Law Practice Management Asked and Answered Blog

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Dec 07, 2011

Client Origination Credit and Importance in Law Firm Partner Compensation Systems

Question:

Our firm is a 18 attorney insurance defense firm located in Chicago. We are in our second generation and none of the original founders are still working in the firm. The majority of our insurance company clients have been with the firm for decades and were inherited. Our current crop of partners are primarily "worker bees" and have not developed "rainmaking" skills. We have not added a new client to our client roster in years. In the past two years we have lost several clients due to mergers, consolidations, and partner defections. This concerns us. Currently partners are rewarded and compensated totally on "working attorney" fee collections. We are considering changing our compensation system to including a credit for origination of new business. What are your thoughts regarding client origination credit?

Response:

All law firms need a mix of finders, minders, and grinders. Finders (client originators) are needed to provide sufficient work to keep the workers busy. Minders (responsible matter attorneys) are needed to manage the portfolio of client work. Grinders (working attorneys) are needed to service and produce client services. While there are exceptions, in most firms partners must hit on all three of these cylinders. In other words, most of the partners must do well at finding, minding, and grinding. Partners may perform some of these roles better than others, however overall they should be competently performing each of the roles. Very few firms can afford the luxury of having several senior partners only bringing in business without being required to maintain personal production levels as well. Partner compensation research concludes that the most a law firm can afford to pay a rainmaker – over and above his or her own billable hours (fee collections) is the marginal profit derived from the associates the rainmaker can keep busy, regardless of how many partners he or she occupies. The most valuable partners are those who offer a balance of skills: worker, delegator, supervisor, and rainmaker.

Since origination of new clients is the lifeblood of any firm it is a key factor that should be recognized in any compensation system. The exact weight that it is given will depend upon the firm and how dependent it is upon constant client replacement, only a few institutional clients, turnover of clients, leverage ratio, etc. A firm that has a well diversified base of institutional long time clients will typically weigh client origination much lower than a firm that has to constantly replace individual clients.

Actual approaches to implementation will depend upon whether your system is a subjective or a objective (formula system). However, the pitfalls are the same. Actual assignments of origination credits to partners can be difficult to initially determine. When and how should origination credits be shared between partners? Who determines and monitors such determinations? How long should the credit be awarded?

Origination credit becomes counter productive when it encourages senior partners to become comforable on the income received from origination credits from clients they brought in 20 years ago to the extent that they no longer develop new sources of business nor generate working attorney fees.

For this reason we believe origination credit should have a sunset expiration provision and that a firm should set time limits on origination credits – say five years on a reducing schedule – and have partners share origination credit with other members of the firm who develop business by cross-selling the firm's services to clients whose accounts were originated by another partner. In addition, offer "maintenance credit" as long as the originating partner continues to perform tasks that reinforce the relationship between the client and the firm.

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

Nov 30, 2011

Reducing Bar Complaints and Improving Client Service

Question:

Our firm has 14 attorneys. Just this year three of our more senior attorneys have had bar complaints filed against them. One has been disciplined by the bar. How can we improve this situation?

Response:

Hopefully you have the right attorneys on the bus and they actually care and see the importance and value of client service. If not – an educational program for the entire firm combined with a coaching program for the offenders, if needed, might be a starting point.

Here are a few other suggestions:

1. Improve client selection. Learn to recognize problem clients and say no to some and do not represent them.

2. Use engagement letters as a tool to manage client expectations. Underpromise and overdeliver.

3. Ramp up your communications and communicate, communicate, communicate with clients as well as office team members. Communications problems with clients – both initially and later on in the engagement – is the root cause of most problems.

4. Insure that you have effective office systems for managing client work production, conflicts of interest, calendar and docket control, and overall case management.

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

 

Nov 22, 2011

Governance Plan for a Law Firm

Question:

Our firm has 25 attorneys. We are located in the greater Washington D.C. area. I am one of three members on the Executive Committee. While we try hard to effectively manage the firm too many people are trying to make decisions on behalf of the firm, therefore nothing is getting done. All of the partners continually second guess everything that our committee tries to do. I have been told that we need a governance plan. What is a governance plan?

Response:

Sounds like your practicing attorneys are spending too much time on administrivia and there is not a definitive outline of roles and responsibilities in the firm. Everyone is dabbling in the day-to-day maintenance and administration of the office, leading to decreased profitability and billable hours. Not only are each of you practicing law, you are also involved in the everyday management of the firm as it relates to finance, staff and systems. Clearly these are roles within the office that could be delegated to a trained and professional administrator. It just takes a little push of encouragement and trust on behalf of the partners to let go of the day to day details of running the firm.

