Law Practice Management Asked and Answered Blog

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May 2013

May 28, 2013

Law Firm Estate Planning Practice – Increasing Summer Demand

Question:

Our firm is an estate planning firm located in the Chicago suburbs. We have three attorneys, four paralegals, and three staff support members. We have observed over the past three years a trend where our new matters and associated fee revenues starts a dramatic decline in April and continues to do so until August. In the past we have just remained in a state of denial and relied on hope and prayer. This year we would like to be more proactive. I would appreciate your thoughts.

Response:

You could try investing in some additional advertising designed to stimulate early demand for such services. However, short of a new tax or other regulation occurring this summer or a dramatic price reduction – i.e. get your will done and get your spouse's will for free – I doubt that such advertising will do much to create a reason to act now as opposed to the fall or end of the year. Then you would have the additional cost of the advertising and lower revenue as a result of the discount or special offer. I believe you might be better off focusing on cost reduction and cutting back on attorney and staff hours until demand picks up again in the fall.

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

May 21, 2013

Law Firm Mergers: The Importance of a Timeline and Project Plan

Question:

Our firm is a 4 attorney firm in Columbus, Ohio. Three of our partners are in their 60s and contemplating their exit strategies. We have a very profitable high profile practice and have been approached by a couple of very large firms concerning possible merger. We believe that this would be our best exit strategy. What mistakes have you seen other firms similar to ours make that we should avoid?

Response:

Mistakes can run the  gambit – from choosing the wrong marriage partner – to getting into a deal that does not make business sense. A common problem that I have sees is the lack of a timeline and project plan resulting in project drift and lost time. I just got involved with a small firm that had been working with the managing partner and a small team from a much larger firm. After a few months of  financial and other document exchange, informal gatherings, etc., these individuals advised the partners in the small firm that they believed all looked good and led the partners in the small firm to believe that a deal with eminent. However, after one year had passed the small team in the larger firm presented the matter to the full partnership for a vote on the merger and the partnership voted against the merger.

Lessons Learned

  1. Don't assume that the managing partner or a small merger committee or team in a larger firm speaks for the firm or has the authority to approve a merger. Merger with another firm or extending partnership are usually decisions restricted to partnership vote in most firms.
  2. The partnership dynamics in larger firms will always be a variable and in larger firms a great deal of time is often required for this to play out.
  3. It is critical that you establish your timeline (goal date) and let it be known to the other firms that you are speaking with. Let them know that you are talking with other firms that will have to have a decision by a date certain.
  4. Outline a step-by-step task or project plan based on the goal date to focus your efforts, keep you on target, and reduce project drift.

Don't invest a year with only one firm only to find out that they are not interested.

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

 

May 14, 2013

Law Firm Compensation – Associate Bonus – Fee Split

Question:

Our firm is a 12 attorney firm located in downtown Chicago. We have 8 partners and 4 associates. We are considering making a change to our associate compensation system. Currently associates are paid a salary plus a discretionary bonus at the end of the year. We are considering continuing to pay them a salary plus 60% of any business they bring in (origination). Does this plan make sense?

Response:

I would need to know more about your financial situation, your overhead, and profit ratio. You and your partners should expect to make a profit from your associates. I believe you should expect to realize a profit margin of 25% – 30%.  After factoring in firm overhead and associate compensation I don't believe you will be able to give away 60% and realize this goal. 20%-30% may be all that you should incorporate into a bonus system. Be careful that a bonus system such as this accomplishes what you are seeking to accomplish and that you don't create a lone ranger culture. 

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

 

 

 

May 07, 2013

Law Firm Growth and Reduction in Profits

Question:

Our firm is a personal injury plaintiff firm in Topeka, KS. Until two years ago we had two attorneys (both partners) and two support staff members. In early 2012 we added an associate attorney, increased our marketing investment, moved our offices and took on additional space, added five additional support staff members, and implemented a case management system. We currently have 500 open cases – up from 200 cases 2+ years ago. Revenues are up – but the two partners are each taking home $40,000 less than they were before the expansion. Our home grown office manager manages and runs the office. What should we be doing differently?

Response:

My first thought is that your revenues have not caught up with the overhead and the growth investments that you have made. (You should review your reports and verify this) Personal injury cases have a much longer revenue lag than does work that gets "time-billed" monthly. Some cases may be in progress for two years or so. So be patient but don't be complacent.

You do need to be proactive in managing your case pipeline and your team. Someone needs to mind and manage the store. You are a larger firm now and you can't assume that your team is working to maximum effectiveness and efficiency. Insure that you actually need all of these people and that people are working smart. Roles for each member of the team should be created and performance standards and expectations established. Goals (cases) should be created for each team member, metrics and measurements established, standard reports created – generated – and used, and team members held accountable for results. Use the reports that the new case management system provides to measure goal accomplishment and performance.

Evaluate whether your office manager has the leadership skills that the firm now requires.

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

 

 

May 01, 2013

Law Firm Capital – How Much Do We Need

Question:

Our firm is a relatively new firm. Several of us left a large firm in Dallas and started the firm last year. We have 17 attorneys – 10 of us are partners. When we started the firm we each put in a little cash and obtained a line of credit which we have used extensively and we are at our limit. Is this a good practice? Should the partners contribute more capital? How much? I would appreciate your ideas.

Response:

There are two categories of capital – short-term or working capital which is used to fund daily operations and long term capital which is used to pay for capital assets such as furniture and fixtures, computers and other office equipment. I guess I am old school but I believe that short term working capital should be funded as much as possible with partner capital and long term capital funded with bank borrowing or leases. I have more and more clients that are funding working capital with partner capital and have no bank debt at all. I have other clients that finance all working capital with their bank line of credit – these firms could find themselves in dire straits if bank credit should tighten in the future.

The amount of working capital needed by a firm depends upon your practice, billing and collection cycles, whether you do contingency fee work, and whether the firm is growing and adding attorneys and staff. As a rule of thumb I suggest that a firm have three times one month's expenses excluding draws in working capital. This would need to be increased if the firm has lengthy billing and collection cycles, does contingency fee work, and is in a growth mode.

Partner capital contributions are usually made proportionately based on partner earnings or ownership percentages.

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

 

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