Law Practice Management Asked and Answered Blog

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January 2019

Jan 16, 2019


Improving Productivity and Profitability in a Sole Owner Six Attorney Insurance Defense Law Firm

Question:

I am the owner of a six attorney insurance defense firm in Indianapolis, Indiana. I started the practice twelve years ago with myself and a paralegal and have grown the firm to where is is today – six attorneys, two paralegals, and two other staff members. While I have done well, and am taking home around $350,000 a year, I am not sure if we are attaining the numbers that we should be. I have a fifteen hundred billable hour expectation with a per hour bonus payable for each billable hour exceeding fifteen hundred. I do not have any attorneys that have reached this expectation. Our billing rates average around $150 per hour. I am wanting to put in place a partnership track and am not sure where to start. You thoughts would be appreciated.

Response

Let me first illustrate the profitability levers for law and other professional service firms:

R – Rate – billing rate (effective rate, realization rate, etc.).
U – Utilization – the number of billable hours.
L – Leverage – the number of associates/paralegal, etc. to owners or equity partners.
E – Expenses – office overhead
S – Speed – time it takes from the time work is done to when cash comes in the door.

With the low billing rates that are prevalent in insurance defense firms the primary profitability levers that can be managed in an insurance defense practice are utilization, leverage, and expenses. Insurance defense firms need 1800 – 2000 annual billable hours from their associates, a high leverage ratio of three or four associates for every equity partner, and low expenses  – i.e. no frills office space.

You are doing fine now with regard to compensation but this would not be the case if you had partners – the profits would not be there to pay higher salaries. Less than 1800 annual billable hours is not acceptable and it sounds like there are no consequences for non-attainment of the 1500 hours. You need to look into the reasons as to why your associates are not attaining the 1500 hours. Possibilities could include:

If there is enough work you need to focus on the other factors and let everyone know what the consequences are for not attaining the billable hour expectation. Start with the 1500 hour expectation as an initial baby step but then increase the expectation to 1800 hours as soon as your can.

As you think about a partner track keep in mind the issue of leverage and don’t be temped to make too many partners.

Keep an eye on your expenses.

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

 

 

 

Jan 09, 2019


Law Firm Management – Held Hostage by Office Manager or Bookkeeper

Question

I am a partner is a small family law firm in Tucson, Arizona. There are two partners in the firm and two associates. We have an office manager/bookkeeper, a receptionist, and two legal assistants. The office manager was hired one year ago. The other partner is retiring next year and I am purchasing the practice from him. I became a partner last year. I am new to the management side of the practice and have been relying on the office manager who also serves as our bookkeeper. I am at my wits ends with our office manager and I believe that she is not suited for the position. She has no organizational skills, she misses deadlines, vendor bills are not paid on time, and client bills are not sent out accurately and timely. I have counselled her on numerous occasions to no avail. I believe we need to replace her but I am reluctant since no one else here knows what she does or how she does it. A new billing and accounting system was implemented last year and she was the only one trained on the system. What do we do if we terminate her or she quits? We are hostages. I would appreciate any ideas of thoughts that you may have.

Response: 

I understand and appreciate your situation. It sounds like you have not documented your procedures in the form of a firm procedures manual and everything is in the office manager’s head. This makes it difficult for someone to take over her responsibilities if she leaves the firm for whatever reason but not impossible. It will probably be difficult to get her to develop one now as it may signal to her that her time with the firm is short and she may start looking for another position. You may have to just bit the bullet, terminate her, restaff the position, and go from there.  It won’t be fun but you will make it though. You might consider the following:

  1. The office manager probably has handwritten notes, etc. that she has used to roughly document how she does things. Collect these and review these.
  2. Contact your billing and accounting software provider and have them help you will any training needs you have as well as procedural issues. Back in my old life when I did software work with law firms I often was called and assisted firms with such situations.

After you get the position staffed and past the crisis develop a detailed written manual of procedures for the office. Not just the office management side but the client service side – attorneys and paralegals as well.

I believe that it is imperative that owners and partners in a law firm have access to financial information on a timely basis, understand the information, and use the information in a proactive way to manage the practice. I suggest:

  1. The owner, or an appointed partner(s) in larger firms, obtain a basic level of understanding in basic accounting/bookkeeping and law firm financial management.
  2. The owner, or an appointed partner(s) in larger firms, obtain detailed training on the accounting software system(s) along-side the bookkeeper when the system is implemented. In addition to general operation of the software, special training should also be obtained on interpretation and use of the management reports.
  3. Insure that you have accounting controls in place and appropriate segregation of accounting duties.
  4. Outline your expectations and requirements of the office manager/bookkeeper, meet with her/him, and communicate appropriately.

Click here for a bookkeeper listing of duties.

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

 

Jan 03, 2019


Law Firm Non-Equity Partner Subjective Compensation Factors

Question:

Our firm is a seventeen-attorney commercial litigation firm in Atlanta, Georgia. I am a member of our firm’s management committee that decides raises and bonuses for non-equity partners and associates. Currently our non-equity partners are paid a salary and a discretionary bonus. We would like to stay with this approach however we have had complaints that our system is totally arbitrary. We would like to be able to provide more transparency – a general list of the items that we consider when making our decisions on salary and bonuses. You thoughts would be appreciated.

Response: 

Here is a suggested list of factors with weights that you might want to consider:

  1. Fee Production – Client Origination Collections – 25% weight
  2. Fee Production – Working Attorney Collections – 25% weight (billable hours in some firms)
  3. Profitability of Work – 10% weight – (effective rate per hour, realization, etc.)
  4. Delegation of Work  – 10 weight (delegation to paralegals and associates)
  5. Client and Case Management – 5% weight
  6. Technical and Professional Competence – 5% weight
  7. Professional Conduct – 5% weight
  8. Firm Management and Leadership – 15% weight

You can adjust this list for your particular situation and what is important for your firm.

Here is a sample list of subjective compensation factors with detailed consideration factors with weights and points.

Click here for our blog on compensation

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

 

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