Law Practice Management Asked and Answered Blog

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Aug 29, 2018

Law Firm Effective Rate Improvement

Question:

I am a partner with a sixteen-attorney firm in downstate Illinois and a member on our three person management committee. My responsibility on the committee in overseeing the firm’s finances and supervision of the firm administrator pertaining to accounting and finance. In reviewing our financial reports I have noted that our effective billing rates (realization rates) are not what they should be. We are reluctant to raise rates to our clients. What other steps can we take to improve our effective rates?

Response:

The most direct way to improve rate performance is to simply increase rates at an amount at least equal to inflation and to do so often (at least once a year). Without regard to whether this can be done, there are several other important techniques such as:

  1. Managing the client intake process
  2. Tailoring rates and billing policies to specific clients and matters
  3. Managing rate and billing adjustments
  4. Billing often and keeping the client informed
  5. Tying partner reward structure to rate performance
  6. Reporting rates achieved

Managing the client intake processes is probably the most important technique for improving rate performance. Intake management means:

Here are some ways to accomplish this:

  1. Effective preacceptance interviews
  2. Credit checking or prior payment history review
  3. Up-front discussions and arrangements
  4. Liberal use of retainers and advances for costs
  5. Early conflict of interest checks 
  6. Use engagement letters; and
  7. Management review of significant new clients or matters except accepted.

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

 

Aug 22, 2018

Law Firm Retreat Follow-up and Implementation

Question: 

I am a partner in a eighteen attorney firm in Milwaukee. Over the years our firm has held firm retreats, but the results have been disappointing – a lot of talk and little action. We have the same problem in our monthly partner meetings. We spend a lot of time in meetings – discussions and decisions made but little implementation. This week we are having a partner vote to decide on whether to have a retreat this year. Frankly, I will vote against it and I think it will be a waste of time. What are your thoughts concerning law firm retreats?

Response: 

I understand your frustration and concern. Many law firms have had similar experiences with retreats. Good ideas and decisions but no follow-up or implementation once the retreat is over. Often retreats are too loose with no structure or leadership.

Insure that the firm appoints a qualified retreat leader either from within the firm or someone outside the firm that has experience leading or facilitating retreats. Identify specific objectives and desired outcomes during the retreat planning phase and design in how follow-up and accountability for implementation will be achieved. Be sure you come away from the retreat with a specific plan for follow-up action on every problem discussed. For example, if you decide to start a talent search to fill specific position, or if you have assigned several partners members to work further on specific problems and report the results, it is important that individual assignments and target dates for reporting and completion be made explicit. Determinations of this kind should be recorded and made part of the minutes of the retreat. Further, a system of follow through meetings to assess progress is advised, in order to maintain the momentum achieved at the retreat.

Many law firms benefit considerably by incorporating specific retreat decisions into a twelve month plan and schedule of activities to meet firm objectives. Planning of this kind typically results in significant firm progress, even though there may be initial resistance to these efforts by some firm members.

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

Aug 15, 2018

Six Worries That Keep Law Firm Managing Partners Awake at Night

Question: 

I am a new managing partner in a thirty-five attorney firm in Tucson, Arizona. I replaced the previous managing partner who retired. He was the firm founder and had been in the position since the firm’s inception. I have had this position for six months and I am finding the job overwhelming – trying to serve my clients and managing the firm at the same time is very difficult. What are the major challenges that managing partners are having.

Response: 

I understand and appreciate your situation. Managing partners advise me that the following challenges are what keeps them awake at night:

