Law Practice Management Asked and Answered Blog

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Oct 27, 2015

Law Firm Succession/Transition/Exit Planning – Two Phase Deal Arrangement for Sole Owners

Question:

I am the solo owner of a five attorney estate planning firm in Los Angeles consisting of myself and four associates. I am approaching retirement and looking at my exit options. Since there are no heirs apparent in the firm I am looking to sell the practice. However, the potential buyer that I have been speaking with is nervous and concerned about client defections, proper transition, etc. Also, I would like to continue to practice for a few years and don't want to run afoul of the rules of professional conduct. I would appreciate your thoughts.

Response:

You might want to consider a two-phased approach. Merge with the other firm, continue to work for a few years, work on transitioning relationships, retire and sell your interests, and continue to work as an Of Counsel after that if you so desire.

For Example. A sole proprietor was generating $500,000 in annual revenues with one full-time senior attorney, a full-time paralegal, and a clerical person while netting 40%, including perks and benefits. This owner wanted to work three more years full time and several more years in a part-time role thereafter. The firm interested in acquiring the practice was a three-partner firm generating $2.2 million a year working with similar clients, under a similar culture and fee range.

Phase One consisted of a merger with the retiring owner agreeing to retire in three years and sell his ownership interests for an agreed amount. At its inception, the two practices were combined. The successor firm provided the practice with the same amount of labor required in the past through a combination of retaining and replacing staff, as both were deemed necessary by the parties. The successor firm took over most of the administration, and the deal was announced to the public as a merger. 

The transitioning owner was able to come and go reasonably as he saw fit, run his practice through the successor firm’s infrastructure, and retain significant autonomy and control. Because he historically generated a 40% margin, the successor firm agreed to assume all the operating costs of the practice and pay 40% of gross collections from the transitioning owner’s original clients as compensation. Phase One was set to terminate on the first of the following events: (1) the end of three years; (2) the death or disability of the transitioning owner; or (3) the election of the transitioning owner.

Phase Two was the buyout of the retiring partner's ownership interest, and it was set up in a traditional fashion. Phase Two kicked in at the end of Phase One. By deferring the buyout until the full-time compensation ceased, the transitioning owner could extend the period for his full-time compensation, and the successor wasn’t being asked to pay for the practice and full-time compensation at the same time."

Many firms have taken this approach and we have found that it increases the likelihood of successful client transitions, reduces the risk of client defections, and increases the value for the retiring owner.

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

Oct 20, 2015

Law Firm Competitive Strategy – Daring to Be Different

Question:

I am the managing partner of a 16 attorney business transactional firm in Chicago. Over the last five years we have lost several core clients due to client consolidation of their outside law firms and mergers of the clients themselves. Competition is getting fierce in our market, our services are being viewed as commodities, and it is getting harder to stand out. What can we do to differentiate ourselves from everyone else? We welcome your thoughts.

Response: 

Creating a competitive advantage that is sustainable over time is difficult at best. It is so easy for your competitors to copycat your recent innovations. Clients of law firms advise us that they hire the lawyer – not the firm. However, this only partly true. The firm – its image – its brand – provides a backdrop for the individual attorneys marketing efforts as well – makes marketing easier – and provides backup and bench strength that many clients require before retaining a lawyer.

In general the law firm is faced with the dual challenge of developing a reputation (brand) at both the firm and the individual lawyer level. In general – client delivery practices and behaviors that are part of the firm's core values and have been burned into the firm's cultural fabric are the hardest to copycat.

Areas in which you can consider differentiation strategies:

https://www.olmsteadassoc.com/blog/category/strategy/

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

 

Oct 13, 2015

Law Firm People Management and Accountability

Question:

I am the managing partner of a newly formed 8 attorney firm in Austin, Texas that was formed last year when several of us left another firm and started this firm. The most frustrating part of the managing partner job is managing the people – this includes other partners, associates, and staff. How do I deal with people that are not following firm policy or doing things they should not be doing?

Response:

Managing people is one of the toughest challenges that law firms face. Challenges often involve  people not following firm policy and doing what they should not be doing. It drives owners, managing partners, and administrators crazy.

