Make More Rain : productivity, law firm bus model

Reducing Headcount May Lead to Less Profit in the Long Run

BrianTaaffe — Thu, 09 Jul 2009 18:00:00 GMT

Very few firms today are 100% utilized. Almost all attorneys within a firm have free capacity, and depending on the firm, this can be a large cost. With profits dropping, layoffs and delayed start dates for first year associates have been seen as a short term solution to increase profits. This may be an effective way to address utilization concerns and bring profits back up to levels that law firms have experienced over the last five years, but it may also have some long term effects related to production.

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Law Firm Business Model - Realization

Admin — Fri, 25 Jan 2008 08:00:50 GMT

The 5 key performance indicators all law firms should measure are:

Rate
Realization
Utilization/ Productivity
Leverage
Margin

This week each day I will focus on one of the above. Today the focus is on realization.

Realization is a word with many meanings. Depending on what you want to see, it could mean the percentage of what was billed from what was worked (billing realization), the percentage of what was collected from what was billed (collection realization), or the percentage of what was collected from what was worked at standard rates. Further, you can look at realization on the basis of standard rate or negotiated rate (standard rate realization). This article will take a look at billing, collection, and overall realization from a performance measurement perspective. For some previous posts on realization, please read What Is Realization?, Measuring Law Firm Collection Realization, Collection Realization In The Law Firm, Law Firm Standard Rate Realization, and Role of Realization in the Law Practice Business Model.

Why is it important to track realization? The answer is efficiency. How efficient are you in converting work to cash? Each percentage point lost represents money out of the pocket of the firm. Firms that don't track realization will only find success by accident. Tracking realization at every step in the process will help your firm become more efficient and thus more profitable.

Sometimes referred to as "accrual" realization, billing realization looks at what work you performed at your standard rate and compares it to what you bill. Your standard rate is the rate you would charge a new client before any negotiated discounts. Some only want to look at negotiated or actual rate that you are charging to a client and that is fine, but you should also look at what percentage you are billing based on your standard or, as I call it, your "aspirational" rate. That way you can measure the difference between what you should be receiving based on what you believe you are worth and what you are actually getting.

Let's say your standard rate is $250 per hour. For client ABC, Inc. you and your associate perform 5 hours of quality, best in-industry work on the DEF matter. Because ABC gives you 200 matters per year as part of the guaranteed 20% of their workload for your region, you have provided them a nice 30% discount on the rate. $175 x 5 hours gives you $875 of billable work. However, once you see the pre-bill, you notice that 2.5 hours was spent by your associate "reviewing draft of status letter". You aren't going to make your client pay 2.5 hours for this, so you write it down to .5, reducing the bill by $350. Your bill the client for $525.

What is your billing realization? Based on your standard rate, you would have charged $1,250. This is your standard value for the work performed. There is a $725 loss from the negotiated rate and write down. Your billing realization is determined by dividing your billed amount, $525, by the standard value, $1,250. Your billing realization based on standard rates is therefore 42%. If you based it on your negotiated rate, your realization is $525 divided by $875, or 60%. Either way it's money lost due to inefficiency.

Ok, so you have billed $525. The invoice reaches your client, they notice a charge for .2 hours with a narrative "Telephone call with Ed regarding his paternity test - advised he should start saving for child support." Since the matter for client ABC, Inc. was related to a breach of contract claim, they requested that the time related to the erroneous entry be taken off the bill. You adjust the bill $35 and $495 is promptly paid. Your collection realization is 94%, another hit on your profits due to a lack of attention to reviewing the bill; ie, inefficiency.

Overall realization based on standard rate would be $495 divided by $1,250, or 40%. Overall realization using your negotiated rate is $495 divided by $875 or 57%. You won't make a living with these numbers. However, does any of the above (except maybe the reason for the post-bill adjustment) look that out of the ordinary? The only difference is that I am looking at realization at a per invoice level rather than a global level.

According to the 2007 Law Firm Economic Survey from LexisNexis, billing realization has a relationship to increased partner income while collection realization doesn't. Though overall realization is preferred, tracking billing realization appears to have the most impact on revenue. The charts below illustrate this:

The first graph represents cash basis, or collection realization. It is split up by quartile, the first quartile representing the best performing firms in terms of per partner income and the 4th quartile representing firms with the lowest per partner income. Note that there is no link between cash basis realization and per partner income. In fact, those in the 3rd quartile had the best collection realization, while the best performing firms in the 1st quartile were over 3 percentage points less. In the second graph, which represents billing or accrual realization, there is a clear correlation between the realization percentages and per partner income, regardless of whether you compare based on standard rates or negotiated rates.