  1. Managing cash flow. Investments in technology, higher salaries for attorneys and staff, and longer collection cycles are all having a negative impact upon cash flow. Contingency fee firms have additional cash flow challenges. Managing partners must insure that client bills are going out promptly, client payments are deposited promptly, and vendor bills are paid “just in time.” Cash shortfalls will have to be financed with additional partner capital contributions or bank loans.
  2. Satisfying hard to please clients. Institutional clients are demanding more from their law firms in terms of service offerings, geographical coverage, responsiveness, and fee arrangements. Law firms are finding that the market for legal services is a buyers market and that they must continually innovate in order to continue satisfying client demands. Many are conducting client satisfaction interviews with these clients in order to measure client satisfaction and identify needed improvement areas and new opportunities.
  3. Competition from other law firms and non-law firm service providers. The oversupply of lawyers, advertising, and the internet has increased competition between law firms. In addition to the competition between law firms, law firms also also facing competition from other service providers as well. Managing partners are finding they have to allocate more resources to advertising and marketing. Websites, internet search engine optimization, and pay-per-click internet advertising is becoming the norm for many firms.
  4. Getting new clients and keeping existing clients. Today clients are less loyal and more likely to switch law firms than in years past. Managing partners are having to work harder to retain existing clients and acquire new clients. Acquisition of new institutional clients often requires responding to request for proposals, bidding for engagements and projects, preparation of quality proposals, and making presentations to prospective clients.
  5. Succession and retirement of senior partners. Many law firms are experiencing a “bunching” of numerous senior partners approaching retirement at the same time. Succession and transition planning is critical to the continued success of these firms. Getting partners to openly discuss their retirement plans is a major challenge that managing partners are facing.
  6. Getting and retaining top talent. Acquiring and retaining top lawyer and staff talent is becoming more difficult and more costly for law firms. Even though there is an oversupply of lawyers on the market there is still a shortage of experienced lawyer talent in many practice areas. Lawyer search timelines and recruiting cost are on the rise.

 

 

 

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

Aug 07, 2018

Firm Administrator vs Director of Administration or Chief Operating Officer

Question: 

Our firm is a fourteen-attorney firm in South Florida. I am the senior member of a three member executive committee. Our firm is in the second generation of partners. The founders retired five years ago. Upon their retirements we changed our governance from a managing partner to an executive committee model supplemented with a office administrator – some refer to the position as the office manager. Our executive committee model has worked relatively well. The administrator that we hired five years ago is still in place but we are not satisfied with his performance. We believe that this is in part due to the fact that our expectations have changed. When we hired him we thought that we needed an office administrator primarily to manage the office staff and the billing and bookkeeping function. So we hired an administrator that had worked, as his first job out of junior college, as an office manager in an eight-attorney firm for two years and had an associates degree in accounting. He has does a good job with managing the staff and the billing and bookkeeping. However, we have now discovered that we want more – we want executive level leadership. We want someone that is respected by all the attorneys and can:

  1. Provide overall leadership
  2. Help lead the executive committee
  3. Develop create solutions to problems
  4. Lead the associates
  5. Serve as marketing director, etc.
  6. Take the lead in strategic planning and implementation of a strategic plan

I welcome your thoughts and opinions.

Response: 

Yes your expectations have indeed changed. Your administrator has not been able to grow in the role expectations that you now have for the position and does not have the education or experience to meet your new demands.

My observations are as follows:

  1. You would like your administrator to act and think like an owner/partner.
  2. You would like your administrator to be a quick learner.
  3. You would like your administrator to provide a higher level of management insight and bring business training and experience to the table.
  4. You would like your administrator to be accepted as a peer professional by all the attorneys in the firm.
  5. You would like your administrator to be innovative and willing to question the status quo.
  6. You would like your administrator to provide recommendations concerning new methods for  improving the firm’s operations and profitability.
  7. You would like your administrator to be able to resolve most administrative issues with minimal guidance from the executive committee.

I believe that you would like an administrator to serve more in the role as a Director of Administrator or Chief Operating Officer and your present administrator simply does not have the education, experience, and maturity to function in this capacity. If you want someone to serve in this capacity you will have to hire someone with degree credentials – such as a MBA or CPA, that will facilitate the candidate’s acceptance by other attorneys in the firm as a peer professional as well as provide the candidate with the academic tools needed to carry out the expectations of the position. In addition, you need to hire someone that has ten years plus as a director of administration or chief operating officer position in a similar size firm or company – preferably a firm that provides professional services such as a law firm, accounting firm, engineering firm, etc. You will have to look beyond the titles that candidates have had and inquire into the specific duties and roles performed. You will need to back up this inquiry with solid reference inquiries.

