Law Practice Management Asked and Answered Blog

Category: Financial Management

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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

May 07, 2013

Law Firm Growth and Reduction in Profits

Question:

Our firm is a personal injury plaintiff firm in Topeka, KS. Until two years ago we had two attorneys (both partners) and two support staff members. In early 2012 we added an associate attorney, increased our marketing investment, moved our offices and took on additional space, added five additional support staff members, and implemented a case management system. We currently have 500 open cases – up from 200 cases 2+ years ago. Revenues are up – but the two partners are each taking home $40,000 less than they were before the expansion. Our home grown office manager manages and runs the office. What should we be doing differently?

Response:

My first thought is that your revenues have not caught up with the overhead and the growth investments that you have made. (You should review your reports and verify this) Personal injury cases have a much longer revenue lag than does work that gets "time-billed" monthly. Some cases may be in progress for two years or so. So be patient but don't be complacent.

You do need to be proactive in managing your case pipeline and your team. Someone needs to mind and manage the store. You are a larger firm now and you can't assume that your team is working to maximum effectiveness and efficiency. Insure that you actually need all of these people and that people are working smart. Roles for each member of the team should be created and performance standards and expectations established. Goals (cases) should be created for each team member, metrics and measurements established, standard reports created – generated – and used, and team members held accountable for results. Use the reports that the new case management system provides to measure goal accomplishment and performance.

Evaluate whether your office manager has the leadership skills that the firm now requires.

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

 

 

May 01, 2013

Law Firm Capital – How Much Do We Need

Question:

Our firm is a relatively new firm. Several of us left a large firm in Dallas and started the firm last year. We have 17 attorneys – 10 of us are partners. When we started the firm we each put in a little cash and obtained a line of credit which we have used extensively and we are at our limit. Is this a good practice? Should the partners contribute more capital? How much? I would appreciate your ideas.

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.

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

 

Apr 09, 2013

Law Firm Margin/Profitability Ratio – Net Income to Gross Revenue

Question:

I am the owner of an elder law firm in Boston. I recently closed out the 2012 books for tax preparation, I'm reviewing my annual numbers from what was my 4th year in solo practice and wondering how I'm doing.  Is there some kind of benchmark/goal or can you share any advice about an ideal ratio between gross income and overhead costs?

Response:

I usually say 35-45% margin (net income divided by total fee revenue) which is supported by most of the survey data. (Expenses used in the determination of net income defined as total expenses less owner/partner compensation). However, I have some law firm clients that have 20% margins were the partners/owner are taking home $1,000,000 per year. So margin is sometimes tells only part of the story. Depends upon the area of practice and practice/leverage structure. Solos operating virtually with no staff may have a margin of 80% but only taking home $40,000. ($40,000 net income divided by $50,000 fee revenue – only $10,000 in expenses.)

Be careful of using the term overhead as this often refers to expenses less all producer compensation. (partners, owners, associates, and paralegals) I assume that by the term overhead you are referring to total expenses less your compensation or draw.

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

 

Feb 12, 2013

Mitigating Law Firm Case Portfolio Risk With a Firm Contingency Fee Case Selection System

Question:

Our firm – St. Louis, Missouri – handles personal injury cases on a contingency fee basis. All 6 attorneys practice in this area and we do no work on any other type of fee or billing arrangement. During the last couple of years cash flow has been tough, we have lost some cases, and we are looking for ideas on what we should be doing differently. We would appreciate any ideas that you may have.

Response:

A balanced case portfolio is critical for contingency fee firms. You must carefully select your cases. Here are some ideas for an effective case selection system:

1. Develop an evaluation/case rating tool to be used to determine risk and feasibility of taking on contingency fee cases. The tool could be a form with an brief write-up and synopsis of the case, potential fee (high and low), probability of success or failure expressed as a probability percentage, specific risks, how long case might be in progress, hours that it may take to staff the case, client cost investments, and other resources that may be required.

2. Determine criteria that must be met to accept or reject a case.

3. Require more than one head or set of eyes on a case before committing to accept a new case. You might want to require all contingency fee cases to be reviewed and discussed at a weekly team meeting before a case can be accepted by anyone – including. This will help keep any  one attorney from getting too emotional and close to a case and base acceptance upon business and economic considerations rather than emotional considerations.  This is routinely done in lot of my PI firms to help access and mitigate case risk.

4. Write-up and document the case selection system.

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

Jan 29, 2013

Cash Flow in a Contingency Fee Law Firm: Re-Balancing Your Case Portfolio

Question:

I am sole owner of a law firm in Western Kentucky. My practice consists of myself, a legal assistant, a part-time bookkeeper, and a part-time contract attorney. The practice is limited to employment law – both plaintiff and defense side. Approximately 80% of my business is contingency fee and 20% is time-billed and or retainer. While the practice has done okay over the past fifteen or so years worrying about paying bills (cash flow) is a constant source of stress for me and my family. I do no marketing – all of my business comes from lawyer referrals. Do you have any suggestions?

