Law Practice Management Asked and Answered Blog

Category: Financial Management

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Sep 07, 2016


Law Firm Profitability – How Do I Know if We Have Enough Work for the Attorneys?

Question:

I am the owner of an eight attorney estate planning firm in Jacksonville, Florida. Our firm handles estate planning and estate administration. For this entire year our financial numbers are way down and I am getting concerned. For example, compared to last year:

I would appreciate any ideas on what I should do next.
 
Response:
 
Several of my estate planning/administration firms from different areas of the country are advising me that business is way down this year and they can't put their finger on the problem other than demand and timing.
 
I would start by:
 
  1. Take a look an your new matter intakes for the year – month by month.
  2. Examine the referral and marketing sources as to where this business is coming from.
  3. Prepare a open matter inventory report by attorney and matter type to get a count of the number of matters each attorney is handling
  4. Examine billable hours, non-billable hours, collected working attorney fees and realization rates for each attorney.
Compare each of the metrics above with last year and prior years. Meet with all of the attorneys and review their matters in progress and discuss their workloads. Also review your marketing budget and marketing programs to see if changes are warranted.
 
This should give you a feel for what is going on. You could have problems in the following areas:
 
While you may find that you have problems in each of the above areas I suspect that your biggest problem is that attorneys do not have enough work and your business is down. If this is the case I would question how they are using their non-billable hours – are they doing more business development and marketing – or they simply pacing their time so they fill an eight hour day.
 
If your problem is lack of work you are going to have to see if additional marketing can generate the business needed to support the attorneys you have on board or reduce your attorney headcount.
 

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

 
 
 
 

 

Aug 17, 2016


Law Firm Financial Management – Monday Morning Report

Question:

I am the owner of a seven attorney firm in New York City. I have a bookkeeper that handles the accounting function. I receive monthly financial reports – but I believe I need a better tool to stay on top of my firm. I feel that I am lost, I don't want to take time to access different software modules such as our billing system, accounts payable system, general ledger system, etc. to get the information that I need to effectively manage the firm. We use Timeslips for billing and QuickBooks for bookkeeping. I would appreciate your thoughts.

Response:

I hear what you are saying. Most software program are good at giving you reams of paper in the form of reports but not so good at giving you the summary reports you need. Software companies are beginning to develop dashboards in their systems but the lower end systems do not give you what you need. You might consider tasking your bookkeeper with providing you with a Monday Morning Report (created in Excel) every Monday morning with the following summary information:

  1. Cash in bank balances for each account
  2. Bills due this week (vendors, payroll, taxes, draws)
  3. Anticipated payments from clients (new engagement retainers – flat fee and time bill)
  4. AR Balance
  5. Work in process balance
  6. Number of new retained matters for the month
  7. Total billable hours for each timekeeper (month and year to date)        
If after reviewing the Monday Morning Report you have questions ask for a more detailed report.
 

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

 

Aug 09, 2016


Law Firm Financial Management – What Reports Should I Give To the Attorneys in My Firm

Question:

I am the firm administrator of a sixteen attorney firm in San Diego, California. We have six equity members, four non-equity members, and six associates. We also have four paralegals and six staff members. We are managed by a three member executive committee. Each month I provide the equity members and the executive committee with the same reports from our software system. They are quite numerous. The equity members and the executive committee complain that they get too many reports and they don't look at them while the non-equity members and the associate complain that they don't get access to any financial information. Do you have any suggestions?

Response:

Less is often more. I would rather see partners receive less reports and read and use the reports they do receive. They can always request additional detail reports if they desire them. Think of a pyramid – at the top are equity members, then non-equity members, associates and then the executive committee and the firm administrator. At the top of the pyramid the information is more summarized and more detail is provided as you work you way down the pyramid. For example, do the equity members need to see journal registers, cash receipts registers, etc.?

I suggest you develop a report distribution guide that outlines who gets what and when and have it approved by the executive committee. Here is an example:

The objective of these guidelines are to provide timely, meaningful reports to firm management, equity and non-equity members, associates, and other timekeepers. Therefore, as few reports as possible should be distributed to reduce bulk and information overload. All other reports not listed for equity member distribution should be available to them on a per request basis.

Daily Reports

 Weekly Reports

 A detailed time report will be generated weekly (by Wednesday of each week for the conclusion of the preceding week) and will be distributed as follows:

Monthly Reports

        Monthly reports should be distributed no later than the 5th of each month according to the         following schedule:

        Equity Members             

        Non-Equity Members

        Executive Committee

        Director of Administration

        Associates

        Paralegals

        Staff (Timekeepers Only)

Quarterly Reports

Annual Reports

Annual reports are generated at the end of the year and maintained in a end of year section of the reports binder for the year (or computer system)

        Equity Members

        Same reports as received monthly.

