Law Practice Management Asked and Answered Blog

Category: Profit Improvement

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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

Jan 08, 2013


Focusing the Law Firm To Improve Profitability

Question:

Our firm is a 9 attorney firm in Joplin, Missouri. We have our first partner meeting this weekend and we are looking for ideas that we can implement this year to improve our practice and profitability. We would appreciate any ideas that you may have?

Response:

Based upon our experience from client engagements I have concluded that lack of focus and accountability is one of the major problems facing law firms. Often the problem is too many ideas, alternatives, and options. The result often is no action at all or actions that fail to distinguish firms from their competitors and provide them with a sustained competitive advantage. Ideas, recommendations, suggestions, etc. are of no value unless implemented.

I suggest the following:

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

 

Jan 31, 2012


Law Firm Profit Improvement Strategy

Question:

Our firm has been struggling for the past couple years. We have lost three key institutional clients, had partner defections to other law firm, and have suffered financially. We were a 40 attorney firm- six years later we are ten. We simply must improve profitability. What areas of our overhead should we attack first?

Response:

Many law firms waste considerable time trying to find ways to cut a pie that is too small up differently by implementation of new compensation systems or increasing the size of the pie by decreasing costs. While unnecessary expenses should be reduced – once they are reduced a repeated effort to slash costs proves fruitless as a strategy to increase the firm pie. The vast majority of law firm expenses are fixed or production-related. The percentage of costs that are discretionary is low, typically in the 20-30 percent range, and the number of dollars available for savings is small. The available dollars available for reduction disappear after a year or two of cost-cutting, leaving the firm with dealing with the effects of further cuts on production capacity. For example:

§ Should a firm eliminate staff positions if the result is additional administrative burden on lawyers and paralegals thereby reducing the revenue capacity of the firm.

§ Should the firm cut lawyers continuing legal education if improving an attorney's level of expertise is important to increasing revenue production.

§ Should a firm cut the marketing budget?

Once a firm has eliminated wasteful spending and made appropriate adjustments to the budget, further cost reductions often results in the firm reducing the possibility of turning the firm around, improving financial performance, and increasing the pie.

Increasing revenue, while maintaining the same expense structure, is the most powerful approach to improving firm profitability. Additional revenue goes directly to the bottom line and makes a significant impact on partner profits. If the firm is able to increase revenue by10% while maintaining the same cost structure, 100 percent of the additional revenue dollars will go to the partners.

So think revenue – not costs!

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

Dec 28, 2011


Goals and Plans For Focusing the Law Firm in 2012 and Beyond

Question:

Our firm, a 12 attorney firm in Detroit, needs to find a way to improve fee revenues and financial performance in 2012. We do not have a business or strategic plan, have never had a retreat, and we don't even have a budget. We believe that we must do something for 2012 and yet we are out of time since 2012 begins next week. Any suggestions?

Response:

Generating adequate fee revenue is the primary challenge for most law firms and this is where I would start for 2012.

I am a strong believer in the power of focused goals and objectives when integrated with a system of accountability. I have clients that have improved fee revenue by 20% (over a two-three year period) with existing headcount simply by establishing production goals for each attorney and paralegal in the firm – reporting, measuring and reporting goal v.s. performance monthly using simple reports, and follow-up with individuals behind on their goal attainment. Solo practitioners can use the same system and use a staff member, spouse, or coach to serve as an accountability partner. You might want to consider the following:

  1. Ask each attorney and paralegal to provide SMART (specific, measurable, attainable, realistic, and on a timeline – i.e 2012) goals for fee generation, fee origination, billable hours, etc.
  2. Review and discuss these goals with each member and engineer an agreement (commitment). Insure that there is adequate stretch – but that the goals are attainable.
  3. Setup a monthly report, spreadsheet if necessary, listing each individual and including their monthly goal number(s), actual performance, variance, year to date goal number(s), actual performance and variance.
  4. Review and discuss monthly at firm meeting, management committee meeting, or whatever forum is appropriate for your firm.
  5. Follow-up and meet with individuals that are falling behind. Devise strategies for improving performance or revise goals if unrealistic.
  6. If the firm has insufficient client work use this as a tool to bring out into the open and create specific business development initiatives to deal with such issues.
  7. Find ways to tie attainment of goals to compensation.

Try to get this in place by January 1, 2012 and see how this works for you and consider this your first baby step. Down the road you might want to consider a firm budget and eventually a strategic plan. See Helen Gunnarsson's article on strategic planning in the November issue of the Illinois Bar Journal.

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

Sep 07, 2011


Increasing Law Firm Profitability: Using Metrics and Measurements to Focus Performance

Question:

Our firm does mostly flat fee work. I am the sole owner of the firm and am considering hiring my first associate. Each of us work as a team and do a lot of cross-over work on all client/matters. I have two paralegals. We don't keep timesheets on our flat fee cases. Do you have any suggestions as to how to proceed with the hiring of this associate?

