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Dec 17, 2013
Law Firm Management – Managing in a Time of Shrinking Demand and Excess Capacity
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.
This is an issue that many firms are experiencing. Here is what I am seeing in firm after firm:
- Lower billable hours – in some firms hours are 100 to 200 hours less per attorney than they were a few years ago.
- Lower or stagnant collected fee revenues.
- Increased expenses
- Lower or stagnant profits and profit margins resulting in depressed partner earnings.
- Lower associate turnover (due to economy and employment situation for lawyers – many associates are staying put – getting raises – resulting in higher production cost structure)
- 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:
- Find ways to use the excess capacity rather than lay off lawyers completely. (This was considered a last resort)
- 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.
- 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.
- Work hours were reduced for newer attorneys and staff that could not achieve full utilization.
- 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
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