Law Practice Management Asked and Answered Blog

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Nov 04, 2014

Law Firm Attorney Compensation in a Contingency Fee Firm

Question:
 
Our firm is a five attorney personal injury plaintiff law firm located in San Francisco. We have 2 equity partners, one non-equity partner and two associates. One hundred percent of our fees are contingency fees. Our attorneys work on some cases together. We do not keep time sheets.

The two equity partners are compensated based upon their ownership interests and this has worked well. We are looking to improve our compensation for the non-equity partner and the two associates. Currently they are paid salaries and a percentage of firm collected fee revenue over a certain threshold. We feel that they have not been profitable and we have been overpaying them. We would appreciate your thoughts.

Response:

Personally I think that a percentage of firm revenue or profit should generally be reserved for equity partners or shareholders. There should be a reason for them to want to become equity partners. I would tie the majority of their compensation to individual performance – client origination revenue, working attorney production revenue, and responsible attorney revenue, and case profitability - being the primary factors. Develop specific guidelines for client origination (rules for the credit – direct effort of the attorney versus the brand of the firm). Since you don't keep time sheets you will have to develop some method for allocating the working attorney credit when attorneys work together on cases – subjective determination of value and contribution to the case, etc. Without timesheets it will also difficult to determine profit at the matter/case level. Decide how you want to weigh origination, working attorney, responsible attorney and case profitability and then use these to determine a compensation percentage to be used for overall compensation or bonus.

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

 

Oct 28, 2014

Law Firm Marketing – Should We Advertise?

Question:

I am the managing partner of a six attorney general practice firm located in Arlington Heights, Illinois. We have been in practice for ten years. In the past most of our business has come to us through client and attorney referrals. We have not advertised. However, several of our attorneys are pushing us to embark on an extensive advertising program. I am interested in your thoughts.

Response:

Keep in mind that advertising is only one form of promotion and promotion is only one of the four elements of a firm's marketing mix. Other elements such as service strategy, pricing strategy, and service delivery strategy are often more important to the firm than its promotion strategy. For firms that are providing commodity type legal services such as personal injury, divorce etc, extensive advertising can work very effectively. However, for firms that are providing customized differentiated legal services this form of promotion is usually not effective nor appropriate. This is why it is so important for law firms to formulate their business and marketing strategies and plans before implementing specific marketing promotional programs.

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

 

 

 

Oct 21, 2014

Law Firm Insurance Defense Work – Opportunity or Commodity?

Question:

I am the managing partner of a 5 attorney general practice firm in Kansas City, Missouri. My book of business is down and I have been considering taking on insurance defense work. During the past year  I had the opportunity of working as co-counsel on a couple of insurance defense matters and enjoyed the experience and the work. It seems to me that representing insurance companies would represent a steady flow of work. I would appreciate your thoughts.

Response:

Insurance defense work can be a blessing and a curse. Working for insurance companies often does result in a steady flow of work but at the following costs:

  1. Low billing rates – often in the range of $145 – $175 for partners and even lower for associates – auto mechanics and plumbers often fare better
  2. Unrealistic controls.
  3. Mandated billing guidelines regarding what can, what cannot, and how much time can be billed
  4. Strict litigation guidelines that dictate how the case is handled and managed.
  5. Case budget requirements
  6. Audits of your legal bills
  7. Limited loyalty and inability to develop close relationships with the client due to centralized claims offices and restrictions on social activities

So, in exchange for a flow of cases you may be selling your freedom, independence, and your soul. It is hard to be successful if you dabble in insurance defense. You either need to be in or out and if you are in you would have to leverage the practice in order to be profitable at the lower billable rates. Be careful about relying on a large volume of work from one just one company. Consider diversifying your case portfolio to include a mix of higher stakes cases, if you are able, such as professional liability, products liability, medical malpractice, commercial litigation, and major construction defects.

Realize going in that insurance defense work is commodity work and insurance companies are shopping for the best deal and the best price – so is your competitive strategy to be a low cost provider?

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

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

Oct 14, 2014

Law Firm Client Service Standards

Question:

I am the managing partner of a 14 attorney business law firm in Baltimore, Maryland. Our marketing committee has been discussing marketing initiatives and is planning on a client service initiative. Where do you suggest that we start?

Response:

You might want to start by putting in place some basic client service standards. For example:

Look for ways to become your client's trusted advisor rather that their hired gun that they only call on when they are in trouble.

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

 

 

 

Oct 08, 2014

Law Firm Succession – Consequences of Waiting Too Long

Question:

I am a solo practitioner in an estate planning firm in Carbondale, Illinois. I am the only attorney in the firm. I have one legal assistant that has worked for me for ten years. I am 72 years old. I suppose it has always been my goal to practice forever as I have been in denial about my age. I have done nothing concerning the eventual transition of my practice and I don't even have anything in place in the event that I would become ill and out of the office due to illness. I am beginning to have more and more health problems and as a result I am coming to the realization that I must address the transition of my practice. Please share your thoughts.

