Law Practice Management Asked and Answered Blog

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October 2011

Oct 26, 2011


Competitive Strategy for a Personal Injury Plaintiff Law Firm in Today’s World

Question:

We are a five attorney personal injury plaintiff firm in the central Missouri. In the last few years we have gone through tort reform, increase competition from other law firms doing extensive advertising, and now trying to weather the recession. From a profitability standpoint – we are holding our own. However, we are concerned about the future. What are your thoughts for firm such as ours?

Response:

We are hearing this question quite often and have provided some thoughts in past blogs and articles.

The majority of our PI law firm clients are advising that they are having to work much harder at getting clients and investing more heavily in marketing – both time and money. PI firms were feeling the most of these challenges before the recession. However, the recession may accelerate the pace with which law firms reevaluate existing processes and consider new business models. PI firms may want to begin by:

1. Develop a firm strategic plan and individual attorney marketing plans which include aggressive network/contact plans for past clients, attorney referral sources (non PI attorneys), attorney referral sources (other PI attorneys), and other referral sources.

2. Evaluate the feasibility of adding an additional practice segment to reduce the level of risk in the case portfolio and reduce cash flow variability.

3. Reduce case portfolio risk and improve case profitability by implementing a case intake system whereby all new cases over a specified level of projected case value are reviewed and approved by the partnership (or a client intake committee) in order for the case to be accepted by the firm. In other words – don't let one attorney expose the entire firm to either excessive levels of case risk or case investment (time and client cost advances) without other partners having a say on the matter.

4. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Metrics might include effective rate, return on LOADSTAR, dollar case profit after allocation of all appropriate firm overhead, etc.

5. Review and measure present marketing investments (time and money) and determine what is working and what is not. Reallocate resources if appropriate.

6. Insure that you are using an appropriate mix of marketing tools in your program.

7. Consider increasing marketing investments (time and money). Suggest a marketing budget be developed in the range of 8-12 percent of fee revenue. Also suggest that non case production (non-billable) time be budgeted for business development and marketing activities as well.

8. Look into defensive advertising.

9. Insure that you have a first-class website that goes deep and demonstrates expertise.

10. Maintain a yellow page presence – but gradually reduce investment and shift into website and other online vehicles.

11. Find ways to enhance the client's experience and deliver exceptional client service.

12. Use exceptional client service and bedside manner as a primary means of differentiating you from your competitors. Under Promise – Over Deliver in everything you do for the client.

13. Make your office client friendly.

14. Use end-of-case satisfaction surveys to measure the client's experience with the firm and to improve future service.

Click here for our blog on law firm strategy https://www.olmsteadassoc.com/blog/category/strategy/

Click here for our law firm management articles

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

Oct 18, 2011


Law Firm Leadership: How do We Get Started

Question:

I am the managing partner of a 24 attorney firm in San Francisco. We are becoming frustrated at our inability to achieve a consensus and make timely decisions on matters of firm policy, strategy, marketing, and management. We are missing out on opportunities. We have no management scheme and no one to lead the charge – no team effort. The attorneys can't decide anything and firm management is a free for all. Things don't get done because no one is responsible. Conflict exists because anyone may be in charge. We are strong on ideas but weak on implementation. We lack leadership and focus. What are your ideas regarding leadership? Where should we start?

Response:

This is a common in firms of all sizes. In general, the foundation of leadership is built upon exhibited behaviors illustrating a proven track record of trust, respect, and accountability. These are the building blocks required for the development of leadership practices. Without these building blocks leadership cannot exist or be developed. The law firm culture must be nourished in such a way as to support these behaviors. These behaviors must become a part of everyday practice in dealing with clients as well as partners and others within and outside of the law firm. Law firm leaders must develop and practice the following behaviors:

The organizational structures, practices and procedures that exist in many law firms also discourage the development of leadership behaviors and practices. Many firms have a short-term production orientation focused upon individual lawyer productivity and production based upon billable hours and dollars billed and collected. A "me first" attitude rather than "firm first" "client first" attitude is frequently prevalent. Many lawyers hoard clients and consider them their clients as opposed to firm clients. These lawyers use individualistic approaches to client problems as opposed to team approaches. Compensation and other reward systems are not well suited to fostering leadership and developing teamwork in law firms. Firm governance, practice management, and performance management systems in law firms are also ill-suited to foster a climate encouraging and supporting leadership.

Law firms are finding that developing effective leadership skills can be a very difficult task. Dealing with leadership is a very emotional issue for most law firms due to the independent nature of most lawyers and the general unwillingness of firm lawyers to put aside their personal interests for the good of the firm. In fact, in many cases existing law firm partnership structures reinforce this tendency. What is needed is a balance between partner autonomy and partner accountability. Leaders will either have to be recruited externally (ie lateral partners) or skills will need to be developed internally.

The firm can begin by conducting a self-assessment using the following 10 point checklist:

  1. Only the best should lead and be placed in key leadership positions. Does the firm have its most capable people in leadership positions?
  2. Does the firm have partners or other lawyers with leadership skills or potential leadership skills? How many?
  3. How many lawyer leader positions are there in the firm that require leadership skills? How many lawyers have these skills?
  4. Does the firm's compensation system reward management and leadership activities?
  5. Does the firm's compensation system have a team reward component and are non-billable firm investment activities respected and rewarded?
  6. Does the firm's culture support a team orientated practice or an individual type practice?
  7. Does the firm's governance structure provide for administrative, management, and leadership roles and responsibilities?
  8. Does the firm have an in-house leadership training and development program?
  9. Does the firm invest and budget funds for leadership development?
  10. Is the firm willing to make the commitment?

