Law Practice Management Asked and Answered Blog

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May 2018

May 30, 2018

Outsourcing Appellate Work

Question: 

Our firm is a six attorney insurance defense firm in Kansas City. For the last few years our associate attorney costs have gotten out of control and in some cases revenues generated by particular attorneys are not even close to where they should be considering their costs. We have one associate attorney that we are paying a base salary that only does appellate brief work. He does not like litigation and does a poor job doing our bread and butter litigation work. We simply don’t have enough appeals to keep him busy. We are paying him a base salary of $100,000 a year. Last year his working attorney fees collected were $110,000. I welcome your thoughts.

Response: 

Obviously, you are losing money on him. An associate being paid $100,000 per year should be generating $300,000+ if you are looking to make any margin from him. Overall you should be making 25%-30% profit from your associates. Margin from associates is critical in an insurance defense firm. You are not even covering his direct cost alone any indirect overhead cost.

I believe you cannot justify this position and should consider eliminating this position and outsourcing your appellate work . Many insurance defense and other litigation firms that I work with are outsourcing appellate work to other law firms that provide this service for other law firms. There are also solo practitioners and freelance attorneys with appellate expertise that are working as contract lawyers for law firms doing appellate work. Another option is a legal process outsourcing firm.

It is imperative that you conduct proper due diligence and really check out the background, experience, and appellate track record of the firm or individual attorney that you are considering. Your short list should only include firms or attorneys that have a proven track record of appellate wins. Talk with some other law firms that are doing this.

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

May 22, 2018

Law Firm Financial Management – Using Credit Line to Purchase Equipment

Question: 

I am the financial partner with our sixteen attorney firm in Indianapolis, Indiana. The firm has had a rough couple of years. We had several partners leave the firm and they took several corporate clients with them. Unfortunately, this was ongoing consistent retainer and time bill work. While we still have some retainer and time bill corporate work, a much larger mix of our work is now contingency fee work. As a result we have had some cash flow challenges and for the first three months of this year there was no money to pay partner draws. We have a credit line with the bank of $125,000 that we have not used. We only use our credit line for long-term equipment purchases. We would appreciate any suggestions that you have.

Response: 

A line of credit is designed to be used for financing short-term working capital needs – not long-term financing needs such as fixed asset acquisitions. I would use either leases or long-term bank loans for equipment and other fixed asset financing secured by those assets. This leaves your your credit line available for short-term financing needs. While I hate to see a firm use a credit line to pay partner draws, often there is no other choice in law firms that are not adequately capitalized, especially contingency fee firms.  Partners have to eat too. Contingency fee practices can have wide cash flow swings and often have to use their credit lines to temporarily fund payroll and partner draws.

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

 

May 16, 2018

Law Firm Client Surveys – How to Collect and Report the Data

Question:

Our firm is a sixteen attorney firm in Chicago. Our marketing committee has been discussing implementing a client survey program. We are not sure where to start or how best to collect and report the data. Your thoughts would be appreciated.

Response: 

Surveys can be used for a variety of purposes including the following:

I assume that you are planning on doing a client satisfaction survey in order to solicit feedback on how well the firm is meeting client needs, quality of services being provided, and additional needs that the client may have where the firm can provide services.

The type of survey will depend upon whether your clients are individuals or institutional clients such as corporate or governmental. If your clients are institutional I recommend that you conduct telephone structured telephone interviews with these clients using a interview questionnaire consisting of quantitative and qualitative questions. If you have a large number of institutional clients then you may want to consider conducting these interviews with your top fifty, twenty-five, or ten top clients and use a paper mail survey or online survey for the remainder. For individual clients you may want to use a paper survey or online survey for your entire database of individual clients and thereafter a paper mail survey or online survey at the conclusion of a matter. Another option would be to survey a random sample of your clients.

Once the surveys are completed – whether telephone interviews or paper mail or online surveys the questionnaires/surveys will need to be tabulated and provided in some form of a report. Some firms use two Excel spreadsheets – one for the quantitative responses and one for the qualitative/narrative responses for interview and paper mail questionnaires.  Then averages, percentages, and other summary statistics can be calculated for the quantitative responses. If you use an online survey service such as Survey Monkey the tabulation and the statistics will be done already for these surveys. If you have a Survey Monkey account you could also enter your interview questionnaire and paper mail questionnaires responses into Survey Monkey and use it rather than Excel. If you want more sophisticated statistical analysis you might want to look into statistical software such as SPSS which is sold and marketed by IBM.

Once you have summarized analyzed the questionnaires you may want to prepare a summary report document using your word processing software. Include the tabulation, statistical calculations, charts, etc. as attachments to the report.

There are several articles on our website – see links below – that discuss client satisfaction survey programs and how to get started.

Click here for our blog on client service

Click here for our article on client satisfaction

Click here for our article on client surveys 

Click here for our article on analyzing survey results

Click here for our article on developing your client service improvement plan

Click here for our article on tips for rewarding and recognizing employees

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

May 08, 2018

Of Counsel Arrangement as a Law Firm Exit Strategy

Question: 

I am the owner of a solo real estate practice in Merced, California. I have two staff members that work for me. I am the only attorney in the firm. I am sixty years old. While I am concerned about the long term exit from the practice I am also concerned about office coverage in case something would happen to me in the short term. I appreciate any recommendations that you may have.

Response: 

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

Click here for our blog on succession

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

 

May 02, 2018

Law Firm Overhead and Profit Margins

Question: 

I am an attorney in New Orleans that has been a lawyer for ten years. I practiced with a small firm for eight years as an associate and then opened my own firm two years ago. I primarily work from home supplemented with a virtual pay-as-you-go office. I do not have any staff employees. I have been approached by a fourteen-attorney firm that would like me to join their firm as an income partner. Their offer includes a salary which I feel is low and a bonus based upon a percentage after covering my salary, other direct costs, and indirect firm overhead. The overhead allocations seem extremely high to me. In my practice I am bringing in around $100,000 in gross fees and my overhead averages $10,000-$15,000 per year. My profit margin is around 90%. I feel like I am better off building up my practice rather than accepting their offer. What are typical overhead and profit margins for law firms?

Response: 

We have to be careful how we define overhead. Overhead is generally to be considered all law firm expenses less attorney salaries and sometimes less paralegal salaries. The overhead ratio would then be the overhead divided by firm revenues. Profit margin is  expressed in terms of owner (partner, shareholder, etc.) earnings. In other words what is going into the owner’s pockets in terms of salary, share of profit, etc. Owner earnings is firm revenue less all firm expenses including associate and paralegal salaries but not including owner salary or compensation. The profit margin is total expenses (excluding owner compensation) divided by firm revenues.

A desirable profit margin range for law firms is thirty-five to forty-five percent.  Some firms are able to attain fifty percent. Profit margins depend upon the type of law practice, leverage ratios (associates to partners), how well the firm is managed, etc. I have some very successful firms with profit margins as low as twenty percent but the partner earnings are very high.

Your current overhead and profit margin is not sustainable in the long-term. While you have low overhead and a high profit margin you also have low earnings. You are only earning $85,000. You will soon reach a point where in order to increase your revenues you will have to hire people, acquire office space, and buy phone systems and other equipment. When this occurs you will be in a similar situation as to the law firm you are talking with.

Click here for our financial management topic blog

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

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