Ultimately, the best practice would be to track overall realization based on your standard rate. However, the above provides some insight into where most of the money is being lost. It appears that if you can get control over pre-bill adjustments, your revenue will increase as will per partner income.

Ways to increase realization:

Don't negotiate your standard rate away without volume guarantees.
Pay attention to mark downs. If they must happen, make attorneys note a reason. If it is correctable, correct it so you can decrease mark downs.
Bill. WIP is inventory and loses value every day it sits on the shelves (your desk).
Don't wait months for a client to call and try to negotiate down their bill. Stay on top of receivables.
Be efficient in how you work, how to bill and how you collect. Modify your processes to the extent you already have them. Develop a process to the extent you don't. Measure your performance and prepare to adjust if your process isn't yielding the results you desire.

Along with other key profit drivers, realization is something you should track regularly. Utilizing technology will help you achieve your goals. Tools such as Juris® Active Information can alert users when their realization goes below their desired percentage. Benchmarking tools such as Lexis® Insight can compare your realization numbers to your peers. Measure against your own goals and the performance of your peers to gain insight as you how your firm performs against others in the marketplace.

There's no reason law firms can't earn more even in a rescessionary economic cycle - unless they don't measure performance. Don't leave the financial state of your firm to chance. Measure your performance.

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 Business Model - Leverage

Admin — Thu, 24 Jan 2008 08:00:13 GMT

The 5 key performance indicators all law firms should measure are:

Rate
Realization
Utilization/ Productivity
Leverage
Margin

This week each day I will focus on one of the above. Today the focus is on leverage.

Head count leverage is by far the most difficult indicator to change. Hiring new associates involves much risk, plus you not only need to have the workload, you have to have partners who are willing to share that workload. Some previous posts related to leverage are What Is Leverage?, Best Law Firm Practices for Increasing Leverage, Handling Complexities of Law Firm Leverage, Billable Hours vs. Head Count Leverage In Law Firms, and Leverage Can Help and Hurt Law Firms.

The two types of leverage that will be the subject of this article are head count leverage and billable hour leverage. Head count leverage is the ratio of all non-equity partner fee earners to equity partners. Billable hour leverage is the total sum of all non-equity partner fee earner billable hours divided by the total billable hours of equity partners. The goal is to increase leverage if your partners have reached or exceeded the target billable hour threshold per year. What that number is varies from firm to firm, but in the 2007 Law Firm Economic Survey by LexisNexis , we used a baseline of 1,800 billable hours. I consider 2,000 hours (40 hours per week based on a 50 week work year) as the maximum reasonable output that one should expect from a fee earner. Of that, 4 hours per week can be reasonably dedicated to non-billable activities. As so many who argue for alternative fee arrangements, there are only so many hours an individual may work. After reaching this threshold, it is imperative that work is passed to another fee earner if you want to increase income over the long term (ie, firm growth). Increasing the headcount of non-equity fee earners to handle accretive work (as opposed to absorbing work that could be handled by others) is central in making leverage work to increase income.

According to the 2007 LexisNexis survey, partners are still billing more than associates but continue to project that they will pass work on and reduce their own workload. It appears talking about it is easier than doing it.

Head count leverage is obviously risky if you don't have full utilization of your existing fee earners. If you add staff before full utilization, you are merely absorbing someone else's work - a sure way to lower profits. Plans to increase head count leverage are discussed in years, not months. First and foremost there must be a need. Otherwise, it isn't going to benefit the firm. Still, if used correctly, increasing leverage will increase partner income. The best performing firms in the 2007 LexisNexis survey also had the highest head count leverage.

The best performing firms also had the highest billable hour leverage. This is where firms can make immediate changes and get results measured in months. The key is measuring fee earner productivity. In mid-size firms, partners typically outwork the associates. In order to benefit from leverage (whether it be head count or billable hour leverage), associated must be fully utilized. Before I go any further, let me clarify what I mean by "fully utilized". It doesn't mean "work the suckers until they keel over". It means determining what the maximum amount of billable hours should be (governed by firm culture and reasonable expectations) and don't hire a single person until associates reach that threshold consistently. The whining about associates being overworked may be true in biglaw, but it doesn't appear to exist in mid-sized firms. In mid-size firms, partners are the overworked ones and most don't complain. Finding young associates who have proper work ethic is more the concern (as one managing partner told me recently, "we can't find associates that want to work!") but that is a topic for another article.