You might want to develop a three tiered governance plan to help draw a line in the sand regarding responsibilities. In the law firm setting, it is appropriate to distinguish between administration, management, and leadership. Administration is concerned with the day-to-day business and practice support activities of the firm that should be the responsibility of a firm administrator, office manager or other assigned staff member. Specific functional areas of responsibility include supervision of staff personnel, accounting and billing, collections of accounts receivable, financial management and profitability analysis, budgeting, information systems, purchasing, and facilities management.

Management is concerned with the production and delivery of professional services to clients. Specific areas of responsibility include committee management, planning and oversight of information systems, development and enhancement of client relationships and communications and development and maintenance of practice support system. These functional areas are often the responsibility of the managing partner, executive committee or chairpersons of firm practice groups.

Leadership is concerned with the executive functions of the firm. These functions involve the long-term policy activities of the firm and are often performed by a board of directors, the partnership at large, or committee. Specific areas of responsibility include long-range strategic planning, practice development, marketing, lawyer recruiting and development, lawyer performance management, mergers and acquisitions, service quality management, and partner compensation.

In essence a governance plan are job descriptions specific to management, administration and leadership and spells out roles, responsbilities, and accountabilities for each. Once established these establish the boundaries and help prevent backsliding.

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

 

Nov 22, 2011

Getting Control of the Financial Side of Law Firm Practice

Question:

I am a partner in a 14 attorney firm. Our bookkeeper has been with us for 20 years. We have a time and billing system, a separate bookkeeping system, and a separate database for clients, and something else for trust accounting. The other partners and myself do not know the name of the software that we are using, don't know how to access the software, and we have to ask the bookkeeper for any financial information that we require. We feel like "hostages". She gets offended when we ask questions. When we do receive information we don't know how to read or interpret much of the information. How can we get control of our firm back?

Response:

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. We 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. In your current situation – this may be a good time to consider upgrading your system and at that time obtain training on the new system, review the roles of all parties, and current procedures.
  4. Insure that you have accounting controls in place and appropriate segregation of accounting duties.
  5. Outline your expectations and requirements of the bookkeeper, meet with her/him, and communicate appropriately.

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

Nov 16, 2011

Contemplating Merging with Another Law Firm

 

Question:

We are a 15 attorney estate planning firm just outside of New York City. Ten years ago we had 37 lawyers in the firm. We have had several defections due to internal management problems pertaining to structure and compensation. We have operated more as a group of solo practitioners than as a true law firm. Recently we have considered the option of merging with a larger firm. What are your thought regarding the pros and cons of doing this?

Response:

Research indicates that 1/3 to 1/2 of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don't try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone. Right reasons for merging might include:

a. Improve the firm's competitive position. .Increase specialization – obtain additional expertise.
b. Expand into other geographic regions.
c. Add new practice areas.
d. Increase or decrease client base.
e. Improve and/or solidify client relationships.

I would start by thinking about your reasons for wanting to merge and your objectives. Ask yourself the following questions?

a. Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?
b. What is driving the desire to merge?
c. If the desire to merge is being driven by a desire to retreat from internal problems – what have you done to address these issues internally?
d. Is your name being part of the firm  name important to you?
e. What are your expectations and objectives for a merger?
f. What are you  looking from a merger partner?
 g. Make sure that you look for a complimentary fit. If you are weak in firm leadership, management and administration – look for a firm that is strong in these areas. Strong leadership, management, and administration may be hard to find in a firm under 25 attorneys.

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

Nov 08, 2011

Diversifying a Personal Injury Plaintiff Law Firm

Question:

Our firm is a personal injury plaintiff law firm located in Austin, Texas. We have 4 attorneys in the firm and all are partners who have been practicing for over 25 years. One hundred percent of our practice is PI plaintiff. We have been extremely successful over the years and handled some very large cases, have had some big wins, and handled several class action cases. Our current challenge is cash flow. The cases we are involved with seem to be bigger and more complex with fewer smaller cases that can be resolved quickly and contribute to cash flow. We are getting in deeper to our line of credit. Of late we have been discussing pros and cons of diversifying the practice and adding a non-PI practice area to our practice. What are your thoughts? Have you seen PI plaintiff firm do this successfully?

