Law Practice Management Asked and Answered Blog

Category: Profit Improvement

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Jun 20, 2017


Characteristics of a Successful Liability Defense Law Firm

Question: 

I’m a second generation attorney (about 5 years’ experience) at a small liability defense firm in Southern, California. My father is the managing partner and we have three total attorneys. My father and his partner probably have 5-7 years left practicing. We only do California workers’ compensation defense. I’m planning on taking over the practice but am concerned about trends in the industry that will affect profitability, such as more stringent billing guidelines/bill audits, cuts to travel time, etc. What are the characteristics of a successful liability defense firm that I should strive towards? (i.e., # of attorneys, leverage, overhead ratio, revenue per lawyer, etc.)

Response: 

I appreciate your concerns. Both workers’ compensation defense and civil insurance defense firms have a real challenge with the performance pressures placed on them by their clients, billing guidelines and audits, and low billing rates. I have civil insurance defense firm clients across the country billing at rates averaging from $175 to $225 per hour and workers’ compensation defense firm clients billing at rates averaging from $140 to $175 per hour. Some firms are being required to take on more work on a flat fee basis.

Here are a few thoughts concerning characteristics of successful liability defense firms that you should strive towards:

  1. Number of attorneys will depend upon the amount of business that you can bring into the firm. If you are a sole owner you should have an additional four associates to achieve the level of leverage that you will need to be profitable. This assume that the work is there to keep them all busy.
  2. You should strive for a leverage ratio of four associates to every owner. Resist the temptation to make everyone a partner.
  3. Hold the line on expenses and remember that your largest expenses are salaries and office space. You do not need to hire lawyers from top tier law schools and pay the salaries that such lawyers are able to command. You also do not need to have your office in an A or B+ building. Look for B or C+ office space.
  4. Revenue per working lawyer should be in the $300,000 range.
  5. Profit margin (earnings available to owners) should be in the 35% to 45% range.
  6. Annual billable hours should be 2000 or greater for each attorney.
  7. Ensure that you tie lawyer compensation to performance. Pay your associates a salary but also have a variable performance bonus based upon billable hours collected or dollars collected. Keep the salary low enough that they are still hungry.
  8. Diversify the practice. Actively market to more companies and organizations that you can represent directly rather than representing strictly insurance companies. Consider big box companies as target clients. Get on their panels and bid lists. Consider expanding into civil liability defense work rather than doing just workers’ compensation. Many law firms in the Midwest do both.
  9. Some of our clients have found that a federal workers’ compensation practice is beneficial.

Here are links to two articles on defense firms that you might find interesting.

https://www.olmsteadassoc.com/resource-center/trapped-in-a-insurance-defense-practice/

https://www.olmsteadassoc.com/resource-center/insurance-defense-law-firms-strategies-and-best-practices/

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

 

May 02, 2017


Increasing Law Firm Revenues Through Additional Marketing Investment

Question: 

I am the solo owner of a two attorney firm in Atlanta. I have been in practice for thirteen years. I have one associates that has been with me for one year, one full-time paralegal, and two part time assistants. I have a general practice. Revenues have stagnated and I need to identify strategies for getting to the next level. My practice is struggling. I have been thinking about narrowing my practice and focusing on five or six practice areas. I am ready to invest in marketing. I would appreciate your thoughts.

Response: 

This is the age of specialization – less often results in more. Many attorneys in small general practice firms are afraid to specialize and focus on three or less – even one – area of practice. The concern is that by specializing there simply will not be enough business of keep the attorneys busy generating sufficient revenues.

I have worked with several firms that have shifted their practices from general practices to practices limited to estate planning and elder law and they have performed far better as specialized practices than they did as general practices. I suggest that you consider focusing your practice on on no more than 2-3 key practice areas in which you can differentiate yourself.