What are some ways to increase billable hour leverage?

Increase paralegal hours or don't retain them. Paralegals are chronically underutilized. If you don't intend on using them, don't hire them. If you only have 600 hours of billable work for a paralegal and your associates are billing 1,300 hours, the paralegal is lowering both productivity and effective rate.
Introduce partner caps on billable hours. This is one I expect will be well-received by work hoarders. The idea is to set a maximum annual billable hour requirement - once reached, all further work must go to client development and all billable work must be shifted to available resources. This is a drastic measure and should be instituted only to initiate change when other attempts at shifting workload have failed. It is not feasible over the long term and in firms that have a lockstep compensation system it isn't a good idea period. However, excessive workload is an important requirement to increasing leverage. Client development is key to bringing in more work and partners are in the best position to do rainmaking activities. Whatever it takes to get partners to act like owners of a company (not a confederation of sole proprietors) is worth trying.
Mentoring activities. Mentoring is a nonbillable but crucial activity. Encouraging mentoring will force partners to do things besides bill time - things that will ultimately make the firm more competitive and profitable. Mentoring is an art not used enough and associates who are properly mentored are in a better position to succeed and develop into good future partners. The work that would have been done by the partner will then get shifted to the associate. Partners should focus on doing work that demands the highest rate so that there isn't as much of a profit hit when implementing mentorship programs.
Change the criteria for achieving partnership status. Do away with lockstep compensation and similar paths to partnership. In its place create compensation plans based not only on billable work but firm citizenship. Introduce non-equity partnership programs that provide a place for excellent associates who may not be good owners (ie, don't have the drive or talent for client development and management - ie, grinders).
Change your compensation plan to reward not only billable activities, but non-billable activities. Make shifting workload with mentoring a measurable performance indicator for compensation purposes.

It takes planning to make leverage work to improve profits. Determine where you want to be in terms of fee earner headcount. Look at where you are today in terms of client development. Look at where you are in utilizing your non-equity fee earners. Make your objectives clear and measurable. Track them - and hold everyone accountable for the success of the plan.

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 Business Model: Margin

Admin — Wed, 23 Jan 2008 08:00:31 GMT

The 5 key performance indicators all law firms should measure are:

Rate
Realization
Utilization/ Productivity
Leverage
Margin

This week each day I will focus on one of the above. Today the focus is on margin.

Margin is partners' profits divided by firm revenues. It is the percentage of revenue left after all operating expenses have been paid (not including partner salaries and distributions). For previous posts on margin, look here, here, here, here, and here.

There's no secret to increasing margin. Do a good job, be fair to clients, focus on client development, bill what you are worth, never devalue your time, and make sure costs rise proportionately to revenue. You don't increase margin over the long term by cutting costs. Reducing expenses is either done to correct a past mistake in investment or to replace lost revenues. Neither are positive causes. If you want to grow, you have to spend.

The point is made in the 2007 Law Firm Economic Survey from LexisNexis as well. The firms who had the highest per partner income spent the most. The firms with the highest margins spent the most.

The firms with the highest per partner income are represented in the Q1 column. The operating margin is at nearly 51% and their expenses per head are nearly $100,000. Compare that to the lowest performing firms. In the Q4 column, margin is a paltry 29% but they saved money - only $84,000 per head cost. You can't grow with a constrictive operating budget. Note that both the best performing and worst performing firms also spent a nearly identical percentage of their budgets on technology. This could mean that technology isn't being utilized properly in the poor performing firms (due no doubt to a lack of services if experience tells me anything) or that poor performing firms are attempting to utilize technology to manage their practice. I am encouraged to think the latter and am curious as to whether those firms are improving their practice as a result. There are so many variables to successful implementation of a process, but looking at these firms in 5 years might be a good follow up.

The way to improve margins may be different for each firm depending on where they start, but there are still two constants: cutting costs do not equate to long-term increases in per partner income and measurement improves results. With any action geared to improve the financial performance of your firm, you must measure it and adjust when you get off track.

