Law Practice Management Asked and Answered Blog

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Jul 30, 2013

Impact Of Law Firm Growth Upon Management and Organizational Structure

Question:

Our firm is a five attorney firm in Peoria, Illinois – three partners and two associates with four staff members. One of our legal assistants wears two hats – she serves as our office manager and also performs legal assistant duties for clients. Three years ago we had two attorneys and two staff members. We are feeling the consequences of our growth – our caseload has increased by 200%, our overhead is much higher and even though we have greater revenues – our take home earnings is less. We are overwhelmed. I would appreciate your thoughts?

Response:

It sounds like your firm has outgrown your management (organizational) structure. A firm with nine people is a different firm than a firm with four people. You are at a difficult size – large enough to feel the pains and challenges of being larger than two attorneys and two staff members but not large enough to reap the organizational benefits of a larger firm such as a full-time firm administrator, accounting manager, HR manager, etc. (I believe that as a law firm grows – management gets harder until a firm gets to around 12 attorneys – then as the firm begins to put in place a management team – it gets easier.)

In the meantime you might want to consider the following:

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

 

 

 

Jul 20, 2013

Law Firm Succession Strategy for An Owner That Wants to Keeping Working

Question:

I am the founder and solo owner of a small firm in Memphis. Besides myself there is one non-equity partner and four associates. We handle the transactional and litigation work for small and large business concerns in the Memphis area. I am 60 now and would like to begin slowing down over the next five years – but I want to continue working – I don't want to retire completely. Over the past few years I have focused more on client development as opposed to serving clients and have turned over much of the client service work over to other attorneys in the firm. While I would like to receive some compensation from my sweat equity – I also do not want to place an unreasonable financial burden (large cash buy-in/buy-out) on others in the firm. Legacy of the firm is important as is a place to continue to work and contribute – so I really would like to transition the firm internally to deserving attorneys employed by the firm. What are your suggestions concerning how I might accomplish this?

Response:

I often ask attorneys – are you more a lawyer that wants to lawyer or a business person that enjoys and wants to focus on the business of law. It sounds like you, as you approach retirement, would like to spend more of your time "finding" rather than "minding" or "grinding". You might want to consider the following:

  1. Get a feel for the value of your firm. If you have been taking home say $400,000 per year – using that as a starting point for your rough value figure if you were to sell your practice to outsiders. Would you be willing to discount to transition the members of your current team? If so, maybe that figure might be $200,000 – $300,000.
  2. Establish a date when you want to start to wind down.
  3. Decide on your future role, institutionalize the role and write a job description for it. You might want to consider a role such as Business Development Director or Manager. Establish specific goals and expected outcomes for the role. 
  4. Then plan a gradual wind down with gradual draw reduction but at a level that in essence is greater than the ratio of time reduced providing you with say – $200,000 over a five year period of time.
  5. Put in place a commission arrangement where you would receive a commission on fees (say 20%) from new clients that you bring into the firm after the date that a program is put in place. I would suggest a 5 year sunset provision whereby after five years the commission decreases to zero – requiring you to continue to develop new relationship and bring new clients into the firm.

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

 

Jul 16, 2013

Metrics and Dashboards for a Personal Injury Law Firm

Question:

I am the managing partner of a three attorney personal injury plaintiff firm in Indianapolis. We have a total of 600+ open PI files. What are some of the key financial metrics/indicators that we should be using to manage the practice?

Response:

From your case count it is obvious that you a managing a high volume practice. In addition to selecting the right cases managing you inventory (case portfolio) is crucial as is managing and monitoring the effectiveness of your marketing investments. Here are a few metrics that you might consider incorporating into a one page report with trend line charts. You can design the report in Excel and pull the numbers from detail reports from your case management system:

Plotted by Month

This will get you started.

Income statements/profit and loss statements are nice history lessons but they don't help you manage the productive operations of the firm.

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

 

Jul 08, 2013

Law Firm Pipeline – A Key Financial Metric and Indicator

Question:

I am the managing partner for a 16 attorney firm in Miami. I am new in the job and am trying to learn all that I can about law firm financial management. I have recently read several law firm management articles that have referred to "Pipeline Management". What exactly does this mean and what is the implication for law firm management?