Click here for our blog on governance and leadership  

Click here for our blog on financial management

Click here for our law firm management articles

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

 

Oct 11, 2011


Controlling Cost and Managing Overhead in the Law Firm

Question:

As the administrator of our 17 attorney law firm I am charged with the responsbility of managing and controlling costs. Our management committee is always complaining about our overhead – – and then looking to me for solutions – with the focus usually on cost reduction. Do you have any recommendations?

Response:

I am often asked to help law firms design and implement profitability improvement programs. In most of my engagements the real problem is insufficient gross income and lack of sufficient investment (spending and time) on marketing and initiatives designed to stimulate client and revenue growth. For most firms increasing revenues is the most effective way of impacting the bottom line. However, we do find that there is waste and unnecessary overhead that eats away at profits and a cost control program is also recommended and implemented. During recessionary times such as we are currently facing – drastic cost control are often the only option. Reducing overhead can immediately and effectively improve a firm’s bottom line.

The first step in an expense control program is to identify those areas where potential savings exist. Review your profit and loss statement. Resist the temptation to arbitrarily cutting costs which could cut the muscle with the fat and result in revenue loss as well. You have to spend money to make money – so if cost cutting is the appropriate strategy – cut the right costs. Think strategically about cost reduction.

After you have identified areas where savings can be made prioritize and develop specific strategies and implement action plans to achieve the savings.

 Here are a few ideas:

STRATEGY #1:  Reduce Headcount

This is the largest area for potential savings. Downsizing is a strategy that has been used by many firms this past year. However, it can have long term negative consequences for revenue and talent management. Consider all levels – non-productive partners, associates, paralegals, and staff. Be prudent and sensitive in implementation.

STRATEGY #2:  Reduce Compensation

Obviously one way is to cut salaries – a strategy to be used as a last resort. A better approach is to reduce fixed salary (paying people for showing up) and add a variable pay component which will allow employees to earn additional compensation in the form of bonus for results achieved. Another approach is to freeze salary increases.

STRATEGY #3:  Benefits

A major area for cost savings – especially health insurance. Determine which programs are most important to employees. Do your best to protect those and reduce or eliminate programs that are less important. Consider offering more than one health insurance plan. Pay the premium for the lowest cost plan and provide options for employees to “opt up” to the better plans by paying the additional premiums. Consider increasing deductibles and requiring employees to pay a portion of the base premiums.

STRATEGY #4:  Outsource

Examine potential for outsourcing – from copy services – IT management – to your legal team.

STRATEGY #5:  Occupancy

Review your lease invoices and question increases and escalators for which you have been charged. Consider renegotiating your lease and ask for a lower rate. Reduce excess space either through a renegotiated lease or through sub-leasing.

Click here for our blog on financial management

Click here for our law firm management articles

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

 

Oct 05, 2011


Managing Law Firm Cash Flow

Question:

Our five lawyer firm has had a very successful past couple of years. We have been growing in terms of clients, billings and revenues. However, we are getting deeper into our credit line and we simply don't have adequate cash to pay our bills. I would appreciate your thoughts on this matter.

Response:

Sounds like you are caught in the growth-cash flow trap. Growth puts strain on cash and increases demand for additional working capital. There have been many law firms and small businesses that were profitable – but failed due to simply running out of cash. While you cannot escape this paradox – by actively managing your cash flow (timing of the intake of cash against the outflow of expenses) you can minimize the impact of the following traps:

  1. Lack of Attention Paid to Financial Management. Many law firms, especially solos, often give this task a low priority on their to do list. Servicing clients and new client development are given higher priorities. There is often a lack of understanding of financial reports and statements. Understanding financial reports such as income statements v.s. cash flow statements are important is providing early detection of potential cash problems requiring corrective actions. Law firms should develop reasonable monthly, quarterly, and annual cash flow projections as well as income and expense projections.
  2. Poorly Managed Accounts Receivable. Cash is king. Law firms need to improve client payment terms and cash collections by speeding up billing cycle, getting more upfront through initial retainers, requiring retainer replenishments, and staying on top of retainers. Use your billing software reports to review retainer useage weekly, if not daily. Billing and accounting software should be implement any potential delinquent accounts and someone in the firm, or outside of the firm, should be responsible for prompt follow-up to collect all outstanding invoices. Depending on the resources available, a law firm may decide to out-source accounts receivable management and collections to industry professionals and specialists.
  3. Heavy Investment in Client Advances. Many law firms have large investments in client advances. For firms that book these expenditures as an asset – these items will not be reflected on an income statement as expenses. Be aware of their impact upon cash flow and look for ways have the client pay these directly, and bill sooner with cost only out-of-cycle invoices. Contingency fee firms will have to cover with additional working capital or line of credit.
  4. Paying Invoices too Quickly. Another way of improving cash flow is to slow down the outflow of cash by insuring that payables are not paid until they are due. I find many firms simply pay invoices when the invoice comes in the door – way before they are due. Monitor payment terms and pay when due.

Law Firms often experience these top cash flow problems when they do not manage the store and practively manage their income, receivables, and payables. Many are left wondering how they went out of business while their clients and revenues were growing substantially.

Click here for our financial management blog. https://www.olmsteadassoc.com/blog/category/financial-management/

Click here for our law firm management articles

 

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

 

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