Here are a few thoughts:

  1. Don’t copycat. Brand yourself. Look for ways to differentiate yourself and your firm from your competitors. Become the only attorney that can do what you do. Make a decision – what do you want to be known and remembered for? Unique services, unique client groups, different service delivery strategy, personal style. Create a five-year plan for goal accomplishment.
  2. Create a marketing culture and environment. Marketing and client service needs to be incorporated into the culture of the firm. All attorneys and staff should have a role in marketing. Owners/partners must walk the talk and consistently, build and reinforce the marketing goals of the firm. Marketing goals and action plans should be formulated and team members held accountable. Over time a marketing mindset will emerge.
  3. Learn how to become “solutions orientated” and become a consultant to your clients as opposed to simply their attorney. Solutions may involve activities and services other than legal services. Think out-of-the-box and outside of typical frameworks in which you are comfortable.
  4. Join a client’s trade association and make contributions in the form of articles, speeches, conference attendance, etc. Learn the client’s business from top to bottom.
  5. Increase your geographic reach – possibly a state wide or multi-state practice.
  6. Institute quarterly client service/marketing brainstorming sessions. Break the rules. Encourage all members in the firm to think out-of-the-box and innovate. Look for new ways to solve client problems. Look for new solutions. No topic should be initially be considered out-of-bounds.
  7. Write an article every other month.
  8. Take a client or referral source to lunch once a week.
  9. Establish a marketing library to include general materials on marketing as well as specific publications related to your clients business.
  10. Provide marketing training/coaching for attorneys and staff. and improve time management skills of everyone in the firm.

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

 

 

Mar 29, 2017


Improving Law Firm Profitability

Question: 

I am the managing partner of a six lawyer general practice firm in Chicago. We have four partners and two associates and have been in practice for twenty years. While we are holding our own and doing okay financially we would like to do better. The partners have never earned more than $175,000 – some years not even that. What can we do to improve profitability?

Response: 

Profitability can be increased by increasing revenue, decreasing expense, or increasing leverage – ratio of associates to partners. Most law firms do not have an expense problem – they have a revenue problem. Profitability improvement programs tend to be more successful when they concentrate on improving profits through increased revenue versus programs than focus on reducing expenses. A program that focuses on increasing revenue such as increasing billable hours, raising billing rates, and improving realization rates will yield better results. Programs that focus on expense reduction often do not yield satisfactory results in the long-term.

Improvement in leverage usually can only be achieved as part of a long-term program. Sudden sizeable increased in the number of associates may prove to be counterproductive if there is not sufficient client work to keep associates busy. Another option would be to reduce the number of partners  through retirement and other options must be carefully planned and I am sure is not an option that your firm is looking for.

I suggest that you review your expenses to insure that they are in line and if they are not make reductions that make sense. Then focus on the revenue side of the equation. Review your client base, practice areas, billing rates, flat fee rates, billable hours being worked by your partners and associates, and realization rates. Then identify problem areas and chart out a course of action.

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

 

Nov 22, 2016


Law Firm Billable Hours – Attorneys Not Meeting Expectations

Question:

I am a partner with a fourteen attorney business litigation defense firm in Los Angeles. I am the member on our three member executive committee that is responsible for financial oversight. This year we put in place an 1800 annual (150 hours per month) billable hour expectation for associate attorneys. No one has ever reached 150 hours. Are our expectations unrealistic? What is our problem? I would appreciate your thoughts.

Response:

I do not think that a 1800 annual billable hour expectation is unrealistic. Litigation defense firms typically have an expectation of 1800 to 2000 annual billable hours. Many litigation defense firms that I am currently working with have a 2000 billable hour expectation with many attorneys working 2200 billable hours.

Typical causes for an attorney not meeting expectations are:

  1. Not working or putting in enough hours.
  2. Not enough work.
  3. Poor time management habits.
  4. Poor timekeeping habits.

I suggest that you meet with each associate and discuss each of these possible causes.

Since this seems to be an across the board problem I suspect that the firm may not have enough work to support these billable hour expectations. Many of our clients are having this problem. They are hiring more attorneys that they actually need, have overcapacity, and simply don’t have the work to support billable hour expectations.

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

 

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 04, 2015


Law Firm Associate Attorney Performance

Question:

I am the managing partner of a 8 attorney general practice firm in Chicago western suburbs. We have 5 partners and three associates. For years it was just the five partners all who started the firm together. In the last three years we added our associates. We are not making money from our associates and wondering what we need to be doing differently. One associates is logging 925 billable hours, one is logging 1200 billable hours, and the other 1400 billable hours. You thoughts are welcomed.

Response:

If these are full time associate positions and they have been with your firm a couple of years you should be getting 1600 – 1700 billable hours per year. If your firm does litigation – 1800+ billable hours. Some practice areas such as estate planning/elder law – range in the 1500-1600 hour area.

