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Jun 26, 2019


Law Firm Succession Strategy When Candidate Associate Attorney Says No to Your Proposal

Question: 

I am the owner of a law firm in Mesa, Arizona. I started the firm twenty-five years ago. Our focus is exclusively on estate planning and we serve clients throughout the Phoenix metropolitan area. There are three other associate attorneys working in the firm as well as staff. One of the associates has been with the firm for ten years and the other two are right out of law school – one was hired this year and the other one year ago. I am sixty-three years old and I would like to retire and exit the practice within the next three years – the sooner the better as I have other interests that I would like to pursue.

For several years it has been my goal to transition my practice to my senior associate and he and I have discussed this vaguely over the years – just the idea in general – no specifics. Recently, I made a proposal to him where he would gradually buy my shares over the next three years and have all my shares paid for by the time of my retirement which would be three years from now. To my surprise he refused. Where do I go from here?

Response: 

Getting a “no” is not unusual. We are experiencing this quite frequently in our succession planning projects. Often this results in the firm exploring external succession strategies and having to merge with another firm or selling the practice. First of there is not the hunger for “equity” that there was thirty years ago. This is due in part to the fact that in many firms – large and small – there is now a non-equity partner status with the recognition of partner status, additional compensation and perks, and none of the risks of equity partnership. In addition, work life balance is important to many attorneys and many are unwilling to give up work life balance in exchange for the stress of equity partnership. Finally, many candidate associate attorneys either don’t have the capital/financial resources often required to obtain equity or don’t see the payback or return on their investment should they buy-in.

Here are a few thoughts concerning your situation:

  1. Reevaluate your proposal. Is the price you are asking for your shares reasonable and affordable for the candidate based upon the actual profits (your earnings) generated by the firm? If the price is not reasonable or affordable for the candidate consider providing an alternative proposal.
  2. Even if the price is reasonable and affordable, three years may not be a long enough period. You may have to settle with getting some of the value say three to five years after your retirement. Consider this as an alternative.
  3. Your associate may be reluctant not because of the terms but because he does not really want to own a law firm – he just wants a job as a lawyer. If this is the case it does not make any difference what you propose and you need to examine other options such as bringing in a lateral that is willing to take over your practice or a merger or sale of the practice.

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John W. Olmstead, MBA, Ph.D, CMC

Jun 19, 2019


Burning Issues for a New Law Firm Owner Starting Firm After Leaving BigLaw

Question: 

I have recently started a law firm in the suburbs of New Orleans after leaving a large law firm in the city. I was a non-equity partner in the firm and had worked for the firm for fifteen years. I worked in the estate planning group and handled complex estate planning matters for wealthy individual clients. Much of the business was referred to the firm by large bank trust departments. I have been promised referrals from some of these banks. I had other referral sources as well that will be sending business. The focus of my practice will be exclusively on complex estate planning for wealthy clients. A paralegal and an associate from the firm will be coming with me. During my career my focus has been on practicing law and not running a business. What are some of the challenges and burning issues that I will face?

Response: 

You are starting with the advantage of probably having grown up with excellent training and mentoring that larger firms are capable of providing. As a result you probably have an excellent skill set and it sounds like you have learned how to get business and have developed referral relationships. However, you also have been accustomed to firm management and other resources that will not be available to you in a smaller firm. You will have to get your hands dirty and handle much more of the firm management and administrative functions than you had to do in the larger firm.

Some of the challenges and burning issues that will keep you awake at night will probably include:

  1. Hiring, training, motivating, compensating, and retaining attorneys and staff – both those that initially join you and future hires. Small firms often cannot afford to provide the level of compensation and benefits that larger law firms and other businesses provide. You must creative and use other carrots such as flexibility, work-life balance, etc. to be competitive.
  2. Additional sources of business. Even though you have promises from past referral sources to send you business the business may not materialize from these sources for various reasons. You must be prepared to proactively marketing your practice. A content-rich website, client seminars, and additional referral source development should be at the top of your list.
  3. Cash flow will be a challenge and issue, at least initially. Insure that your have sufficient working capital to start your firm and access to adequate credit lines if you need them. Obtain retainers from clients upfront, stay ahead on retainer replenishment, and bill promptly. Watch your spending but focus on revenue generation.
  4. Balancing your time between servicing clients and managing the practice. In your prior firm your primary mission was to practice law and serve clients. Now, as the sole owner of a law firm, you will also have management and administrative responsibilities. Your time between these two areas will require careful balance – neither can be neglected. While you can eventually hire some help you can never relinquish total responsibility for running the business.
  5. Development of systems. Processes and procedures will need to be documented in office policy and procedures manuals. Computer hardware and software will need to be acquired and implemented. There will need to be oversight over these systems. You should at least have a “top level” understanding of these systems.
  6. Client demands. Client demands and workloads can often take a toll on new owners. There will a time will your will be so busy you would like to hire additional help but not so busy that you are ready to or can justify doing so.

