the firm as a team. Move to a system where every partner benefits from the success of every other partner. Toss out the “it is my client” mentality and replace it with an “our client” way of thinking. Replace the one-on-one firm-to-client relationship with Velcro relationships.

It is change that can make your firm unique and your competition irrelevant. You can create your own Blue Ocean.

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 Can Send Registered E-Mail

Admin — Thu, 06 Sep 2007 17:37:58 GMT

E-mail has just about become the standard for communication. It saves time and facilitates collaborations. But there are times when you need to be able to prove receipt and contents of an e-mail, and in that regard, it presents its own set of problems.

Carole Levitt and Mark Rosch addressed that subject in some detail in an article appearing in the August 2007 The Bottom Line, the official publication of the State Bar of California Law Practice Management and Technology Section. After laying out the problems of proving receipt and contents, the authors point to a solution endorsed by various bar associations—registered e-mail. Registered e-mail is a service offered by RPost.

If you are not already using this service, you need to consider it. On a pay-as-you-go model, it is $0.59 per e-mail, but there are various package prices that will bring that cost down for law firms making regular use of the services.

We have come to use e-mail automatically. It has been moving from an informal and casual communications device to our primary means of communication, stipulation and agreement. As noted by the authors, RPost is “a process by which sent e-mails can be ‘registered’ to show legal proof of receipt of a specific e-mail and attachments.”

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.

Trends in Law Firm Practices and Procedures

Admin — Tue, 28 Aug 2007 17:24:58 GMT

Many small nitty-gritty practices can make one law firm more productive than the other. It is always interesting and educational to see what others are doing in the nitty-gritty sphere. We have some insight into those trends from Reid Trautz. Trautz was reporting on activities at ABA’s August meeting in San Francisco in his blog Reid My Blog.

Attorneys are moving to dual LCD monitors. One screen for doing work on documents and the other for practice management tools-- calendar, client info, email.etc.
Law firms are finally shifting to remote back-up services to protect the firm from a fatal loss of data.
Interest in document management technology outranks interest in case management software.
More firms are closing their billing on the 25th to speed up billing and for an earlier position in the client’s payment cycle.
Firms are implementing automatic procedures and technology that increases the pressure on partners to collect bills sooner
Fewer firms are starting work without having first obtained a signed representation agreement.

Trautz also observed:

“Adobe Acrobat Professional 8.0 continues to impress every lawyer who sees it in action, especially as to creating searchable text PDFs, redacting, and e-mail features with Outlook.”

“Smaller firms have yet to feel the impending impact of EDD. Many big firms have head-on experience with EDD, but it doesn't seem to have affected many smaller litigation firms--yet.”

For Trautz’s original report on this subject, go to his August 15, 2007 post Best of the ABA in San Francisco.

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 Utilization in the Law Practice Business Model

Admin — Mon, 27 Aug 2007 17:33:12 GMT

This post deals with the use of Utilization in the Law Practice Business Model.

While David Maister uses the term utilization his model, many others refer to this metric as productivity. Sometimes productivity is used to refer to timekeeper billable hours and utilization is used for firm or group totals. This post will use both terms, productivity and utilization, interchangeably.

At first glance, Davis Maister’s Law Practice Business Model seems simple enough to apply to your law firm. With it, you can predict future results and test the impact of changes involving price, leverage, productivity and expense levels. But as the old saying goes, the devil is in the details. It isn’t that easy to measure the variables used in the model. Utilization is no exception.

Utilization is the number of hours worked on billable matters and is usually expressed as the “Billable Hours per Fee Earner”. Very simple models like the example below (click on graphic to download) work with a single average per fee earner which is multiplied by the number of fee earners to arrive at the total billable hours for the firm.

While more complex models may use average productivity by class of fee earners such as first year associates, mid-level associates, senior associates, etc., it is important to keep any model relatively simple. It is easy to get lost in numbers and complexity. Models keep us from being distracted by the minutia and focus our attention on the relationships among the key performance elements that influence financial performance. Simplified models usually prove to be better predictors than detailed forecasts and budgets. Models are not replacements for either. Budgets and forecasts are operational tools—detailed road maps for accomplishing a plan or targets. Models are decision support tools used in setting and revising those targets. Measuring and tracking the variables used in a model provide leaders with an instantly digestible macro view of the firm’s performance. Business Intelligence (BI) systems like Juris Active Information can convert models into dashboard images with drill-down capability to provide law firm leaders with actionable information needed to take corrective action when the firm or areas in a firm move off course.

There are three things we want from a metric like utilization:

1. We want a metric that telegraphs changes in performance without the risk that such changes will be masked by the computation method.

2. We want a representative number for benchmarking against our peers

3. We want a reliable number for predicting the future

For the first objective, a straight end-of-period calculation is the most appropriate—total hours divided by the number of fee earners. The objective here is to signal something has changed. That change may be due to moving attorneys to part-time status, hiring new attorneys or losing attorneys to other firms. The change can be good or bad. The change can signal a continuing condition or a temporary variance from expectations. Whatever the reason, a change has occurred. The change in the metrics alerts management that they need to investigate in order to understand the nature of the change.

For benchmarking purposes, utilization based on the average number of fee earners is the right approach. For comparative purposes it would be meaningless for a firm that added ten laterals near the end of the year to include those attorneys in the calculation of attorney productivity, without some compensating adjustment. Ten attorneys for two months are only equivalent to 1 ^2/3attorney for a twelve month period. The full time equivalent result is accomplished by using the average number of fee earners for the period being reported. A growing firm that reports end-of -period counts of attorneys rather than the average will always appear to be underperforming. Likewise a firm declining in size will appear to have higher performance. Utilization based on the average number of fee earners for the period is also the right number for tracking individual productivity. It signals when the firm has access capacity or is moving toward burn-out work levels for its professional.

The third forward-looking objective takes some "Kentucky Windage". To project next year’s results, start with the firm’s backward-looking current average productivity per attorney. Adjust it for significant plans, if any, that are expected to impact productivity. Use this forward-looking expected average of fee earners for the period being modeled. Keep the relationship between the variables in mind to avoid serious errors when looking forward. A learning curve related to new hires could require a decrease in the firm’s expected average productivity. While the new associates may be unproductive for several months, the firm will still be paying their salary. Thus, margin as a percent of fee revenues may also require a compensating downward adjustment to reflect that the firm’s expenses are expected to increase relative to added revenues. In most cases the greater danger of misleading projections is from over-manipulating the variables in an effort to compensate for future plans. Models are broad brushes. Make compensating adjustments but only for “big” exceptions to norms. Things have a tendency to balance themselves out; as a result, simplicity usually wins the reliability contest.

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.