Response:

Pipeline management is a term used in the management consulting profession to refer to the process by which you continually evaluate your active opportunities (prospective clients to booked clients) for their balance of QUALITY and QUANTITY. The goal is to continually stay on top of the overall health which is a full pipeline. Pipeline management allows client relationship managers to more accurately forecast fee revenues, better staff and manage client engagements, and close more client business.

I often also refer to Pipeline management in law firms in the context of using financial dashboards by which the individual charged with financial management responsibilities is continuously aware of significant changes in the firm's Pipeline (from prospects to cash): 

By comparing these dashboard statistics to a prior month, quarter, or year – you are able to avoid financial surprises down the road.

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

Jul 02, 2013

Law Firm Managing Partner Compensation

Question:

I am one of the founding partners in a 27 attorney law firm in San Antonio, Texas. We have four equity partners, six non-equity partners and seventeen associates working in the firm. We focus totally on litigation. Each of us four equity partners have equal ownership percentages and since day one (20 years) have divided firm profits equally along those lines (25%, 25%, 25%, 25%). We each put in the same amount of effort and work – but since I am managing partner – my fee collections are much lower than those of the other three equity partners and I am concerned that they may feel that I am not carrying my weight since my fee collections are lower. How should this be handled in our compensation system?

Response:

This is a common question that we hear often. It sounds like you are still allocating income in the same manner that you did when the firm first started. Often when a firm grows the partner compensation system needs to be reexamined when and if partner roles or contributions change. As the firm has grown I suspect that your time spent on management activities has grown as well. I, as well as many other legal management consultants, believe that firm management (running the business) is as important as generating client fees and should be so considered in partner compensation systems.

We have numerous law firm clients where at least one or more of the equity partners "run the business" and do not provide billable client services at all.

Management time should not be used as a non-billable time category (excuse) to simply "dump" time. Your partners have a right to expect results that improves the bottom line and the size of the pie for all.

Here are a few suggestions:

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

Jun 22, 2013

Law Firm Succession – Where and How Should I Start

Question:

I am the sole owner of a 8 attorney practice in Houston. I am 55 years old and am beginning to think about retirement. The other attorneys are associates in the firm. What do I need to be thinking about in order that I can transition out of my practice and have money for retirement. While I have put some money in a 401k, I am not yet financially secure enough to retire.

Response:

You are not alone. As the baby boom generation ages – more and more attorneys are asking this question. Unless you have an appropriate Exit Planning Strategy and put in place a sound Exit Plan, it is doubtful that you will be able to cash in on the full value of the goodwill that you have created. To exit successfully you need:

You will need to consider whether you should consider merger, sale of the practice to an outside buyer, or sale of the firm to the other lawyers in the firm. You need to find ways to institutionize the firm so that in additional to professional goodwill (your personal reputation and goodwill) you develop practice goodwill (goodwill of the firm that will remain after you have left the firm). Develop your lawyers and create a desire and motivation for them to want to be owners/partners in the firm. Develop your staff and practice systems. Diversify and stabilize your client base.

If you decide to sell to attorneys in the firm – begin the process early so that most of the buy-in is completed before your actually leave the firm. The longer the planning horizon – the easier they buy-in burden will be for others.

Click here for our blog on succession

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

Jun 11, 2013

Law Firm Buyout Arrangements in a Contingency Fee Practice

Question:

I am a partner in a four partner law firm in Cleveland, Ohio. Our firm does class action contingency fee cases and all of our fees are contingency fee. We do keep time of our time expended on these cases even though we don't bill by time. One of our partners has announced that he will be withdrawing from the firm. We each have 25% ownership interests. How do we value the firm and determine his buy-out. Our partnership agreement does not address this nor do we have any precedent. Do you have any suggestions?