Response:

More and more of our PI plaintiff law firm clients have been raising this question during the past year. While a lot can be said about specialization – a firm can also sometimes be too specialized. I have seen many hybrid firms over the past 20+ years that have successfully combined a plaintiff personal injury practice with a transactional practice. As one firm told me "us transactional folks bill the hours and pay the bills while we turn the PI folks loose to go after the big hits." Firms that operate the firm as a "firm-first" firm tend to be more successful with such a practice mix than do firms that are "long ranger" firms operating as a collection of individual practitioners. In these firms compensation can become difficult and divisive due to the large swings that can occur in contingency fee work. However, firm-first firms look beyond this year's fee production, carry their contingency fee brothers and sisters when their numbers are down, and share the wealth when the big hits come in. Marketing and advertising came be more challenging – but it can be done. Practice areas might include commercial litigation, employment discrimination, business transactions, etc. High-end family and criminal practices have also been good candidates as well. It is not so much the type of practice as it is the type of practitioner and whether then be a good "cultural fit" with the PI folks.

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

Nov 01, 2011

Law Firm Partnership: Pros and Cons

Question:

I am a solo owner of a small law firm in Southern Illinois and have been solo for ten years. I have two staff members in the firm. Recently I have been contemplating either bringing in a partner or joining another firm? What are the advantages and disadvantages?

Response:

Partnership can offer its lawyers a measure of value independent of the skills, talents, and contributions of its individual partners?

Pros

The advantages that the best law firms have over sole practitioners or groups of lawyers who share overhead include:

 Cons

Like anything else in life nothing is free and there are tradeoffs. There can be conflict and interpersonal struggles, large capital contributions, requirements for you to be guarantor on huge firm debt balances, missed paychecks, and loss of independence.

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

Oct 26, 2011

Competitive Strategy for a Personal Injury Plaintiff Law Firm in Today’s World

Question:

We are a five attorney personal injury plaintiff firm in the central Missouri. In the last few years we have gone through tort reform, increase competition from other law firms doing extensive advertising, and now trying to weather the recession. From a profitability standpoint – we are holding our own. However, we are concerned about the future. What are your thoughts for firm such as ours?

Response:

We are hearing this question quite often and have provided some thoughts in past blogs and articles.

The majority of our PI law firm clients are advising that they are having to work much harder at getting clients and investing more heavily in marketing – both time and money. PI firms were feeling the most of these challenges before the recession. However, the recession may accelerate the pace with which law firms reevaluate existing processes and consider new business models. PI firms may want to begin by:

1. Develop a firm strategic plan and individual attorney marketing plans which include aggressive network/contact plans for past clients, attorney referral sources (non PI attorneys), attorney referral sources (other PI attorneys), and other referral sources.

2. Evaluate the feasibility of adding an additional practice segment to reduce the level of risk in the case portfolio and reduce cash flow variability.

3. Reduce case portfolio risk and improve case profitability by implementing a case intake system whereby all new cases over a specified level of projected case value are reviewed and approved by the partnership (or a client intake committee) in order for the case to be accepted by the firm. In other words – don't let one attorney expose the entire firm to either excessive levels of case risk or case investment (time and client cost advances) without other partners having a say on the matter.

4. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Metrics might include effective rate, return on LOADSTAR, dollar case profit after allocation of all appropriate firm overhead, etc.

5. Review and measure present marketing investments (time and money) and determine what is working and what is not. Reallocate resources if appropriate.

6. Insure that you are using an appropriate mix of marketing tools in your program.

7. Consider increasing marketing investments (time and money). Suggest a marketing budget be developed in the range of 8-12 percent of fee revenue. Also suggest that non case production (non-billable) time be budgeted for business development and marketing activities as well.

8. Look into defensive advertising.

9. Insure that you have a first-class website that goes deep and demonstrates expertise.

10. Maintain a yellow page presence – but gradually reduce investment and shift into website and other online vehicles.

11. Find ways to enhance the client's experience and deliver exceptional client service.

12. Use exceptional client service and bedside manner as a primary means of differentiating you from your competitors. Under Promise – Over Deliver in everything you do for the client.

13. Make your office client friendly.

14. Use end-of-case satisfaction surveys to measure the client's experience with the firm and to improve future service.

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

Oct 18, 2011

Law Firm Leadership: How do We Get Started

Question:

I am the managing partner of a 24 attorney firm in San Francisco. We are becoming frustrated at our inability to achieve a consensus and make timely decisions on matters of firm policy, strategy, marketing, and management. We are missing out on opportunities. We have no management scheme and no one to lead the charge – no team effort. The attorneys can't decide anything and firm management is a free for all. Things don't get done because no one is responsible. Conflict exists because anyone may be in charge. We are strong on ideas but weak on implementation. We lack leadership and focus. What are your ideas regarding leadership? Where should we start?