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 Business Model: Productivity/ Utilization

Admin — Tue, 22 Jan 2008 08:00:55 GMT

The 5 key performance indicators all law firms should measure are:

Rate
Realization
Utilization/ Productivity
Leverage
Margin

This week each day I will focus on one of the above. Today the focus is on Productivity.

Productivity is the degree of value generated by fee earners. It is most commonly determined via billable hours, but you can track productivity in terms of fee generation whether via hourly billing or other fee arrangement. The concept is the same either way: attaining maximum productivity means getting the most output from your fee earners. In alternative fee arrangements, you can determine the productivity by breaking down each task by the time it takes to perform the task. Then productivity becomes how many tasks you can complete in a given time frame. One way or the other, you can only work so many hours in a day regardless of how you bill. Since most firms still primarily judge productivity in terms of the billable hour, this article will gauge productivity by billable hours. For some prior posts on productivity/ utilization, please look here, here, here, here, and here.

According to the 2007 Law Firm Economic Survey from LexisNexis, partners billed more hours than associates. Based on a 1,800 billable hour per year standard, top performing firms had associates with productivity numbers that were closer to their partners.

In the above charts, it is clear that partners are more productive than the associates. Considering that partners dictate what associates do, this is a disturbing indicator of a lack of workload sharing by partners of mid-sized firms. Further, for those who do utilize their associates, profits increase. Across the board, partners were within 10% of the 1,800 standard. However, the best performing firms (those in the 1st quartile), had both partner and associate productivity within 8% of each other. In the 2nd quartile, the disparity was a whopping 17% For the 3rd quartile, it was even worse: a 25% difference between the utilization of partners versus associates. For those in the worst performing quartile, the disparity was a little less at 18%, but partners were only as productive as the associates in the 1st quartile.

It is worse for paralegals, though you may argue that paralegals shouldn't be held to the same billable hour standard as associates. Even so, the higher performing firms still utilized their paralegals more than those with lower per partner income. It is clear that utilization is a path to higher profits.

Don't read too much into the above sentence. Again, there are only so many hours in a day and thus only so much productivity you can expect from fee earners. You still need to measure performance based on proper leverage, rate, etc. But you can improve short term profitability by increasing utilization alone.

Assuming the work is there, the best way to increase productivity is through incent. Provide incentives to partners to share work with associates. Provide incentives to associates to reach their billable goals. Provide incentives to utilize paralegals. Try many things and measure against production. If it works, keep doing it. If not, adjust.

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 Business Model - Measuring Rate

Admin — Mon, 21 Jan 2008 08:00:01 GMT

The 5 key performance indicators all law firms should measure are:

Rate
Realization
Utilization/ Productivity
Leverage
Margin

This week each day I will focus on one of the above. Today the focus is on rate.

For a primer, look at some prior posts related to rate here, here, here, here, and here. The importance of tracking rate shouldn't surprise anyone. However, I run into firm after firm who either don't increase rates annually or don't track effective rate. How can you improve performance if you don't measure it?

Source: Timothy McMahon (http://www.inflationdata.com)

The above chart shows the trend in inflation since 1990. Failure to increase rates annually at the rate of inflation during the 1990's wouldn't have as much of an effect on profits considering the economic boom the US experienced along with low inflation. That changed in 2002 and there has been a steady increase in inflation for the past 6 years. In fact, as of December, 2007, the consumer price index (which includes the price for food and oil) was at 4%. If you are not increasing your rate at least by the percentage of inflation, you are working for less money every year. It isn't known where inflation will be at the end of this year, and some are forecasting that this year will see some lower inflation, but the point isn't to predict lower profits when inflation is higher or higher profits when inflation is lower - it is to keep up with the rate of inflation and be certain your rate increases take it into consideration so that you are immune to the index altogether.

Inflation is a starting point - other factors such as relative expertise in a given area of law can also factor into rate. In your retention agreements, you can provide cost predictability to your clients by treating it like one would a long-term lease. You factor price increases into the agreement so that they know the percentage increase each year. In volatile times (such as the last few years), it may be better to treat it more like a mortage, setting a range of increase that won't go beyond a certain ceiling. Then annual increases can meet margin goals as well as inflation.