Response:

It sounds like your firm is relucantly approaching the next step in its growth. Adding your first associate will change the dynamics of your firm and will require you begin to implement more formal approaches to performance management for all members of your team – the new associate, your staff, and yourself. I would start by thinking through the exact tasks and roles that you would like the associate and other staff members to perform. In other words define the associate position. Do to expect the associate to bring in business? Are you willing to train a new associate without experience or are you looking for someone with experience. Can you structure work so there is less crossover of team members on files? If not, how are you going to measure their performance and production? (Time, their production fee dollars, file or case counts, etc.) Are you going to incorporate a variable pay or incentive bonus component into the compensation plan for the associate as well as the other staff members? (More firms are doing this) Define the position first and then decide on the "who".

I encourage you to begin establishing production (performance) goals for all employees and then measure performance against these goals. Tied at least a portion of compensation to accomplishment of these goals. More firms are starting to pay for performance and less for simply showing up.

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

Aug 31, 2011


Improving Law Firm Profits By Improving Processes

Question:

We are a five attorney firm in Detroit. Our firm does exclusively elder law and estate planning and most of our fees are based upon flat fees. Business has been steady and solid in spite of the recession. In an effort to improve profitability we are considering raising our fees but are concerned about adverse effects that it may have upon our competitiveness. We are already at the high end of the fee scale. Do you have any thoughts?

Response:

Raising fees is one approach to improving profitability. Clients are starting to push back more and more concerning legal fees. If you are at the high end of the rate scale I suggest that before charging off and raising rates you step back and conduct a process review by using an approach similar to the following:

  1. Pull a random representative list (by timekeeper and type of matter) of matters that have been concluded during the past six months. Say 10-20 matters.
  2. Calculate the effective hourly rates for each matter overall as well as by timekeeper class. (partner, associate, paralegal)
  3. Compare the calculated effective rate to your internal standard time billing rates as well as to external benchmarks. (Other firms from published survey data) How do they compare? What did it cost to staff the matter?
  4. Review the time detail for each of these matters and ask questions. You might want to flow chart and document the work flow. Is the firm working smart? Is time being dumped on these flat rate matters so that a timekeeper's hours look good on the production reports?  Is the firm using the right mix of paralegals and attorneys to staff the work? Is there wasted or duplicative effort? Is technology being used? Can work steps be eliminated or reduced? Should the firm consider a "limited representation" unbundled option?
  5. Pilot test a few new approaches and measure the impact upon profitability.

Keep in mind that raising fees is one way of improving profitability. There are other ways as well. In today's competitive environment. Working smarter, efficiently, and more effective is another.

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

 

 

Jun 21, 2011


Using Effective Firm Meetings to Improve Accountability and Boost Productivity

Question:

Our firm used to have weekly firm meetings to discuss management and operational issues. We discontinued them due to the excessive time being spent and questionable results and value. Now we are finding that we are totally unfocused and having problems with poor accountability and things falling through the cracks.  We are now considering starting up weekly meetings again but want to insure that we do a better job of managing meetings than we did in the past. What are your thoughts?

Response:

Before scheduling a meeting consider the purpose of the meeting. In general there are the following four types of meetings:

  1. Strategy Meetings are rich group discussions involving strategy and planning sessions, brainstorming, group budgeting, marketing, or financial planning. These meetings are effective when everyone understands the purpose and the ground rules.
  2. Reporting Meetings consist of one person informing the others in the room and sharing of information. These meetings are valuable only if the news is meaningful to most of the attendees. There may be Q&A and discussion, and different people may report out during the same meeting. These meetings should be structured.
  3. Status Meetings are often low in value and you should keep them sort. Attorneys and other team members need to share information and brief sessions are effective at keeping the team on the same page. Consider stand-up meetings – where literally, everyone is standing. It keeps the meetings short. Require agendas.
  4. Dilemma or Issue Meetings where just a few of the participants engage in detailed problem solving, are inefficient. Don't drag the whole group into dilemma or issue meetings. If your meeting is headed this direction deflect it for one-on-one time.

Meetings work best when they have:

  1. An agenda – for reporting and status meetings.
  2. A meeting chair or facilitator – who helps the attendees stick to the agenda.
  3. Meeting minutes – listing decisions, action items, and due dates – sent to all participants shortly after the meeting.
  4. Ground rules – especially for strategy meetings.

Take charge of meetings. Unmanaged meetings are time wasters.

You might want to start with short weekly status meetings using the format outlined above. Conduct reporting meetings on a monthly basis and strategy meetings on a quarterly basis or annual using a off-site retreat format.

Start slow and go from there. Push for accountability and results.

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

May 25, 2011


Improving Law Firm Profitability Through Cost Reduction

Question:

As the managing partner of a 12 attorney I have been asked to see what the firm can do to improve profitability by reducing costs. Do you have ideas or recommendations in this area?