Response:

The real value component is the value of your unsettled cases and it will be difficult – if not impossible – to determine the value of these cases until they are concluded in the future. Some firms payout the capital account and the value of the hard assets upon departure or over a relatively short payout period and they have a future payout formula for the cases in progress as the cases are concluded.

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

 

Jun 04, 2013

Problem Law Partners

Question:

Our firm has been discussing how to handle one of our partners. We are are 12 attorney firm in Houston. One of our partners who is one of our highest fee producers and best business getter's simply won't follow firm policy or play by the rules. He won't turn in time-sheets in a timely manner, he is argumentative with others in the office, and not a team player. He is "me first" while the rest of the partners in the firm are mostly "firm first". We are trying to build a team based practice and this one partner is holding up our progress. Do you have any thoughts or suggestions on how we should handle this?

Response:

Dealing with "maverick partners" is always a challenge. Of course they seem to always be the heavy hitters and this makes it that much more difficult as often there are major clients and large sums of money at stake – at least in the short term. This can also be major issues and large sums of money at stake in the long term if you don't deal with the maverick partner as well. In addition you won't be able to achieve the vision and goals the firm is trying to achieve.

Many firms have had to deal with the problem of a maverick "huge business generator" who just wouldn’t cooperate with firm policies and caused conflict and tension in the firm.  It is an unplesant task – but in the end – worth the investment. In the end he or she either conforms or leaves the firm. We have been advised by our clients that even though they may have struggled in the short term as the result of the loss of a major fee producer – in the long run the firm was better off and should have done it earlier.

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

 

May 28, 2013

Law Firm Estate Planning Practice – Increasing Summer Demand

Question:

Our firm is an estate planning firm located in the Chicago suburbs. We have three attorneys, four paralegals, and three staff support members. We have observed over the past three years a trend where our new matters and associated fee revenues starts a dramatic decline in April and continues to do so until August. In the past we have just remained in a state of denial and relied on hope and prayer. This year we would like to be more proactive. I would appreciate your thoughts.

Response:

You could try investing in some additional advertising designed to stimulate early demand for such services. However, short of a new tax or other regulation occurring this summer or a dramatic price reduction – i.e. get your will done and get your spouse's will for free – I doubt that such advertising will do much to create a reason to act now as opposed to the fall or end of the year. Then you would have the additional cost of the advertising and lower revenue as a result of the discount or special offer. I believe you might be better off focusing on cost reduction and cutting back on attorney and staff hours until demand picks up again in the fall.

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

May 21, 2013

Law Firm Mergers: The Importance of a Timeline and Project Plan

Question:

Our firm is a 4 attorney firm in Columbus, Ohio. Three of our partners are in their 60s and contemplating their exit strategies. We have a very profitable high profile practice and have been approached by a couple of very large firms concerning possible merger. We believe that this would be our best exit strategy. What mistakes have you seen other firms similar to ours make that we should avoid?

Response:

Mistakes can run the  gambit – from choosing the wrong marriage partner – to getting into a deal that does not make business sense. A common problem that I have sees is the lack of a timeline and project plan resulting in project drift and lost time. I just got involved with a small firm that had been working with the managing partner and a small team from a much larger firm. After a few months of  financial and other document exchange, informal gatherings, etc., these individuals advised the partners in the small firm that they believed all looked good and led the partners in the small firm to believe that a deal with eminent. However, after one year had passed the small team in the larger firm presented the matter to the full partnership for a vote on the merger and the partnership voted against the merger.

Lessons Learned

  1. Don't assume that the managing partner or a small merger committee or team in a larger firm speaks for the firm or has the authority to approve a merger. Merger with another firm or extending partnership are usually decisions restricted to partnership vote in most firms.
  2. The partnership dynamics in larger firms will always be a variable and in larger firms a great deal of time is often required for this to play out.
  3. It is critical that you establish your timeline (goal date) and let it be known to the other firms that you are speaking with. Let them know that you are talking with other firms that will have to have a decision by a date certain.
  4. Outline a step-by-step task or project plan based on the goal date to focus your efforts, keep you on target, and reduce project drift.

Don't invest a year with only one firm only to find out that they are not interested.

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

 

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