Response:

Age denial is a common problem that I see with senior attorneys that are continuing to practice into their 70s and 80s. They often tell me – "I want to practice forever." However, eventually the clock catches up with them and often they have not prepared for the transition of the practice. Waiting too long can have the following consequences:

  1. Reduced mental and physical competencies resulting in substandard services rendered to clients.
  2. Stress of the practice as a result of having no one available to cover the practice.
  3. Inability to take an extended vacation or time away from the practice.
  4. Inability to explore other outside interests, hobbies, etc.
  5. No coverage or "back-up plan" – practice continuation plan if you will in the event that you become ill.
  6. Risk of loss of control over the future of your practice – clients – employees – exit value in the event that you become incapable of adequately serving your clients and Illinois Supreme Court Rule 7.76 is invoked whereby the court takes over your practice and a appoints a temporary receiver, clients are notified, arrangements are made, and files are assigned out to various attorneys.

You need to get started on finding someone that can eventually take over your practice even if you eventually just close your doors. You still have client files and records, clients that will need ongoing or future representation, and an employee that may need a job.

You may want to start with an Of Counsel arrangement with another attorney and put in place an Of Counsel – or Practice Continuation Agreement – whereby you each agree to cover each other practices in the event of illness or vacation.

A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract – made between an individual lawyer or a small law firm and another lawyer or law firm. The arrangement describes a course of action to transfer a lawyer’s practice and sets payment for its value. In the event of vacation, temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the business interests of the lawyer or law firm’s clients and the financial interest of the lawyer and his or her family. There are different kinds of practice continuation arrangements. Typically a lawyer enters into a one-on-one agreement with another sole proprietorship, partnership, limited liability company, or professional corporation in the community. Agreements can range from simple “dual coverage for each other” for vacation or other temporary absences to sale of the practice in the event of long term disability or death.

While your initial need may be a practice continuation arrangement in the event of illness or vacation – you should also begin looking for someone that you can transition your firm to in the long run as well via practice sale, Of Counsel relationship with another firm, merger, etc.

Good luck on your journey!

Click here for our blog on succession

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

 

Sep 30, 2014

Law Firm Capitalization – What is the Proper Level for Partner Capital Accounts

Question:

I am the chair of the finance committee for our firm – 17 attorney firm in Chicago. We have 6 equity partners in the firm. We are in the process of admitting a new equity partner and are reviewing our capital accounts and trying to determine our capital needs. I would appreciate your ideas and thoughts.

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.

Click here for our blog on financial management

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

Sep 24, 2014

Law Firm Business Development – Individual Attorney Personal Branding

Question:

I am the owner and founder of a 7 attorney personal injury plaintiff firm in the southwest. Over the years we have become the "go to" PI firm in the area. We have an extensive advertising program including TV, radio, and other mediums. I bring in all the business and the other six associate attorneys are primarily worker bees. I have discouraged business development by the associates and now as I approach my retirement years I am realizing that this may have been a mistake and it make take more than a "firm brand" for the firm to transition to the next generation. I would appreciate your thoughts.

Response:

While I believe that a solid firm brand is important and can provide practice value when you transition and retire from the practice of law the failure of your attorneys to develop their own brands or identities will make the transition more difficult and could even result in your firm becoming a "one generation law firm". Clients of law firms tell us they hire lawyers – not law firms. Even through you advertise – your reputation and rainmaking skills have had a lot to do with your success. Your associates must develop their reputations and hone their rainmaking skills as well and you need to help them do this. Here are a few ideas:

  1. If you do not have a marketing plan for the firm – develop one. This will help focus the firm's initiatives and serve as the glue for individual attorney personal plans.
  2. Announce that business development is important and that business development goals and plans will be developed for associates and incorporated into performance reviews and compensation determinations.
  3. Initiate business development training sessions for associates.
  4. Require each associate to prepare a personal marketing plan (business development plan) each year. These plans should be goal driven with specific SMART goals (specific, measurable, attainable, realistic, and on a date specific timeline), approved by you, results monitored quarterly, and incorporated into annual performance reviews and compensation determinations.
  5. Get your associates networking, writing blogs and articles, speaking, and press coverage when possible on case results.

Click here for our blog on marketing 

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

 

 

Sep 16, 2014

Law Firm Staffing & Growth Models – Mergers (Small Firm Acquisitions) & Branching

Three weeks ago I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing. Over the past two weeks in other posts I have discussed models 2-5.