Response:

Cash flow has always been a challenge for contingency fee practices. However, times are getting harder. For personal injury plaintiff firms insurance companies are refusing to settle cases, stretching out timelines for settling cases that they do settle, paying less, and becoming even harder to deal with. Other contingency fee practices are also facing similar challenges and everyone is finding it harder to find adequate lines of credit. Many firms that were once 100% contingency fee practices are looking for ways to improve cash flow implementing different fee arrangements or by adding non-contingency fee practice areas.

I suggest that you evaluate ways that you might re-balance your case portfolio to say 60% contingency/time-bill mix. You might consider:

  1. Billing and collecting up front for all client costs even if the fee is contingent.
  2. Flat fee paid up front for a certain segment or phase of work – then contingency fees for the rest of the work.
  3. Actively marketing and targeting certain small business firms, establishing relationship, and seeking out defense employment work billed on a time-bill basis.
  4. Adding a different practice area that would not be billed on a contingency fee basis.
  5. Bring in a another attorney with a book of business in a complimentary non-contingency fee practice area.

Review your case pipeline report and your work habits to insure that you are putting the right effort and mix into the cases that you have so that when your time bill matters come up for billing at the end of the month – all can be billed.

Good luck!

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

Dec 11, 2012

Law Firm Management – Planning Ideas for 2013

Question:

Our 16 attorney firm is having our first planning retreat next week to plan for 2013. I have been charged with putting together the agenda and program. Do you have any suggestions that we as a firm might consider or think about adopting? 

Response:

  1. Take a serious look at the firm's present position in the marketplace. Review financials, compare against financial ratios, compare with both firm past history and against law firm benchmarks. Examine how well the firm is competing. Is the firm too dependent on a narrow base of clients? Is the practice at risk? Conduct a client survey and obtain client feedback both on firm performance as well as possible unmet needs and opportunities. Consider a comprehensive management review.
  2. Formulate business goals and develop a strategic business plan as a roadmap for the future. Design and simplify business reports designed to measure the goals identified in the strategic business plan. Strive for a one page summary as the primary report.
  3. Require all timekeepers in the firm to submit personal one page business plans which in addition to outlining goals for the year provided fee revenue goals with an element of stretch. The goals should have a stretch component but yet be realistic and attainable. These plans should be approved by the Executive Committee, Managing Partner or the Partnership.
  4. Find ways to focus the firm and foster accountability from all.
  5. Undertake a few projects at a time that can be realistically accomplished. Delegate tasks across the firm.
  6. Law firms must adopt management structures that enables the firm to act decisively and quickly. Structures that do not support such a culture must be replaced.

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

Dec 04, 2012

Ideas For Law Firms Desiring to Take On More Contingency Fee Work

Question:

Our firm is a 18 lawyer general practice firm in the western Chicago suburbs. Recently, we are beginning to take on more personal injury cases on a contingency fee work which is creating some cash flow strain. Do you have suggestions regarding firms doing contingency fee work?

Response:

Contingency-fee work can pose major risks for law firms, as they earn no fees if they lose those cases and sometimes have profits deferred in protracted litigation. In addition, cases can be lost with no fee whatsoever recevied. Whether your firm is considering "big deal" litigation or bread and butter run of the mill personal injury litigation you may want to consider the following:

  1. Don't dabble in contingency fee work. Take it seriously and insure that your case portfolio is adequately diversified.
  2. Reduce case portfolio risk and improve case profitability by implementing a sound case intake system to insure that you are selecting quality cases.
  3. Realize that you have to spend money to make money and that you simply may not have the financial resources to take on certain cases. Learn how to say no and when to refer these cases out to others.
  4. Insure that you have an adequate portfolio of cases (number of cases, size and type) to insure diversification and manage risk.
  5. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Typical metrics include effective rate and/or LODESTAR.

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

Nov 27, 2012

Law Firm Financial Improvement Plan for 2013

Question:

Our 17 attorney firm has had less than stellar revenues and profitability for the last several years. Our billing and realization rates are in line, we have a good mix of partners and associates, we have managed our expenses effectively, and our accounts receivable are at satisfactory levels. The culprit is utilization – billable hours. Partner annual billable hours are around 1100 hours and associate billable hours are around 1300.  Everyone seems to be working hard. I would be interested in your thoughts?

Response:

Sounds like you have given the RULES (rates/realization, utilization, leverage, expenses, and speed/collection) formula careful thought and analysis. I agree that you have a problem with utilization. General guidelines for partners and associates for annual billable hours are in the 1700 range with litigation firms being much higher and smaller general practice firms being lower – sometimes in the 1500 range. However, 1100/1300 billable hours is a problem and should be looked into to determine the exact nature of the cause. Causes could be any one or a combination of the following:

  1. Insufficient work – lack of business
  2. Poor work ethic – not working hard enough
  3. Poor time management habits – lack of focus, goals, plan
  4. Poor time keeping habits – not recording the time and getting it captured in the system

Each attorney in the firm may have different problem areas. For some it may be they need to work harder. Set expectations and enforce them. Others may need more work and if work is not available their non-billable time should be focused on marketing and other firm building efforts. For those that have time management and or time keeping problems training/skill development should be provided.

Suggest you conduct a review and discussion with each attorney in the firm to identify causes and engineer an agreed to plan with each to work on appropriate problem areas. If habits need to be changed – be patient – changes in habits take practice and time.

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

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