Law Practice Management Asked and Answered Blog

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September 2015

Sep 29, 2015


Improving Law Firm Profitability – Revenue vs. Expense Control

Question:

I am a new recently elected managing partner of our 14 attorney firm in Orlando, Florida. For the last three years our financial performance has been stagnant and my partners are asking me to cut all the overhead expenses possible in order to improve profitability? Suggestions?

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.

Many law firms waste considerable time trying to find ways to cut a pie that is too small up differently by implementation of new compensation systems or increasing the size of the pie by decreasing costs. While unnecessary expenses should be reduced – once they are reduced a repeated effort to slash costs proves fruitless as a strategy to increase the firm pie. The vast majority of law firm expenses are fixed or production-related. The percentage of costs that are discretionary is low, typically in the 20-30 percent range, and the number of dollars available for savings is small. The available dollars available for reduction disappear after a year or two of cost-cutting, leaving the firm with dealing with the effects of further cuts on production capacity.

The lesson here – certainly get control of run away expenses – but focus on revenue generation.

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

 

Sep 22, 2015


Law Firm Budgeting – Is a Budget Necessary

Question:

I am the managing partner of our six attorney firm in Fresno, California. I recently went to a management seminar that stressed the importance of creating a budget for the firm. We currently do not have one. The budgeting process looks like a lot of work. Is it really worth the effort?

Response:

I believe that a revenue goal budget is the most important aspect of the budget and it does not take that much time to develop. It establishes revenue accountabilities for the revenue producers (attorneys). Insufficient revenue is the most common financial challenge that most law firms face.

While expenses are important and should be managed as well – the bulk of a law firm's expenses are office rent, employee cost, and in some firms marketing expenses. Most of these costs are fixed and once set in motion can't be managed.

Unless you have an office administrator that you want to hold accountable for managing the operations of the firm and the expense side of the ledger – you could start by just budgeting the revenue and see how that works for you. If you have an administrator a revenue and expense budget is important so that you can delegate and allow the administrator to manage operations without having to second guess each and every operational decision that they need to make. The budget provides the accountability tool.

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

Sep 15, 2015


Law Firm Succession/Exit Planning – Sole Owner Practice

Question: 

I am the owner of an estate planning practice in northwest suburbs of Chicago. I have two associates and for staff members. I am sixty seven and would like to retire when I am 70 (3 years). I have no idea as to where I should start and the approach I should take. I would appreciate suggestions.

Response: 

Sole owner firms and solo practitioners face a real challenge when deciding what to do with their practices. While many of the issues are similar to those faced by multi owner firms, sole owners and solo practitioners must also face the following additional challenges:

As with multi owner firms the key is to start early and not wait until the last minute. I suggest that you put in place your succession/exit plan as soon as possible – not just for retirement but for unexpected situations as well – so that your family, employees and clients are not left in the dark if something should happen to you.

Just because you have associates – don't assume they want to be owners and own a law firms. Look into this early as it may impact your hiring strategy as well as your overall strategy and whether it will be an internal vs. external succession strategy. 

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

Sep 08, 2015


Law Firm Profitability – Increasing Fees & Risk of Losing Business

Question:

I am the managing partner of a 14 attorney estate planning firm in Lexington, Kentucky. We took a hard hit in 2008 when the recession hit and have just been recovering over the last couple of years. Business is up but profits are still flat. We have not raised our hourly billing rates for several years for fear that we will not be competitive and will lose out on business. However, we believe that we must increase our billing rates and are concerned. What are your thoughts?

Response: 

I would bet that you are leaving money on the table and you should in fact increase your billing rates. Often I find that law firms are more concerned about their rates than their clients are. You must remain competitive for the value package (including your experience, expertise, and reputation) that you are delivering. This does not mean being the cheapest estate planning firm in town. Some of my most successful estate planning firms are those charging the highest fees. 

Here are a few thoughts:

  1. Do some research on the going rates in your market area for estate planning law firms of you caliber.
  2. See if there is data available from your professional organizations such as The Academy of Estate Planning Attorneys, The Academy of Elder Law Attorneys, etc. 
  3. Determine if your competitors are using other than time billing fee arrangements.
  4. Explore alternative billing arrangements for estate planning matters. Many of my client law firms are using flat fee arrangements for estate planning.
  5.  Since your clients are individuals and typically single matter clients (at least initially) experiment (pilot test) with new prospective clients with increased rates and determine whether there is "pushback" and to what extent your prospect/client conversion ratio is being impacted.
  6. Offer prospective new clients more than one option.
  7. Initially leave your old rates in place for existing clients with open matters.
  8. Measure and evaluate impact.

You may find that clients are not as concerned about your fees as you are. 

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

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