Law Practice Management Asked and Answered Blog

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April 2013

Apr 23, 2013


Law Firm Succession – Client Transition

Question:

Our firm is a 24 attorney firm in Chicago West Suburbs. We have 10 partners – five of which are in their early 60s. We represent small to mid-size business clients. Recently we have been discussing the eventual retirement of the senior partners and approaches to client transition. We would appreciate your thoughts.

Response:

Client transition involves different challenges that have to be overcome in order to successfully transition client relationships. Consider the following challenges and hurdles:

  1. Relationships take an investment of time and must be nurtured on behalf of the parties making the introductions and connections as well as the parties trying to form the  new relationship. Attorneys often want immediate gratification and the "quick fix" and are unwilling to invest time needed for longer term results. More than a "one-shot" simple introduction is required.
  2. Clients hire lawyers not law firms.
  3. Client transition requires trust on the part of all parties (introducers and new players). A high level of trust must exist within the law firm organization between the attorneys involved and within the client organization between the parties there as well.
  4. There is potential risk of embarrassment for all concerned. The transitioning attorney in the law firm could risk losing the client if the other attorney does poor work for the client. Another issue is the loss of control over the client. The individuals in the client organization could also risk criticism (or even their jobs) if the new relationship does not pan out.
  5. Many law firms are "lone ranger" rather than "firm first" or "team based" firms. As a result there is no inclination or incentive to invest the time and effort nor take the risk to refer work to others in the firm.
  6. Lack of knowledge regarding other partners' practices.
  7. Fear of losing clients.
  8. Fear of losing client control.
  9. Compensation systems in many law firms encourage hoarding of work and discourage the referring of work to others.
  10. Communication systems in  some law firms do not facilitate relationship building among attorneys. Effective client transition is simply not possible without strong relationships and high levels of trust among attorneys in the law firm.

Effective client transition is not a one-time lunch or introduction event – it most go deeper to bind the new relationship. This takes time. Start early and allow ample time for an effective partner winddown.

I generally suggest five year client transition programs.

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

 

Apr 16, 2013


Managing Partner Non-Billable Time in a Law Firm – How Much?

Question:

I am a partner in a 17 attorney firm in Madison, Wisconsin. We are a business law firm and we have ten partners and seven associates. We are managed by a managing partner, one of my partners, and he also practices law. We pay him his standard client bill rate for his non-billable time spend on law firm management. For the last couple of years his non-billable hours spent managing the firm have been increasing to the point where he is now spending 50% of his total time – 1000 hours a year managing the firm. This has caused tension in the firm and my partners and I are concerned. I would appreciate your thoughts.

Response:

I would concur that this amount of time is excessive for a firm your size. Even if you stay with the managing partner model of governing your firm – most managing partners in firms your size are able to get the job done for around 500 non-billable hours a year – 25% or less of their total time. You may want to consider the following:

  1. Put in place a budget for the total non-billable hours that the firm will pay the managing partner.
  2. Clarify the duties, role, responsibilities, and projects that the managing partner should be spending his time.
  3. Review the overall governance/management structure that the firm has in place.
  4. Consider supplementing the Managing Partner with an Office Manager or Firm Administrator.
  5. Consider whether the managing partner role is still the most appropriate approach for your firm.

I suspect that your managing partner is either not delegating to staff some of the day to day management tasks or he does not have sufficient billable work to stay busy.  At $275 bill rate – 1000 hours per year costing the firm $275,000 a year. I believe that a firm your size can handle this function more economically.

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

 

Apr 09, 2013


Law Firm Margin/Profitability Ratio – Net Income to Gross Revenue

Question:

I am the owner of an elder law firm in Boston. I recently closed out the 2012 books for tax preparation, I'm reviewing my annual numbers from what was my 4th year in solo practice and wondering how I'm doing.  Is there some kind of benchmark/goal or can you share any advice about an ideal ratio between gross income and overhead costs?

Response:

I usually say 35-45% margin (net income divided by total fee revenue) which is supported by most of the survey data. (Expenses used in the determination of net income defined as total expenses less owner/partner compensation). However, I have some law firm clients that have 20% margins were the partners/owner are taking home $1,000,000 per year. So margin is sometimes tells only part of the story. Depends upon the area of practice and practice/leverage structure. Solos operating virtually with no staff may have a margin of 80% but only taking home $40,000. ($40,000 net income divided by $50,000 fee revenue – only $10,000 in expenses.)

Be careful of using the term overhead as this often refers to expenses less all producer compensation. (partners, owners, associates, and paralegals) I assume that by the term overhead you are referring to total expenses less your compensation or draw.

Click here for our blog on financial management

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

 

Apr 02, 2013


Law Firm Merger – Where to Start When Merging/Acquiring a Smaller Firm

Question:

Our firm is a 26 attorney firm in Louisville, Kentucky. We are considering merging/acquiring a 12 attorney firm in the local area. This is virgin territory for us as we have not done this before. We would be interested in your thoughts as to where we should start and the process we should use to minimize the risk of making a mistake.

Response:

While mergers can be a valid option making them work is often another matter. Research indicates that one third to one half of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don’t try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone.

There can be a whole list of reasons for failure including poor financial performance, attorney defections, loss of key clients, and leadership and management issues. However, it has been our experience that most failures have been the result of poor cultural fit. The merging firms – after they have moved past conflict checks and excitement about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due diligence on the people. It is critical that firms insure that cultural due diligence is a key component of the merger assessment process. Philosophies, personalities, and life styles should be generally compatible. The partners should like each other and the deal should make sense.

The question is not the what (merge) but the who (people)

You should do all the due diligence that you can – start with the people – then move through the rest of the process.

Click here for our blog on mergers

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

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