These are just a few of the challenges and burning issues that others from BigLaw starting their own practice have discussed with us.

Good luck with the launch of your practice.

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John W. Olmstead, MBA, Ph.D, CMC

Jun 05, 2019


Law Firm Partnership Tiers – Different Qualifications For Equity and Non-Equity Partners

Question: 

I am the managing partner of a six lawyer firm in Nashville, Tennessee. There are two partners in the firm, myself and another partner, and we have four associate attorneys. Two of our associates have been with firm for over ten years. We are trying to put in place a career progression policy for them and we are thinking about having a non-equity and equity tier which would serve as a prerequisite to equity partnership. What are the differences between the expectations and requirements for non-equity and equity partner?

Response: 

The main difference between an equity partner and non-equity or income partner is that the equity partners assumes a higher degree of capability in a lot of areas, not just good lawyering. Equity partners are expected to develop business, to manage large client relationships, and to have a level of commitment that allows them to do all of that and maintain a very full practice load at the same time. Non-equity or income partners are generally lawyers that are excellent lawyers in his or her field but doesn’t satisfy the other requirements required of equity partners. In addition, equity partners usually invest capital in the firm and assume the risks of the office lease, credit line, and other liabilities. Non-equity partners usually have guaranteed salaries and equity partners do not.

Here are a few of the typical hurdles that are required to move up to equity partner:

The primary difference is non-equity partners focus is on lawyering and the focus of equity partners is on lawyering and being a businessperson as well – practicing law and managing a business.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 29, 2019


Associate Attorney Productivity When Client Work is Slow

Question: 

Our firm is a sixteen attorney municipal law firm in Detroit with six partners and ten associates. Like most firms that do municipal work we must deal with lower billing rates than other firms charge. The volume of our work can also fluctuate at times. All of our work is billed by the hour and billable hours is our most important key performance indicator. Our associates have a billable hour expectation of 1800 annual billable hours and only two of our associates are even close to reaching 1800 hours. Some are not even reaching 1200 hours. Some of the associates have the excuse that they don’t have enough work. We do not believe that this is the case. I would like to hear your thoughts on this matter.

Response: 

This seems to be a common issue. Failure to attain billable hour goals can be caused by any one or a combination of the following:

  1. Work ethic and simply not working enough “worked hours”
  2. Lack of work
  3. Poor time management habits
  4. Poor time keeping/recording habits

I would start by observing the number of worked hours they are putting in. Are the putting in the hours? Observe as well as review their time reports – billable and non-billable time. If you don’t track non-billable time start doing so. Then review and discuss with them their time management and time keeping/recording habits. Questions to ask include:

Review and discuss workload levels of each associate and determine if lack of work is an issue.

I have found that often the cause of the problem is a combination of some or all four of the above listed causes. Lack of work is often one of the causes. My question is then:

The firm should have an established protocol for assignment of work to associates and to whom the associate advises that he or she needs more work. When billable work is slow and not available the associate should be assigned non-billable firm or business development projects  such as developing document templates, writing articles, etc.

If the problem is work ethic appropriate consequences and disciplinary measures may be required.

If the problem is time management and time keeping training and habit building will be required.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

 

May 22, 2019


Conflict Between Law Firm Partners and Non Productive Partners

Question: 

I am a partner in an fourteen attorney firm in Dallas, Texas. There are seven partners in the firm. We started the firm together twenty years ago. Over the years the firm has been very successful and each of the seven partners have had a great relationship. However, over the last five years some of the partners are no longer contributing like they were and relationships have become strained. We are equal partners and our compensation is based upon our ownership interest – so we are paid equally. I am concerned that if we don’t resolve this problem the firm may split apart in the future. You advise and thoughts will be appreciated.

Response: 

There are many reasons that difficulties may arise between partners in a law firm. One of the major factors is that working together effectively is a very difficult skill to acquire. Most individuals join a firm without realizing all that is involved. Professionals, especially, frequently do not understand that being an associate, colleague, and partner require a different set of skills than just being talented in one’s field. Many partners often only have a general idea of what the firm expects of them and only limited interest in how the firm itself operates, as distinguished from what they are professionally prepared to do. Most lawyers are highly motivated to use their expertise on client work, not on spending time in organizing or running a firm or partnership, even though doing so would help the firm operate more successfully and efficiently.

The first step would be, if you have not already, to sit down as a group and discuss the problem, establish agreed to performance expectations for the partners, document in writing, and have each partner sign the document. See if this makes a difference. If no improvement is made then the under performing partners should be confronted and some form of action taken. You may have to redesign your compensation system and possibly ask problem partners to leave.