My advice to frustrated owners, managing partners, and administrators – tell them to stop. Seriously. As the managing partner of your firm you can't beat around the bush and be sheepish concerning your expectations concerning desired performance and behavior in the office. Confront the performance or behavioral problem immediately. Manage such problems in real time. Don't wait for the annual performance review and don't treat serious problem as a "self-improvement" effort. Tell them how you feel about the performance or behavioral issue, the consequences for failure to resolve the issue, your timeline for resolving the issue, and the follow-up schedule that you will be using to follow-up and monitor the issue. If they must resolve the performance or behavioral issue in order to keep their job tell them so. They may need this level of confrontation in order to give them the strength to be able to deal with their issues.

Being a wimp does not help you or them. Tell them like it is and conduct a heart-to-heart discussion. You will be glad you did.

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

Oct 06, 2015

Law Firm Growth – Associate Hiring and Retention

Question: 

Our firm is a two partner firm located in Rochester, MN. We have been approached by a solo practitioner that wants to sell us his practice. The price and terms seem fair but we are concerned about staffing and managing the other office. His practice consists of himself and two staff members. We would have to maintain a second office, hire an associate or two for the office, and then manage both operations. We have recently tried to hire an associate without success by reaching out to targeted lawyers that we knew in our local area. Frankly, acquiring this practice is a little daunting. We would appreciate your thoughts.

Response: 

I believe the first issue is whether you are looking to grow the firm and are willing to undertake the additional management responsibilities that comes with growth. Some firms are ready for growth and others are not. Larger is not necessarily better. 

I would not let your unsuccessful associate hiring attempts discourage you from acquiring the practice if you desire to grow and the price and terms are acceptable. You may need to cast a wider net and be more focused in your efforts. Recently a two attorney firm in Mid-Missouri hired an associate from St. Louis. A two attorney firm in Central Kentucky hired an associate from Lexington, Kentucky. It may take some time but a concentrated recruiting effort usually pays off regardless where you are located – even in small communities. 

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

 

 

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

Aug 30, 2015

Law Firm Associates – Evaluation of Performance

Question:

We are a six partner litigation firm in Des Moines, Iowa. This year we hired two associates and they are our first. We have not provided them with the best mentoring or guidance – it has sort of baptism by fire. I would appreciate your thoughts on what we should be doing concerning performance management.

Response:

Baptism by fire is not the best approach for managing associate performance. It may work in the long term but in the short term it will result in excessive "spin time" and lost revenue and profits for the firm. Here are a few thoughts:

  1. To be effective, evaluation of associates must be meaningful. 
  2. Evaluation for associates right out of school should be done every six months for two years and annually thereafter.
  3. Written criteria must be developed and communicated to everyone as the basis for evaluation.
  4. The associate should be evaluated by every lawyer with whom the associate works.
  5. The evaluation process should be developmental. Weaknesses must be openly discussed, with a plan devised to eliminate the weaknesses. Professional goals should be set each year.
  6. Personal plans should be completed each year and be part of the evaluation process.
  7. The evaluations must be done timely.

Good luck with your program.

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

 

 

Aug 25, 2015

Law Firm Associate Compensation – Incentives

Question:  

I am the owner of a seven attorney litigation boutique firm in New York City. I am the only equity owner and the other six attorneys are associates. Currently all of the associates are paid a straight salary with raises given every year. I am considering freezing their salaries at current levels and putting in place an incentive bonus for individual revenue generation above a certain number. I am concerned that this approach might create an eat-what-you-kill mentality and destroy teamwork in the firm. Do you have any thoughts?

Response: 

I concur with an approach that ties compensation to individual performance such as working attorney collected fee generation up to a point. You are right that this could create more of an individualistic attitude and may spur internal competition which may not be all bad. However, since there are other aspects of firm contribution other than working attorney collections you might want to add a goal bonus component that outlines specific goals that are important to the firm and specifies specific dollars or percentage of salary for each goal with a maximum attainable per year. These goals must be specific, measurable, attainable, realistic, and on an agreed timeline. 

A goal bonus component will reward other non-financial contributions and serve as the glue that will minimize the potential for creating an eat-what-you-kill environment.  

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

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