Measure the effective blended rate consistently so that you know if the rate is going up and down throughout the year. Why is this important? Assuming that your firm has established rate goals for the year, the blended rate (the combined average of all fee earners' rates) should be known. If the rate is decreasing, then something is wrong. The most likely culprit is pre-bill or post-bill adjustments. If your attorneys are devaluing their work, there needs to be a reason - otherwise, you will be sending a signal to the client that you are over charging them and adjusting to make it more fair. This is not the way to make it easier to raise rates in the future. Further, if you are trying to meet a financial objective, write downs and mark offs go directly to the bottom line and put you behind in reaching your financial goals.

The effective rate is calculated after the invoice is paid. It gives you the actual value of your services. In the report below, productivity, realization, and rate are tracked. The image below it is a blow up of the rate section of the report. In it you can see the value of the hours worked at your standard rate, your actual or negotiated rate, the billed rate after mark down but before invoice discounts, the billed rate after discounts, and the collected rate after post-bill adjustments. It is broken down both by both worked hours and billed hours.

In the above, you can instantly see that the time keeper is writing up his negotiated rate at pre-bill edit to conform with his desired standard rate. One way you achieve this (ethically) is by the use of firm-wide standards for the cost of a task. You must determine the time it takes generally to do the task and then price it accordingly. If you have efficient attorneys that can do the task in less time than the standard, he/she may write up the bill to conform (likewise, if it takes longer, you must write it down). This way an efficient attorney may mark up his time and thus increase his effective rate. For those who advocate value billing, here it is at work. The better value goes to either the efficient attorney or the client of the inefficient attorney. Tracking effective blended rate regularly will allow you to determine whether your attorneys are being efficient in their processes and if they are on track to reach the financial goals or not. If they are not, you can act on it well before it becomes an uncorrectable problem.

At the same time, the above time keeper may be increasing his rate unethically, which may lead to undesirable consequences (firm reputation as well as ethical violations may be the result). Without regular reporting on the above, you won't have the information to know which is occurring.

Price increase is one factor to consider in increasing effective blended rate. It isn't the only factor. Many firms, especially those who work in corporate defense litigation, have traded high rates for volume. In practice areas where there is not a lot of price flexibility and the rate is usually heavily discounted to get the business, the key is to have an efficient workflow process and be very wary of mark downs. In some firms, the rate can absorb an inefficient operation. In corporate defense, you may not have that luxury. On top of that, more and more corporate clients are levying restrictive billing guidelines that can seriously affect effective rate. Not only can non-compliance with client billing guidelines delay payment, it can lead to nonpayment of certain tasks altogether.

Improving workflow efficiency is the easiest way to increase effective rate. However, expectation of reciprocity from a client who expects you to provide quality service at a reduced rate wouldn't hurt. Why is it that a client can expect you to lower rate for their volume when you are not guaranteed any volume from them? In my opinion, not only would I work to increase rate, I would tie the frequency and level of the increase on the volume the client provides. If the client is willing to guarantee a certain percentage of their work for a given year, I would be more willing to hold rates steady or only increase them by the annual rate of inflation. Don't be afraid to treat your corporate clients like a corporation. They are treating you like a business. Although restrictive, billing guidelines provide a measure of cost certainty by the tracking of costs associated with a task. They know what it costs for you to do your work. You better know it too - and make sure you are making a profit from the work you do.

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.

RVs, Bananas and Recession-Proofing the Law Firm

Admin — Fri, 18 Jan 2008 08:00:52 GMT

It seems every year there are those who get in front of the press and claim that there is a looming recession that is about to envelop the country and if there is no action, the depths of it will surpass our worst fears.

This year is no exception. December retail sales were down 4%, unemployment is up to 5%, and, of course, RV sales are plummeting. Yes, according to several articles, the reduction of RV sales is an accurate forecaster of recession. I am sure Federal Reserver Chairman Ben Bernanke is keeping close tabs on this key indicator.

Larry Bodine doesn't just think we are headed for economic recession - he claims that we are already there. His reasons do not include RV sales:

Housing starts are down 24% from a year ago. The median sales price of existing single-family homes has been falling all year, according to the National Association of Realtors. A person's home is the largest single asset and the source of a sense of prosperity for most Americans.
The value of the dollar is near an all-time low [ ]. The dollar is worth the same as the Canadian Loonie currency.
The price of oil spiked at $100 per barrel on January 2 and has settled at an exorbitant $92 per barrel.
The US trade deficit widened sharply by 9.3% in November to a larger-than-expected $63.1 billion. The trade deficit has widened to its highest level in more than a year.
The "credit crunch" means that investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, thereby driving up the price of debt products for borrowers. Citigroup, the nation's biggest bank, announced a stunning $10 billion fourth-quarter loss. The Kuwait Investment Authority -- a foreign country -- is expected to bail out Merrill Lynch with a $4 billion investment.
The cost of the war in Iraq over the past five years is now approaching a cumulative $500 billion, or about $100 billion per year on average.