Attorney staffing/growth models include:

  1. Grow Your Own Associate Staffing
  2. Lateral Associate Staffing
  3. Contract – Staff Associate Staffing
  4. Lateral Partners (Equity or Non-Equity)
  5. Of Counsel (Various Approaches and Purposes)
  6. Mergers (Or Small Firm Acquisitions)
  7. Branching

This week I will outline the pros and cons for number 6 and 7 – Mergers and Branching.

Mergers (or small firm acquisitions)

PROS

  1. Quicker access to talent, expertise in a new practice area, and client book of business.
  2. Access to infrastructure and resources.
  3. May enable the firm to fill in weak spots quickly.

CONS

  1. Risks of a wrong business marriage. (The larger the target firm the greater the risks)
  2. Issues involving integrating the firms.
  3. Control issues.
  4. Conflict of interest issues.
  5. Compensation – money, approaches, etc.
  6. Cultural incomptability
  7. Management time to evaluate the feasibility of the merger.

Branching

  1. Using approaches listed above.

The appropriate strategy is often a mix or combination of the above approaches. Need to drill down into the financials and review past experience concerning breakeven point for profitability of your attorneys, costs/overhead, fee collections, time, and profit margin.

Often the WHO dictates the WHAT (specific strategy)

Click here for our blog on law firm mergers

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

Sep 09, 2014

Law Firm Staffing and Growth Models – Lateral Partners & Of Counsel

Two weeks ago I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing.

Attorney staffing/growth models include:

  1. Grow Your Own Associate Staffing
  2. Lateral Associate Staffing
  3. Contract – Staff Associate Staffing
  4. Lateral Partners (Equity or Non-Equity)
  5. Of Counsel (Various Approaches and Purposes)
  6. Mergers (Or Small Firm Acquisitions)
  7. Branching

This week I will outline the pros and cons for number 4 and 5 – Lateral Partners (Equity or Non-Equity) and Of Counsel.

Lateral Partners (Equity or Non-Equity

PROS

  1. Maybe a quicker way to increase profitability and cash flow.
  2. Allows the firm to acquire talent that it may not have time to grow or develop.
  3. Allows the firm to expand into new areas if the candidate has said experience and brings a book of business with him or her.

CONS

  1. Desired compensation may not fit within the firm's existing compensation structure.
  2. Clients may not come or materialize.
  3. May be issues with cultural fit.
  4. Costs may not be justified.

Of Counsel – Various Approaches and Purposes

  1. Allows the firm to acquire partner level talent, business, etc. without offering partnership.
  2. Provides the firm with a way to acquire a practice of someone wanting to retire.
  3. Provides the firm with a way to pilot test new lateral partner candidates and evaluate in a first-phase approach.
  4. Provides the firm with a way to partner with other firms.
  5. Provides a way for the firm to enter more new market areas.

Other models to be discussed in upcoming posts.

Click here for our article on hiring associate attorneys

Click here for our law firm management articles

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

 

    

Sep 02, 2014

Law Firm Staffing and Growth Models – Lateral Associate Staffing & Contract Associate Staffing

Last week I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing.

Attorney staffing/growth models include:

  1. Grow Your Own Associate Staffing
  2. Lateral Associate Staffing
  3. Contract – Staff Associate Staffing
  4. Lateral Partners (Equity or Non-Equity)
  5. Of Counsel (Various Approaches and Purposes)
  6. Mergers (Or Small Firm Acquisitions)
  7. Branching

This week I will outline the pros and cons for number 2 and 3 – Lateral Associate Staffing and Contract – Staff Associate Staffing

Lateral Associate Staffing

PROS

  1. Less training and mentoring time
  2. Will become profitable more quickly – maybe a year sooner
  3. They will be more acceptable to clients than new untrained associates
  4. May be able to charge higher billing rates
  5. Tradeoff of higher salary vs. quicker profitability and cash flow – sooner profitability may pay for itself in the short term depending upon the salary differential.
  6. May generate new ideas and skill sets/approaches/insights that can benefit the firm.

CONS

  1. May have to de-train them. They may bring practices and approaches that are undesirable to the firm
  2. Higher salary initially and expectations for more
  3. Sooner expectations for non-equity and or equity partnership
  4. Clients may not allow you to charge any more for these associates than new young associates
  5. May not result in higher profitability and cash flow any sooner than new associates (probably will – but if not costs will be higher)

Contract – Staff Associate Staffing

PROS

  1.  Allows the firm to staff up when needed using a project/matter staffing approach
  2. Allows the firm to better manage fixed costs and manage contract staffing as a variable cost and match costs to staffing needs
  3. Allows the firm to evaluate candidates before committing to full-time positions
  4. Can be experienced and seasoned or not

CONS

  1. Cost per hour will probably be higher
  2. Turnover due to uncertainty as to their future

Other models to be discussed in upcoming posts.

Click here for our article on hiring associate attorneys

Click here for our law firm management articles

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

 

    

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