The starting place is setting expectations. During interviews with associate attorneys at client law firms I ask – what is your billable hour goal/expectation, etc. Frequently I am told that they have no idea or they tell me that they think that the expectation is such and such. Other times they advise me that the firm simply does not have a billable hour expectation. Of course the partners tell a different story and can't believe that their associates are not clear on billable hour expectations. 

Some firms put in place auto pilot type incentive bonuses based upon hours or dollars and believe that these bonuses in themselves will motivate performance and as a result billable hour expectations are not needed. Often this is simply not the case.

I believe that baseline expectations should be spelled out and measured monthly. These baseline expectations are the minimal requirement to remain employed and justify the base salary that the associate is being paid. If these baseline expectations are not been met, you must had some heart-to -heart discussions in real time. Outline the problem and consequences for non-compliance. 

The billable hours your associates are logging just won't cut it. If the work is there they simply must get their hours up to desirable levels. You might look into the reasons for the low hours – work ethic, time management issues, or problems with timekeeping. If there is not enough work – long term – you may have to consider reducing the work hours that you are paying for.

It sounds like you may not be adequately mentoring or training your associates. Consider performance reviews and active mentoring and coaching. Insure that you are providing adequate feedback to your associates. Your time investment in the short term will pay dividends in the long term. 

 

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

 

Dec 06, 2014


Law Firm Collections – Reducing Accounts Receivable Writeoffs for Family Law Matters

Question:

I am the managing partner in a eight attorney firm in Nashville, Tennessee. We are exclusively a family law practice and while we charge a few client on a flat fee basis – most clients are time billed. We ask for a $5000.00 security retainer up front. After the retainer is used we invoice clients for additional time spent on a monthly basis. We are having problems getting paid and are having to write off a large amount of accounts receivable. I would appreciate your thoughts.

Response:

This is a common problem that I hear from family law as well as other firms representing individuals. The law firm collects the initial retainer, the retainer is used up, additional work is done, – often to the conclusion of the matter – the client is invoiced for the remainder of the time expended, and the bill either does not get paid or is paid partially. The law firm ends up writing off the balance.

The best solution is to require the retainer be replenished at a certain point and, within your state's ethical parameters, not perform additional work until the additional retainer is received. Recently a client told me that his office manager's number one responsibility is a daily review of unbilled time compared to unused retainer. When the unbilled time get to 90% used the client is invoiced for additional retainer. When 100% is reach work is stopped until the additional retainer is received.

With today's client billing systems that have integrated trust accounting, assuming that timesheets are entered directly and daily, an office manager or bookkeeper can simply print or review on screen a summary work in process report that shows for each matter the unbilled values for fees and costs, unpaid receivable, and retainer balances in the trust account. Matters with unbilled fees and costs approaching the retainer balance can then be invoiced for additional retainer. The key to making this work:

  1. All timekeepers must enter their own time via direct time entry and daily.
  2. Someone must be assigned the responsibility for daily monitoring and daily invoicing for additional retainer replenishment and help accountable.

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

  

 

Mar 11, 2014


Law Firm Billing Arrangements – Flat Fees

Question:

I am the managing owner of a four attorney estate planning firm in Phoenix. We also have two paralegals, a receptionist, and an office manager. We have always billed our clients by the hour but have been considering switching to a flat rate billing arrangement. I would appreciate your thoughts and suggestions.

Response:

I am currently working with quite a few estate planning/elder law firms. The majority of these firms are still using "time bill" billing arrangements. (8 out of 10 firms) A few firms are using flat fee arrangements for estate planning and asset protection matters and "time bill" arrangements for estate administration and other matters.

Few firms that are using flat fee arrangements are realizing effective billing rates even close to their standard "time bill" rates. In some cases I have found effective rates per hour $100 per hour less than their standard "time bill" rates. In some cases the problem is not working effectively or efficiently. In other cases the flat fee price has not been properly set or limits placed on the work that will be done for the flat fee – for example – number or document rewrites, etc. 