        Managing Member/Executive Committee

         Same reports as received monthly

        Director of Administration

        Same reports as received monthly

        Note: At year end each of the above reports should be printed and saved to a file to the         reports folder that has been setup on the computer network. This should be done prior to         running the year end close.

        Associates

        Same report as received monthly.

        Paralegals

        Same reports as received monthly.

        Staff (Timekeepers Only)

        Same reports as received monthly.

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

 

Jul 13, 2016


Law Firm Financial Management – Realization Rates

Question:

Our firm is reviewing its partner compensation system and one of my partners suggested that we incorporate realization rates. This term was new to me. Is realization the percent that we collect? Your comments would be appreciated by all of us.

Response:

Not exactly. There are the following three general types of fee realization.

Overall Realization which is the relationship between the standard value of time (standard billing rate) and the actual fees collected. This is calculated by taking the value of unbilled time at the beginning of the year plus fee accounts receivable at the beginning of the year plus value of billable time worked during the year minus the value of unbilled time at the end of the year minus fee accounts receivable at the end of the year – equals potential fees to be collected. Realization (Actual fees collected/potential fees to be collected.)

Billing Realization which are actual fees billed/potential fees to be billed. This is calculated by taking the value of unbilled fees at the beginning of the year plus fees recorded during the year minus unbilled fees at the end of the year – equals potential fees to be billed. Billing realization is then calculated by dividing the actual fees billed by the potential fees to be billed.

Collection Realization which are actual fees collected/potential fees to be collected. This is calculated by taking the value of AR fees at the beginning of the year plus fees billing during the year minus AR fees at the end of the year. Collection realization is then calculated by dividing the actual fees collected by the potential fees to be collected.

All three calculations are important and tell different stories. They can be calculated at a firm level, client level, timekeeper level. Realization reports are available in the better law firm time and billing software programs.

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

 

 

 

 

May 17, 2016


Law Firm Equity Partner Capital Contribution

Question:

I am the sole owner of a twenty-five attorney litigation boutique firm in Los Angeles. I am the only equity partner with nine non-equity partners and fifteen associates. I am concerned that if I don't provide a path to equity partnership some of my senior talent many gradually defect to other firms or split off to create their own law firms. I also believe that providing a path to equity partner for deserving non-equity partners is the right thing to do. Therefore, I am planning on admitting two non- equity members this year. Should I require capital contributions?

Response:

I believe that all new partners should be expected to contribute capital and have some "skin in the game." Whenever a firm admits a new partner, the firm should require the new partner to contribute capital. Increasingly, a partner's capital requirement should bear a relationship to the partner's share of profits. You may want to allow new partners a reasonable period of time to fund their capital accounts – say one or two years via a capital note or help them arrange favorable terms at your bank to finance their capital accounts. Usually capital accounts are tied to working capital needed to operate the firm and the percentage of ownership/income that each partner will have.

While capital contributions are all over the board ranging from zero to $100,000 in firm's your size I often see capital contributions ranging from $25,000 to $50,000. 

There are only three ways to increase a firm's working capital to cover cash flow requirements and fund growth:

1. Have partners put more money in
2. Have partners take less money out
3. Borrow

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

 

 

Apr 26, 2016


Law Firm Billable Hours in an Insurance Defense Firm

Question:

I am the managing partner of a 12 lawyer insurance defense firm in Oklahoma City. We have 4 partners and eight associates. While we have grown over the last five or six years by adding associates our profitability has remained flat. We feel that we are not getting the billable hours that we should out of our associates. What are other firms like ours getting out of their associates in terms of billable hours?

Response:

Most of my insurance defense firm clients expect a minimum of 1800+ annual billable hours from associates and partners. Often 1800 is a requirement to remain employed and the minimum threshold to be eligible for a performance bonus. Often I see billable hours at 2000 to 2200 in insurance defense firms.

This goal is getting harder to achieve. Insurance companies are now managing hours as well as rates and outlining their expectations in their billing requirements and guidelines. Law firms can no longer "lean on the pencil" like they used to do in the old days. In addition, if business and file assignments are down you can't expect associates to work on work that isn't there.

If you are not getting 1800 hours – the problem may not be associate work ethic – it may be that more time needs to be invested by the partners in focused business developed and bringing in more work.

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

Apr 05, 2016


Law Firm Debt – Impact of Debt and Other Liabilities Upon Future Growth Options

Question:

I am a member of a three member management committee of a 16 lawyer firm located in Akron, Ohio. We have 10 partners and 6 associates. Several of our partners are in their 50s and 60s. Recently, we have had discussions with a couple of potential merger partners and laterals and in all cases they have backed out advising us that they were uncomfortable with our balance sheet. What can we do to better position ourselves. We desperately need to bring in new talent with books of business?