A director of administrator or chief operating officer position is rare in a fourteen-attorney firm. Many firms your size have administrators or office managers similar to the office administrator that you currently have. The downside to establishing such a position in your firm will be the salary that you will have to pay – more than many of your attorneys and even some partners are being paid – and turnover in the position when an opportunity from a much larger firm comes along.

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

Aug 01, 2018

Law Firm Merger or Of Counsel Arrangement and Due Diligence Information from Larger Firm

Question: 

I am a solo practitioner in upstate New York and I hope to retire three years from now and move to Florida and spend my retirement years there with my family. I have been talking with a larger firm, twenty-attorneys, in Albany that has an interest in me either merger my practice with their firm or joining as Of Counsel. My plan would be to work three more years, gradually phase back, and transition clients and referral sources.

I have had several meetings with the partners in the firm and they are now asking me for detailed due diligence information – tax returns, financial statements, etc. I have no problem providing these documents however I was wondering if I should be asking them for information. What do you think?

Response:

I believe that you are entitled to similar due diligence information from the other firm. You need to see what you are getting into.

Usually the smaller firm gets less – but they should share some information with you as you have with them.

I would ask for the following from them (or discuss with them):

  1. Five years profit and loss statements, balance sheets and tax returns.
  2. Lawyer and staff headcount for each of those five years.
  3. Current hourly billing rates.
  4. Description of practice area mix of clients by dollars collected – practice type and office location.
  5. Description of how the firm bills (hourly, flat rate, contingency)
  6. Copy of all leases (office space, equipment)
  7. Copy of malpractice insurance policy and last application.
  8. Salaries and benefits for equity and non-equity partners.
  9. Any governance plan or agreements.
  10. Copies of all partnership agreements or operating agreements for all business entities.
  11. Any documents pertaining to the retirement of partners including information as to obligations for partners who have already retired and those nearing retirement.
  12. Compensation data for equity and non-equity partners.
  13. Copy of the written compensation plan for equity partners if one exists or if not a discussion of how the compensation system works.
  14. Information on the line of credit and copies of all debt agreements.
  15. Copies of third party vendor agreements (equipment leases, subscriptions)
  16. Copy of the firm’s present malpractice insurance policy and most recent application.
  17. List of benefits provided.

I presume that you all have discussed any potential client conflicts of interest, etc.

You need to zero in whether the arrangement is going to be a merger or Of Counsel arrangement. If the arrangement is to be an Of Counsel arrangement the firm will be less likely to be willing to share all the information on the list and you will have less need as well. However, I believe you should at least have the basic financial and compensation information.

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

 

Jul 24, 2018

Law Firm Succession Planning – Getting Partners to Discuss their Future Plans

Question: 

I am the firm administrator for a twenty-five attorney firm in Baltimore, Maryland. We have fourteen partners and nine are in their sixties. We have no succession or transition plans in place for senior partners. Every time I bring up the topic there is a resistance to even discuss the topic. I would appreciate any help that you can provide.

Response: 

A decade ago, only the more proactive, well-managed law firms had in place programs and provisions for senior partner succession and transition. A majority of firms simply had not addressed or even given serious thought to the eventual retirement and exit of their senior partners. However, in the last five years, I have seen a lot of interest in succession, transition, and exit planning. The avalanche of baby boomers reaching retirement age has fueled this interest. Firms from the largest to the smallest are getting proactive and actively addressing succession and transition of senior partners. Some are putting in place formal programs, while others are at least addressing succession and transition informally using ad hoc approaches.

A recent Altman Weil Transition Survey gives us a glimpse of what other law firms are doing. Here are a few highlights from their survey concerning responding law firms.

Many other law firms are finding it a major challenge to get senior attorneys to talk and share their plans concerning retirement. In many cases the families of senior attorneys are having the same challenges. Coming to terms with aging is a difficult topic. In the case of law firms, often senior attorneys simply don’t know their future plans themselves, need the income, fear that others shareholders/partners will steal their clients, or the firm simply does not have a mechanism in place that mandates transition planning. Some firms are implementing mandatory retirement and others are putting in place financial incentives to motivate early transition of clients. Client loss is the most significant concern.