Response:

This is a common in firms of all sizes. In general, the foundation of leadership is built upon exhibited behaviors illustrating a proven track record of trust, respect, and accountability. These are the building blocks required for the development of leadership practices. Without these building blocks leadership cannot exist or be developed. The law firm culture must be nourished in such a way as to support these behaviors. These behaviors must become a part of everyday practice in dealing with clients as well as partners and others within and outside of the law firm. Law firm leaders must develop and practice the following behaviors:

The organizational structures, practices and procedures that exist in many law firms also discourage the development of leadership behaviors and practices. Many firms have a short-term production orientation focused upon individual lawyer productivity and production based upon billable hours and dollars billed and collected. A "me first" attitude rather than "firm first" "client first" attitude is frequently prevalent. Many lawyers hoard clients and consider them their clients as opposed to firm clients. These lawyers use individualistic approaches to client problems as opposed to team approaches. Compensation and other reward systems are not well suited to fostering leadership and developing teamwork in law firms. Firm governance, practice management, and performance management systems in law firms are also ill-suited to foster a climate encouraging and supporting leadership.

Law firms are finding that developing effective leadership skills can be a very difficult task. Dealing with leadership is a very emotional issue for most law firms due to the independent nature of most lawyers and the general unwillingness of firm lawyers to put aside their personal interests for the good of the firm. In fact, in many cases existing law firm partnership structures reinforce this tendency. What is needed is a balance between partner autonomy and partner accountability. Leaders will either have to be recruited externally (ie lateral partners) or skills will need to be developed internally.

The firm can begin by conducting a self-assessment using the following 10 point checklist:

  1. Only the best should lead and be placed in key leadership positions. Does the firm have its most capable people in leadership positions?
  2. Does the firm have partners or other lawyers with leadership skills or potential leadership skills? How many?
  3. How many lawyer leader positions are there in the firm that require leadership skills? How many lawyers have these skills?
  4. Does the firm's compensation system reward management and leadership activities?
  5. Does the firm's compensation system have a team reward component and are non-billable firm investment activities respected and rewarded?
  6. Does the firm's culture support a team orientated practice or an individual type practice?
  7. Does the firm's governance structure provide for administrative, management, and leadership roles and responsibilities?
  8. Does the firm have an in-house leadership training and development program?
  9. Does the firm invest and budget funds for leadership development?
  10. Is the firm willing to make the commitment?

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

 

Oct 11, 2011

Controlling Cost and Managing Overhead in the Law Firm

Question:

As the administrator of our 17 attorney law firm I am charged with the responsbility of managing and controlling costs. Our management committee is always complaining about our overhead – – and then looking to me for solutions – with the focus usually on cost reduction. Do you have any recommendations?

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. However, we do find that there is waste and unnecessary overhead that eats away at profits and a cost control program is also recommended and implemented. During recessionary times such as we are currently facing – drastic cost control are often the only option. Reducing overhead can immediately and effectively improve a firm’s bottom line.

The first step in an expense control program is to identify those areas where potential savings exist. Review your profit and loss statement. Resist the temptation to arbitrarily cutting costs which could cut the muscle with the fat and result in revenue loss as well. You have to spend money to make money – so if cost cutting is the appropriate strategy – cut the right costs. Think strategically about cost reduction.

After you have identified areas where savings can be made prioritize and develop specific strategies and implement action plans to achieve the savings.

 Here are a few ideas:

STRATEGY #1:  Reduce Headcount

This is the largest area for potential savings. Downsizing is a strategy that has been used by many firms this past year. However, it can have long term negative consequences for revenue and talent management. Consider all levels – non-productive partners, associates, paralegals, and staff. Be prudent and sensitive in implementation.

STRATEGY #2:  Reduce Compensation

Obviously one way is to cut salaries – a strategy to be used as a last resort. A better approach is to reduce fixed salary (paying people for showing up) and add a variable pay component which will allow employees to earn additional compensation in the form of bonus for results achieved. Another approach is to freeze salary increases.

STRATEGY #3:  Benefits

A major area for cost savings – especially health insurance. Determine which programs are most important to employees. Do your best to protect those and reduce or eliminate programs that are less important. Consider offering more than one health insurance plan. Pay the premium for the lowest cost plan and provide options for employees to “opt up” to the better plans by paying the additional premiums. Consider increasing deductibles and requiring employees to pay a portion of the base premiums.

STRATEGY #4:  Outsource

Examine potential for outsourcing – from copy services – IT management – to your legal team.

STRATEGY #5:  Occupancy

Review your lease invoices and question increases and escalators for which you have been charged. Consider renegotiating your lease and ask for a lower rate. Reduce excess space either through a renegotiated lease or through sub-leasing.

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

 

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