Bodine isn't the only one (not by a long shot) ringing in the new recession. Bruce MacEwen has two posts in a row (The Upcoming Banana? and A Contrarian Bounce?) dedicated to the apparently imminent recession.

In The Upcoming Banana?, MacEwen has his own figures to back up the sure "banana" that is happening:

Morgan Stanley, Goldman Sachs and Merrill Lynch have issued "recession warnings."

The Economist's somewhat impish "R-word index," which counts how many times in a quarter the word appears in The New York Times and The Washington Post, and which accurately forecast the 1980, 1991, and 2001 recessions, is nearing a new peak.

Sullivan & Cromwell Chairman H. Rodgin Cohen said "It is hard to be an optimist," [of the outlook for M&A activity in 2008]. "With the markets where they are, it is going to be a tough year. The markets hate uncertainty, and we are in an uncertain time."

Gold and oil are both at or near all-time (inflation-adjusted) highs.

The front page of just one day's Wall Street Journal lists the following facts:

American Express drops 10% in one day after announcing increased write offs and delinquencies; Capital One, Master Card, and Discover also drop;

Retailers ranging from McDonald's to Tiffany report disappointing same-store sales;

The stock market has started 2008 with its worst year-opening slide in over 30 years; and

A Barron's roundtable questions whether the 25-year bull market is running out of gas.

The American Lawyer's most recent survey of law firm leaders (last month) was appropriately headined "Fog Advisory"—the outlook is unclear.

And, of course, Cadwalader laid off 35 finance attorneys.

With the 300 points the Dow Jones Industrial Average lost Thursday, we may be doing more than just talking ourselves into a recession. Tensions are certainly high. Jim Blasingame from the Memphis Commercial Appeal, however, has a remedy: Don't participate in the recession. Some of his ideas include eliminating operational inefficiencies, cutting costs, converting non-performing assets to cash, and pay more attention to receivables.

MacEwen, in A Contrarian Bounce? has one idea contrary to the above: Don't cut costs - invest:

Rather than tightening their belts, the aggressive firms apparently sensed opportunity and chose to invest in [SG&A, R&D and advertising] in hopes of a longer-run payoff, whereas during flush times they focused on operational efficiencies. In other words—although they always invested more than their peers in R&D—their strategy was to sacrifice short-term profits in bad times for the sake of longer-term advantage: And to more than make up the sacrifice when good times returned.

Investing rather than cutting costs is consistent with what the LexisNexis Economic Survey shows. For firms who retain earnings, recessions become opportunities to exploit the weak economy to its own advantage. The market starves for investors during economic troughs and those who can afford to invest will find great opportunities to expand. Those who choose to devour all profits in good times will be the ones struggling to keep the doors open in bad times.

It is like the politically corrected story of a brother and sister who decided to open different restaurants on the same city block. Both sold roughly the same type of food and catered to the lunch crowd. The brother was very outgoing. He always remembered his customers, greeted them happily when they entered the restaurant, came to their table to mingle with his customers, and was so liked that the place was packed all the time. The sister, on the other hand, was a quiet woman who merely went about running the restaurant and most customers never saw her. The restaurant often was practically empty and you sometimes wondered how the place was still open.

The brother's business soon failed. Though great at bringing in customers, he was a poor manager. His employees stole from him, he gave away food, and he rarely ever looked at the books. On the other hand, the sister's business grew because she kept a ledger, measured what items sold and which didn't, changed the menu to highlight items that sold better, guarded her margins and saved her money.

There is a lesson in this for law firms. I have seen many firms who have neglected their finances because the volume of business kept constant cash flow and hid structural deficiencies in their model. Does your firm give away food? Do you have attorneys well liked by their clients but under producing from a financial standpoint? Do you want to be the brother or the sister?

Firms that plan and measure performance are in a much better position to aggressively attack recessions and benefit from them. Investing in the expansion of your business is a sign of a strong company. Cutting costs is a sign of a failing one.