Response:

First there are the obvious balance sheet items – bank debt, large tapped out credit lines, equipment leases and other liabilities. Then there are the items that are not recorded on the balance sheet – namely unfunded partner retirement buyouts and long term real estate leases. These are often major deal breakers in mergers and scare away laterals. If you have bank and other debt on the balance sheet work at cleaning it up. More importantly if you have unfunded partner buyouts begin either rethinking the desirability of these programs or begin funding this liability now with a goal of the liability being totally funded over the next five to seven years. Then shift to a retirement program that is totally funded. Unfunded partner retirement programs are becoming a thing of the past.

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

 

Mar 15, 2016


Law Firm Alternative Billing – What Do Clients Think

Question:

Our firm is a 18 attorney firm based in Tucson, Arizona. Our practice is a boutique general liability defense firm. Our clients tend to be self insured large corporations and smaller business firms. Currently all of clients are billed by the hour. Recently we have been discussing whether we should propose an alternative billing approach to our clients. We would be interested in your thoughts.

Response:

I do not want to discourage alternative billing – there are a lot of benefits that can be obtained – however I find that firms practicing your type of law and that have your type of clients that alternative is talked about more than actually implemented. You may find that your clients like the thought of the certainty of fixed fees but have concerns about the quality of representation under such arrangements. Recently, a litigation defense law firm asked me to interview their clients concerning their satisfaction with the law firm. When asking one general counsel about his thoughts regarding alternative billing he told me:

"My concern with fixed fee billing is that there might not be the financial incentive for the law firm to dedicate all the resources and best efforts to obtain the best results for our company. I prefer hourly billing with case management plans and budgets. I want our law firms to be financially successful as long as they achieve results for our company and not be penalized or constrained by fixed fee arrangements."

You may find that your clients are open to discussing alternative billing arrangements but may be hesitant when it comes to implementation. They are comfortable with hourly billing.

With this said I think you should explore the dialog with maybe one pilot client and see where the discussion leads. Insure that you do the proper analysis of that client's billing history, overall risks, and develop a fixed fee strategy that not only allows you to attain your desired billing rate but provides for a risk premium as well. Also build in ability to take exceptions for matters that fall outside the scope of the fixed fee arrangement.

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

 

 

Feb 23, 2016


Law Firm Partner Capital Contributions – How Much?

Question:

Our firm is an 18 attorney firm in Chicago that was formed by the existing four equity partners ten years ago. We have four equity partners (founders), eight income (non-equity partners), and six associates. The income partners are not required to contribute capital. We are considering admitting a couple of the income partners as equity partners and also approaching possible laterals. What should we require in the form of buy-in or capital contribution?

Response:

While capital contributions are all over the board ranging from zero to $100,000 in firm's your size I often see capital contributions ranging from $25,000 to $50,000. All depends upon the number of ownership shares being offered. I am seeing firm's requiring more as many firms are resisting the temptation to take on bank debt to finance their short-term working capital requirements. Citibank's Private Law Firm Group reports that between 2004 and 2007 capital contributions averaged 20 to 25 percent of a partner's income. Citibank's recent survey reports that partners are now contributing an average of 30 to 35 percent of their earnings. Thus, a newly admitted partner that will be earning $150,000 upon admission would be expected to contribute $45,000. Contributed capital is returned when a partner leaves the firm in full upon withdrawal or more commonly according to an incremental installment payment schedule.

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

Jan 20, 2016


Law Firm Partner Compensation – Setting Up an Eat What You Kill System

Question:

I am a solo practitioner in Orlando, Florida with two secretaries and I am planning on merging my practice with another attorney in the same office location. He has three staff members. We have both been on our own for twenty years and have enjoyed our independence. We have decided that we want to setup an eat-what-you kill type of compensation sytem. We would appreciate your thoughts.

Response:

While I am not found of such systems as they lead to separate silos – separate firms within a firm - there are situations where they are appropriate. In some situations, the approach is to simply allocate revenue and use the percentage of fee revenue collected to determine a partners interest in the profit for the year. A determination must be made as to what the firm means by revenue collected for each attorney – working attorney allocated dollars, originated attorney dollars, or responsible attorney dollars, or a weighting of all of these. This only works if each consumes overhead at the same level.

If you are not consuming overhead at the same level some form of cost allocation must be made and included in the mix. Direct overhead items such as bar dues, auto expenses, CLE seminars, etc. could be allocated directly to each partner with each sharing equally in the rest of the indirect overhead. Then a net figure would be calculated to determine each partner's compensation based upon their share of the profit.

If you want to really get detailed your can setup a separate profit center for each of you in your accounting system, allocate all revenue and expenses using an agreed to allocation formula, Click here for sample allocation guidelines and then have the ability of generating a separate profit and loss statement for each of you. If you are using QuickBooks Pro you can setup classes to accomplish this. Your compensation would be the profit from your profit and loss statement. 

Good luck with your merger.

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

 

 

 

 

 

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