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John W. Olmstead, MBA, Ph.D, CMC

May 15, 2019


Challenges in Law Firms that are Family Businesses

Question: 

I am a partner in a husband/wife owned law firm in Seattle, Washington. We have four other associate lawyers in the firm. One of these lawyers is our son and the other is the daughter of my wife’s (who is my partner) brother. We have four staff members of which one is also a family member. We are a general practice firm and we have been in operation for ten years. While the firm has done well over the years we have had our challenges. Office problems seen to follow us home and both staff employees and non-family attorneys are alienated. We have been experiencing turnover of both staff and attorneys. What should we being doing different?

Response: 

I have seen family practices go both ways – successful and not so successful due to the conflict and drama that can exit in family practices if they are not setup and managed properly.  A few of the challenges and issues that can arise in family owned law firms include:

Family practices must first start by recognizing that there are three social systems at play – the family, the law firm business, and overlap of the two. Unless boundaries and rules are established there will be conflict and tension. Family roles and roles in the law firm should be be developed. Here are a few guidelines that family practices should consider adopting:

  1. Develop family and law firm charters – sort of like job descriptions – that outlines roles and responsibilities in the family and the law firm.
  2. Establish criteria for who in the family can join the firm.
  3. Determine education and experience requirements for joining the firm.
  4. Determine how titles of family members in the law firm will be determined.
  5. Determine how job performance will be evaluated.
  6. Determine consequences for inadequate performance.
  7. Determine how compensation will be determined.
  8. Leave law firm business at the law firm – don’t bring it home.

Here is a link to an earlier blog in re children of partners who are attorneys working in law firms.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 07, 2019


Law Firm Succession Planning in a Fourteen Attorney Firm – Internal vs External Strategy

Question:

I am the managing partner in a fourteen attorney firm in Austin, Texas. Our firm represents hospitals in their defense against malpractice claims. We have four equity partners, six non-equity partners, and four associates. The four equity partners started the firm thirty years ago and we are all in our late fifties and early sixties. We plan on working another eight years and then plan on retiring approximately at the same time. We may remain on as Of Counsel. Of our six non-equity partners, five are in their early and late sixties. We are considering making one an equity partner in the near future. Our associates are all recent law graduates that we hired right out of law school and all have been with the firm less than five years. What is our best succession strategy – merger or growing our own future partners?

Response: 

Most firms, and I agree with this, prefer an internal strategy and would like to grow their own and leave a legacy of the firm. Mergers can be fraught with problems and are often not successful. Depending on the size of the other firm, many firms are not willing to provide any compensation for practice goodwill beyond the compensation and benefit package. It sounds like you have had your independence for thirty years and you may not be comfortable giving that up and working in a merged firm environment for eight years.

However, a merger is often easier. You have a challenge on your hands since you have to replace four partners and only have one possible future equity-partner candidate on deck. In part it will depend upon the age and the experience of the one non-equity partner. Is he even willing to step-up to equity, invest in the firm, and buyout your interests? My experience these days is that a lot of non-equity partners are saying “no” to equity. With your type of clients you probably need at least three or four seasoned partners in order to convey to the clients that you have adequate “bench strength”. When the four of you retire unless you can build up the bench strength the firm will be also lacking leadership and firm management experience.

You have five years in which to build up your talent pool. You will have to first see if you can recruit and bring in some lateral talent – attorneys in their forties with fifteen to twenty years experience. Look for attorneys that want to be more than just worker-bees – that want to have future equity interest in a firm. If this strategy works out, begin bringing them into equity as soon as possible to ensure that the commitment is there by having them buy shares upon admission. Begin client and management transition no later than three years prior to your retirements.

If you are not able to bulk-up your talent pool or you have no one interested in equity ownership, then you will have to consider a merger strategy. I would begin a merger search three years prior to your retirements.

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John W. Olmstead, MBA, Ph.D, CMC

May 01, 2019


Law Firm Associate Bonuses – Problems Measuring Flat Fee Work Working Attorney Fee Allocations

Question: 

Our firm is a four-attorney estate planning firm in Rochester, New York. We are a general practice firm and we handle a lot of estate planning work and estate administration as well. While some of our work is handled on a time bill basis a lot of our work is handled on a flat fee basis. Recently we switched our time billing system from a desktop-based system to a cloud-based system and we having trouble getting the reporting that we need out of the system. We do keep time on flat fee cases. Our bonus system is based on working attorney fee collections and the new system does not allocate fees correctly for flat fee cases when multiple attorneys and or paralegals work on a matter. Any suggestions?