Don't misunderstand: you don't want to spend away your margins. Make sure there is a link between your spending and increased revenue. But don't necessarily look to cost cutting when the economy is on the downturn. As MacEwen notes, "[i]s it "risky" to increase operating expenses during a downturn? So it would seem. But the real risk may be in following the herd."

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.

Reflections on the 2007 ALM Billing Rates & Practices Survey

Admin — Fri, 11 Jan 2008 08:00:58 GMT

"Is the billable hour dead, as many like to proclaim (whether wistfully or presciently?)" So starts the Executive Summary for the 2007 ALM Billing Rates & Practices Survey. The relentless assault against the hapless billable hour continues. Here is yet another blog post arguing against hourly billing. Yet if you look at billing rates, they continue to increase. The 2007 ALM Billing Rates & Practices confirms this, but also drills down into respondent's use of alternative fee arrangements.

According to the ALM survey, the average billing rate nationally is $240. This is in line with the 2007 Law Firm Economic Survey from LexisNexis, where nationally, attorney rates were at $249 (broken down: equity partner rates were at $263 and non-equity partners billed at $235 on average). In the ALM survey, "[a]ll but a small percentage were the leader, managing partner, shareholder or owner of their firm", so I didn't include the firm effective rate that includes associate and paralegal rates in calculating the $249 (for those of you thumbing through the LexisNexis survey). Only 8% of the ALM respondents were associates, so it may very well be that average rates were lowered to $240 in the ALM survey by the associates (who in the LexisNexis survey billed at $175 per hour).

The survey is heavily weighted to small firms, with about a third of respondents being solo practitioners and 58% from "small firms" defined as between 2 and 39 attorneys. Why ALM decided to include mid-sized firms (Juris defines mid-size to include firms with attorneys with over 10 attorneys) in the small firm category, I don't know, but it might be due to a small amount of respondents in that 11-39 range.

As further comparison, the average national billing rate for equity and non-equity partners in the 2007 Altman Weil survey was $315. The National Law Journal Billing Survey partner average was $427. Both the Altman Weil and NLJ surveys target larger firms.

One of the observations of the survey was that size of the law firm matters and the above figures certainly indicate this. However, in the LexisNexis survey, the observation was different: it isn't the size that matters, but "that law firms that outperform with regard to per-partner income do so because they excel in performance on the key law firm profit drivers." The ALM Billing survey doesn't profile the firms for per-partner income and thus only looks at part of the picture.

In the chart above, each quartile was ranked for the following key profit drivers: productivity (billable hours), leverage, billing realization, effective rate, and operating margin. The highest performing firms ranked the lowest in all of the indicators.

Size, on the other hand, didn't make as much of a difference. For example, the per partner income of the top performing firms with 25 or more attorneys in the LexisNexis survey was $609,548. Income per partner for firms with 11 to 24 in the top quartile was $548,557 and with 10 or fewer attorneys, $512,896. However, the difference between quartile 1 and 2 across all sizes is substantial: $325,986, $322,876, and $294,871 respectively. While there is less than $100,000 that separates the smallest surveyed firms from the largest ones, there is nearly $300,000 difference between quartile 1 and 2 across firms of all sizes.

Which brings us back to the ALM Billing & Practices Survey. 88% of respondents to the 2007 ALM Billing Rates & Practices Survey reported that they offer "alternatives" to the billable hour and it made up an average of 37% of their revenues. That is a pretty substantial number. Given that the survey is made up of smaller firms, you may be tempted to conclude that smaller firms are moving away from the billable hour in order to compete better with larger firms.

That may well be the case, but it is just as likely that some small firms that continue to not operate like a business could be getting caught up in a trend that in the long run will drop their profits even lower while the solo practitioners next door is making half a million. If you don't measure performance, you won't know.

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.

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Admin — Fri, 11 Jan 2008 01:34:34 GMT

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Law Firm Partners Link Profitability to Rate Increases/ Cost Cutting

Admin — Wed, 05 Dec 2007 14:06:12 GMT

One of the interesting questions posed in the Remsen Group Managing Partner Survey (part of the Juris 2007 Law Firm Economic Survey by LexisNexis (the Survey)) related to managing partners' strategic perceptions of profitability. When asked "What strategy has your firm found to be most effective in its efforts to achieve higher profitability?", 26% of the managing partners responded that increasing fees was their firm's most effective strategy. Coming in second was marketing and business development (25%), then cost cutting/ expense reduction ( 18%), improved efficiency (14%), higher billable hour requirements and divesting of low profit work (both under 10%).