Response:

In most law firms 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. 

 STRATEGY #6:  Telephone Service

Scrutinize your bills and examine rate tariffs as well as items that have been tagged to your bill by third parties. Negotiate and ask refunds for any discrepancies or abuse found. We have seen firms receive thousands of dollars in refunds.

STRATEGY #7:  Virtual Office

Do you need an office at all. Many solos are working out of virtual and home offices or a combination of same. Some larger firms are reducing the size of their primary expensive downtown offices by having some attorneys work from home offices or other locations.

STRATEGY #8:  Marketing

Many firms actually need to spend more money on marketing. However, this does not mean that it should be wasted on sacred cows. Review marketing investments, eliminate feel good items, and insure that they are producing results. Reallocate funds.

 STRATEGY #9:  Supplies and Other Purchases

Eliminate waste and unnecessary expenses. Consolidate with fewer vendors and solicit discounts for exclusive relationships.

STRATEGY #10:  Develop a Budget and Financial Plan

If you don’t have one – develop a budget and financial plan and work the plan.

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

 

 

May 11, 2011


Using Legal Project Management to Improve Law Firm Profitability

Question:

I am the managing partner of our firm of 17 attorneys. Our practice is concentrated in insurance defense litigation. In an effort to provide the best services possible and differentiate ourselves we have been discussing whether we should implement a project management system. I have been reading more lately about legal project management and hearing more about it. Do you have any thoughts along this line?

Response:

Legal project management has become the hot topic of late and we are seeing articles, workshops, and seminars on the topic. Over the years project management has evolved into its own discipline with its own jargon, tools,  methodologies, software, etc. Project management as a discipline can become quite technical and complex. Many of the techniques such as PERT and CPM came from the department of defense and were initially utilized to manage projects such as the Polaris Submarine and space projects. The construction industry makes extensive use of project management techniques.

Considering that a legal matter is a project, particularly a large litigation matter, with many moving parts there has been a push by clients and an effort by law firms to look for ways to improve the management of matters and related resources, costs, timelines, etc. and to improve and streamline the overall process. Legal Project Management is a customized approach to matter management borrowing and applying some of the principles of project management and incorporating into a simpler and leaner model. Numerous workshops, training seminars, and publications are being offered on the topic.

The Hildebrandt Instute if offering a workshop in Chicago on June 21-22, 2011. Here is a link to more information on the workshop.  Here is a link to more information on the workshop. Ark Group also has a new publication out called – Project Management for Lawyers as well. Another good book, which can be ordered from Amazon, is Legal Project Management: Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity, by Steven Levy.

As more clients push for improved processes and outcomes in the area of matter management and force various forms of fixed-pricing – law firms will find they need to utilize more sophisticated tools to ascertain matter risks, price services, and manage matters.

So I suggest you at least begin to evaluate some of the tools and approaches being used and get educated on them. However, be careful of getting into overly complex approaches and methods that are simply trying to push generic project management for it's own sake.

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

Apr 27, 2011


Contingency Fee Profitability: Can You Make Money From Contingency Fee Work

Question:

Our firm is a 12 attorney general practice firm located in the Phoenix metropolitan area. In additional to general practice, we do a fair amount of insurance defense work as well. In an effort to improve firm profitability we have been considering alternative fee arrangements – particularlly contingency fees – with some of our existing clients as well as venturing into personal injury plaintiff work. Can we improve profitability by doing more contingency fee work?

Response:

The CEO of the Howrey LLP, when interviewed about the law firm's recent dissolution, advised that deferred profits from contingency fee work led to the firm's demise.  Howrey is a good illustration of what can happen when the risks of contingency fee work is not considered or managed. 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 addtion, 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.

In essence the fundamentals of risk and return is at work and should be considered when accepting contingency fee work. You are betting that you can beat your hourly rate that you receive (or would receive) on hourly work. Contingency fee work often involves the risk of no fee at all, financing the case, long time periods before the case is concluded and fees are received, client advance investments, etc. For these risks the firm should be able to expect a premium. In other words – the effective rate on contingency fee cases should (on average) be greater than that for hourly work.

Many law firms are not receiving a "risk premium" at all and are often, on average, obtaining an effective rate close to their bill rate. So, do consider the risk involved and evaluate methods of mitigating the risk as much as possible. In general – don't dabble – but work to a portfolio of cases large enough to diverisfy your risks.

Herbert Kritzer has done extensive academic research over the years on contingency fees which can be found in his book – Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States. The book can be ordered from Amazon.com. Link to Amazon

While I have outlined a cautious approach here I want to also clarify that I have many clients that are doing very well and making a lot of money doing contingency fee work. It is the firms that did not grow up doing contingency fee work that "dabble" where I see the problems.

So proceed with caution – but go for it if it makes strategic sense for your firm.

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

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