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.
Click here for our blog on financial management
Click here for our blog on profit improvement
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
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.
Click here for our blog on financial management
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
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.
Click here for our blog on financial management
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
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.
Click here for our blog on profitability
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
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:
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!
Click here for our blog on financial management
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
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:
Click here for articles on other topics
Click here for our archive blog on strategies
John W. Olmstead, MBA, Ph.D, CMC
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:
Click here for blog ideas for personal injury firms
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
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:
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.
Click here for our blog on financial management
Click here for our law firm management articles
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am a partner in a small estate planning/administration law firm in Louisville, Kentucky. We are having a hard time getting a handle on determining the productivity of our associates and paralegals. Many of our associates and paralegals work part-time and the typical metrics such as 1500-1700 annual billable hours, etc. don't work for us. Do you have any thoughts or suggestions?
Response:
You might want to consider using a billable/worked ratio which is the ratio of billable hours logged to hours worked. For attorneys and paralegals that are totally focused on providing client services a good benchmark is 70%-73%. If an attorney or paralegal works 30 hours a week – you would hope to see 21-22 hours billable per week. Based on 50 weeks per year this would equate to somewhere around 1050 billable hours per year. For a full-timer working 8 hours a day or 40 hours per week – 50 weeks per year this would work out to around 1400+ hours per year. Most full-time attorneys work closer to 50+ hours a week and are expected to log between 1500-1700+ hours per year. The expectation for full time paralegals is around 1400 hours.
The 70-73% ratio is ambitious – but is achievable. For paralegals this goal will not be possible if they are loaded down with administrative duties. Excellent time management and time keeping skills and practices will need to be in place as well.
While billable hours is a starting point you also need to examine the impact of write-downs of work (adjustments prior to billing) and write-offs of bills that have been rendered to clients. In other words – what got billed and what actually was paid. Examine the billing and collection realization percentages and or the realization or effective rates for these people as well.
In addition to dollars you should also factor in quality and speed of work as well as client satisfaction scores from your end of matter client satisfaction surveys.
Click here for our archive blog on financial management
Click here for our articles on other topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am the owner of a five attorney firm in Chicago. Including staff we have a total of 13 people working at the firm. As we have grown our approach to handling billing and accounting has been piecemeal. We have a combination of several people handling various tasks including a couple of outsourced vendors as well. Frankly it is a mess. I want to restructure and consolidate all the tasks and responsibilities into one bookkeeper position. Do you have a job description that would help guide me in my search?
Response:
Here is a job description that might help get your started.
Position Summary
The primary function of this position is to perform the billing, bookkeeping and accounting functions of the firm. This position requires an experienced and accomplished person with a strong bookkeeping and computer background. The position requires skills and experience in bookkeeping, accounting, law firm billing and QuickBooks software as well as Microsoft Office Products. The position requires experience in a law or other professional service firm environment.
Reporting Relationship
This position reports to the firm owner.
Required Knowledge, Abilities and Skills
1. Must have at least 2+ years bookkeeping experience as a full-charge bookkeeper with responsibilities including client billing in a law or professional service firm environment.
2. Must have successfully completed coursework in bookkeeping/accounting. An associate degress in bookkeeping/accounting is desirable.
3. Must have experience with law firm billing or other professional service firm (TimeSlips or appropriate software that the firm is using) and accounting software (i.e. QuickBooks) as well as Microsoft Office Products.
4. Must possess strong administrative and organizational skills.
5. Must have strong interpersonal and communications skills.
6. Professional appearance and manner.
Duties
1. Perform all bookkeeping functions
2. Performs all client billing functions and other accounts receivable functions
3. Pay vendor bills and manage accounts payable.
4. Perform all data entry of cash receipts and client costs in billing and accounting systems.
5. Perform all data entry of cash receipts and disbursements for the IOLTA trust account in the accounting systems.
6. Process credit card transactions.
7. Reconcile bank statements.
8. Work up and make bank deposits for the operating and IOLTA accounts.
9. Handle payroll.
10. Handle Insurance
11. Provide all required financial reports to the firm owner on a monthly basis.
12. Filing.
13. Coordination with the firm's accountants.
14. Management and oversight of the billing and accounting systems.
I hope this helps you get started.
Click here for our blog on financial management topics
Click here for a short article on the topic
John W. Olmstead, MBA, Ph.D, CMC