Though it isn't surprising that firms list rate as the top strategy to achieve higher profitability, most firms only increase rates at or just above the pace of inflation. According to the Survey, standard billing rates increased an average of 5% to 7% between 2005 and 2006. Adjusted for inflation (currently around 3.5%) this increases rates by 1.5% to 3.5% before other costs of doing business are calculated into the rate (such as the continual decline in client willingness to pay for costs such as online research). Increasing rates in such a way may achieve higher profitability but at 1.5%-3.5% is it the most effective strategy?

What is more surprising and at odds with other Survey findings are the respondents that claimed that cost cutting/ expense reduction was their most effective strategy to achieve higher profitability. Survey numbers do not show any correlation to increased partner income and low expenses. In fact, according to the Survey, the firms with the highest per-partner draws spent the most - but also had the highest margins.

Most Survey respondents gave low priority to improved efficiency, divesting of low profit work and (surprisingly) increasing billable hour requirements. Yet survey numbers from both 2005 and 2006 consistently show that those firms who had the highest partner income performed well across all five of the key performance metrics (rate, utilization, realization, operating margin and leverage).

The New York Lawyer posted on December 4th that some firms have been cutting staff in a bid to lower operating costs. Said Southern California legal recruiter Larry Watanabe, "They want to retain rainmakers, and to do that, you have to maintain a meaningful level of profitability." So they must. However, again, based on this year's Survey, the firms in the 1st Quartile (representing the highest per partner income) also had the highest operating expenses. If you are cutting costs to maintain profitability, then the firm isn't growing and this is no achievement. This may indicate that for those 18% of firms who used cost cutting as a strategy to increase profits, times aren't so good.

What factors are more likely to achieve higher profitability?

• Better efficiency in workflow – lower the days to bill and days to collect fees;
• Discontinue “lock-step” compensation increases to the extent your firm uses this to compete;
• Adopt and adhere to a written, achievable strategic plan;
• Measure your key performance metrics:
o Effective rate upon collection of fees;
o Realization both at billing and collection;
o Productivity (billable hours or equivalent);
o Operating Margin;
o Leverage – either by headcount or billable hours;
• Market to your strengths – don’t be afraid to ask for business.

What strategy has your firm found to be most effective in its efforts to achieve higher profitability?

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 .

Secondments: A Sound Law Firm Tactic

Admin — Tue, 04 Dec 2007 19:37:00 GMT

The terms ‘secondment’ and ‘secondees’ aren’t used much in the U.S. Nor is the tactic (by whatever name) used often by midrange law firms. Secondees are usually young associates who for an intermediate term (several months to a year) are given over to clients as temporary additions to their in-house legal team. Internationally the practice is more common, especially in the U.K. It has expanded beyond secondment assignment just for young associations to include senior members of the law firm.

There are good reasons for the strategy. First and foremost is the relationship building aspect between the law firm and the client. Because secondees are usually provided at a bargain price, the client views the arrangement as the law firm making an investment in them. For midrange firms, a secondment strategy lowers the risk of adding to its legal team. Adding new associates is an expensive undertaking. The cost comes right out of partner profits and many experts believe that it takes as long as three years before the cash flow from the additional associate becomes positive. The smaller the firm, the greater the relative impact on existing law firm partners. Having an ongoing secondment program can help finance those additions.

The relationship with insiders that secondees develop during their tenure with the client will surely prove to be valuable in terms of retention and expansion of the business relationship between the client and the law firm. And the law firm builds a team with a far greater awareness of service quality concerns of all clients.

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.

Uncollected Law Firm Fees related to Business Model

Admin — Wed, 19 Sep 2007 17:33:00 GMT

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

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

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

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

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

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

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

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

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

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

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

Law Firm Economic Outlook for 2008

Admin — Tue, 18 Sep 2007 17:20:10 GMT

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

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

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

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

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

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

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

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

Unbilled Law Firm Fees (Work-in-Process)

Admin — Thu, 13 Sep 2007 17:27:50 GMT

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Law Firm Business Intelligence Systems

Admin — Wed, 29 Aug 2007 17:21:00 GMT

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

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

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

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

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