Response: 

I have heard this complaint from many firms using both desktop and cloud-based billing systems. However, it does seem that cloud-based systems are lacking in the level of reporting that desktop-based systems have. Here is what some firms have or are doing:

  1. Working with the software vendor to determine what the issue is – is it your procedures or is it the software. In some situations, fee allocations are effected by the manner in which payments are entered when partial fee payments are made, whether such payments are first deposited in the trust account and then later applied after all time has been billed and adjusted, etc.
  2. If the issue is lack of software reporting capability try to get the software company to add this function to the software.
  3. Manually making the allocations in a spreadsheet for flat fees cases when all else fails.
  4. Changing the bonus system and basing bonuses on responsible attorney collections rather than working attorney collections. Many personal injury plaintiff firms that don’t keep time-sheets take use this approach. This approach works best if the attorneys primarily work on their own matters. One advantage of this approach is that it encourages delegation and discourages hoarding of work.

When evaluating these newer cloud-based billing systems don’t just look at the bells and whistles – determine your reporting needs and insure that the software meets these needs.

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John W. Olmstead, MBA, Ph.D, CMC

Apr 24, 2019


Law Firm Training Tools – Documentation of Processes and Procedures in Firm Procedural Manuals

Question: 

I am the sole owner of a six attorney personal injury firm in San Francisco with five support staff. My father started the firm twenty-five years ago and has since retired from practice. I took over the practice five years ago. At the time I took over the practice we had just my dad, myself, a couple legal assistants, and no technology. Since then I have done a lot to grow the practice including adding attorneys and staff as well as implementing technology. My biggest problem is training new attorneys and staff. We have no written documentation as to how we do things so training has to be done orally by myself or others every time a new attorney or staff member joins the firm. Can you offer any suggestions?

Response: 

Sounds like you don’t have a written employee handbook or procedures manuals. These are essential tools that every law firm regardless of size should have. These tools dramatically reduce time that has to be spent by others to on-board new employees and can facilitate bringing on lower cost employees with less experience such as recent law graduates or paralegal graduates.

The employee handbook outlines the firm’s employment policies and contains sections such as:

An operation or procedures manual is the firm’s how-to-do-it guide. It defines the purpose of work, specifies the steps that need to be taken while doing the work, and summarizes the standards associates with both the process and the result. Your operation or procedures manual specifies this is how we do it here. Every process in the firm should be documented in your manual – from marketing – to accounting –  to IT – to legal case work. Sections in your manual might include:

Procedures manuals are often a list of steps in outline form. The American Bar Association has a book – The Law Office Policy and Procedures Manual that may help you get started. 

In my earlier life I spent nine years in the United States Air Force Judge Advocate Generals (JAG) office and there I learned the importance of policy and procedures manuals and I carried this into both law firms where I worked prior to starting my consulting practice thirty-four years ago.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

 

 

Apr 17, 2019


Law Firm Merger/Acquisition – Should We Merge or Acquire

Question: 

I am the managing partner of an eight attorney firm in Dayton Ohio. We have two equity partners (both in our early fifties), two non-equity partners, and four associates. Our practice is a very niche specific practice and there are only three or four other practices in the state that do the work that we do. There is another firm in Cleveland, Ohio that has approached us regarding possible merger or acquisition. The firm does similar work that our firm does but this firm also handles some areas that we don’t handle but would like to get into that falls within our niche area. There are two founding partners in the firm – one in his late sixties and the other in her early seventies, one associate attorney, and four staff members. The two partners are planning on moving towards retirement and are looking for a succession strategy. They have not shared with us their timeline or any financial information. We have had one face-to-face meeting and several phone calls. We would appreciate your take on this, next steps, and whether we should pursue further.

Response: 

You have not indicated whether your firm has a strategic plan? If you do my next question is whether this practice area and having another office three and one half hours away supports the vision of your firm?  Often, but not always, a merger will emerge as a way to achieve some aspect of the firm’s vision. For example, a merger might help the firm:

The above would be right reasons to consider a merger or acquisition.

You should take pause if the reasons you are considering merging or acquiring the other firm include:

If your firm does not have a strategic plan you may want to at least engage in some form of internal self-analysis to insure that you are looking through a clear lens, are building a sound business case for the merger or acquisition, and are identifying the characteristics of the ideal merger/acquisition candidate.

In your situation you are looking at actually acquiring a practice three and a half hours away with two senior partners that will be retiring. Obviously, there are risks but the devil will be in the details that will come out of a thorough due diligence examination which I believe is your next step. Here is a link to a prior post concerning information that you should ask the other firm to provide. 

Your due diligence examination should focus on:

Right up front you should ask the partners in the other firm their specific timeline for retirement and how long they will be available for client and management transition. A key issue will be whether clients will remain with the firm when they retire? Are there others in the firm, non-equity partners or associates, that the clients have confidence in to the extent they would remain with the firm or will this all be on your shoulders as owners of the acquired firm? The other question you should should ask up front is what the partners of the other firm are looking for in the form of purchase price or compensation for the firm.

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John W. Olmstead, MBA, Ph.D, CMC

 

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