I believe that more than ever clients are wanting the budgetary certainty that flat fees provide.  I think that a flat fee pricing strategy is a good strategy but the scope of work and proper price point must be properly established. A couple of suggestions:

  1. Do some basic market research – secret shopping – and obtain the best information that you can on competitor pricing.
  2. Review time charges on typical estate planning matters and get a handle on the amount of time that it typically takes – by each office professional – for matters of varying levels of complexity.
  3. Based on these time estimates determine flat fees using the desired standard hourly rate and then add a risk premium of 10%. If a matters typically takes 10 hours and your desired rate is $200 per hour – set the flat rate fee at $2200.00.
  4. Incorporate into your engagement letters, fee agreements, etc.
  5. Get at least 1/2 of the fee before commencing work and the other half before deliveringand executing the final documents.
  6. Keep time sheets on the matters for time expended.
  7. Review at least quarterly effective rates realized on completed flat rate matters.
  8. If effective rates are below your target rate review the time detail and determine where the problem lies.
  9. Make changes and adjustments if needed.

I believe that properly implemented and managed flat fees can be a worthwhile strategy.

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

 

Dec 17, 2013


Law Firm Management – Managing in a Time of Shrinking Demand and Excess Capacity

Question:

Our Chicago law firm of 17 attorneys – 12 partners – 5 associates – is entering its second decade. While we were extremely successful during our early years, the last few years have been a challenge. Since 2008 we have been holding our own and doing okay. We have not laid off any attorneys but the partners are making less money than they made three or four years ago. Billable hours and production seems to be down? Do we have a work ethic or motivation problem? What can we do to get the attorneys producing more billable hours? I would appreciate your thoughts and any suggestions that you may have.

Response:

This is an issue that many firms are experiencing. Here is what I am seeing in firm after firm:

  1. Lower billable hours – in some firms hours are 100 to 200 hours less per attorney than they were a few years ago.
  2. Lower or stagnant collected fee revenues.
  3. Increased expenses
  4. Lower or stagnant profits and profit margins resulting in depressed partner earnings.
  5. Lower associate turnover (due to economy and employment situation for lawyers – many associates are staying put – getting raises – resulting in higher production cost structure)
  6. Declining realization rates. (Firms that had realization rates in the 90% range have seen their realization rates decline into the mid 80% range.)

Several of our clients recently found that they were barking up the wrong tree. They assumed that the lower billable hours and productivity was a result of associates and partners not working hard enough and were searching for compensation approaches to motivate the attorneys to work harder. Further analysis however revealed that the real problem was reduced client demand and excess lawyer capacity. As a result approaches were taken to:

  1. Find ways to use the excess capacity rather than lay off lawyers completely. (This was considered a last resort)
  2. Rather than working less – non-billable hours were specifically targeted in individual attorney personal business plans with specific goals in marketing and other firm related activities to develop firm infrastructure, systems, and marketing intended to increase demand for the firm's services. 
  3. Fiefdoms were broken down and attorneys and staff were cross-trained in other practice areas so that more key personnel could achieve full utilization of 1650-1750 billable hours.
  4. Work hours were reduced for newer attorneys and staff that could not achieve full utilization.
  5. The firm expanded into additional geography areas with cost effective remote intake offices and new service offerings. 

Examine your financials and talk with you people so that you can discover the real problem – work ethic, motivation, compensation, or client demand and lawyer capacity. Once you discover the real cause of the problem you will be able to think you way to the solution.

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

 

 

Nov 26, 2013


Law Firm Non-Equity Partners – Compensation and Perks

Question:

Our law firm is a New Orleans 14 attorney firm that focuses its practice on business representation in both litigation and transactional matters. We have four equity partners. The other ten attorneys are associates. We have been discussing implementing a non-equity partnership tier and how we should handle compensation and other perks. We would appreciate your thoughts and suggestions.

Response:

I believe that the non-equity partnership tier should be meaningful and distinctive – both internally and externally. Consider the following:

  1. List non-equity partners as partners on the firm's website and other firm marketing collateral material. If you feel you must make a distinction list the equity members as managing partners.
  2. Allow non-equity partners to attend some partner meetings and have input as non-voting partners into management decisions.
  3. Allow one non-equity partner to be elected to the Executive Committee as a non-voting partner.
  4. Allow non-equity partners to serve on firm committees.
  5. Pay dues to a Country or other similar club for the non-equity partner.
  6. Tie a portion of the non-equity partner's compensation to a bonus based upon firm performance.

While you want to create incentives – status and economic – for the non-equity partnership tier be careful that you don't diminish the desire for future equity partnership.

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

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