Keep at it and don’t give up but it may take a series of baby steps. Educate your partners on the risks of “doing nothing”. Provide them with articles and other resources and keep the topic on the agenda.

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

Jul 19, 2018

Law Firm Structure and Elevating Associates to Partnership

Question: 

I started my firm as a solo nine years ago in New Orleans. My practice focuses on maritime defense litigation. Over the years I have added associates and currently I have six associates working for me. I am overwhelmed with work – from the legal work that I am doing in addition to the business development and firm administration. My thought is that I should consider restructuring the firm by making some of my associates partners so I can offload and share some of the administrative responsibilities. I would like your thoughts. What are other firms in my situation doing.

Response: 

Years ago when I started in this business there were solo practitioners and there were multi-attorney firms that were partnerships. There were not many multi-attorney firms that were what I call sole owner firms – firms will many attorneys and just one owner. This has changed. More and more attorneys don’t want to be in partnerships with other attorneys. Sometimes this is a result of bad experiences in other partnerships. In other cases they simply want to go it alone. Also, more and more associates don’t want to take on the stress and financial obligations of partnership – they simply want a job that provides them with a decent income with work life balance. I have law firm clients with sole owners, fifteen to twenty attorneys, and fifty to seventy staff employees. These firm owners have hired firm administrators, marketing managers, and other such talent to offload the administration. While these firm owners have been enjoying the fruits of sole ownership eventually they will have to reevaluate their situation when they begin planning their succession and exit strategies.

I think you have to ask yourself the following questions:

  1. Is adding partners the best way to offload your administrative responsibilities? Should you hire a firm administrator?
  2. Are  you ready for partners?
  3. Do you have associates that meet your requirements for partner admission? Have you thought about these requirements?
  4. Do the associates that you would consider for partnership have an interest in being partners?

Give this some more thought – don’t just make partners to have partners or to have someone to handle administration.

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

 

Jul 11, 2018

Law Firm Goodwill and Valuation

Question: 

I am the owner of a six-attorney litigation firm in San Francisco Bay area. I am sixty and starting to give though to gradually transferring my interest to associates in the firm. I have heard other attorneys mention that I should get some goodwill out of my practice. I would appreciate your thoughts.

Response: 

Many law firm owners prefer to leave a legacy and keep the firm “within the family” and transition the firm to non-equity partners or associates in the firm at a discounted value and buy-in as an incentive to stay on with the firm and a reward for their years of dedication to the firm.

Some law firms – typically second generation or later firms – allow non-equity partners or associates to become equity owners with no buy-in whatsoever. The thought being that the real assets of the firm are its talent – its people and the firm’s priority is to retain and keep the best talent that it can. These firms also do not have hefty buy-outs for partners or shareholders leaving the firm other than possibly the initial founders of the firm. Over the years, such firms fund retirement through 401ks, profit sharing plans, and other mechanisms. When partners or shareholders leave the firm, they get their cash-based capital account, or share of retained earnings and their share of current year earnings.

A “founders benefit” is sometimes put in place for firm founders in which they may be paid a share of the accrual-based capital or retained earnings – WIP and A/R. They may also be paid a goodwill value as well either in the form of a multiple of earnings or a specific sum based upon a multiple of gross revenue.

The problem in many firms is that associates are still paying off student loan debts and they don’t have cash available to purchase the owners interests. As a result, if you don’t start early, the cash often has to come from future cash flows that are available after the owner leaves the firm from the compensation that the owner is no longer receiving.

You need to start early, get people committed and start selling affordable minority shares years before you retire so you can get at least half of your ownership interest paid for before you leave the firm and the other half paid out over a five-year time period.

Wait too long and your associates may feel they can just wait you out and inherit your clients without having to pay you anything.

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

Jul 04, 2018

Lawyer Performance and Setting Expectations

Question:

I am the owner of a real estate practice in Rockford, Illinois. I have two offices – one in Rockford and the other in Chicago. I started my practice twenty years ago and have had my associate for the past five years. He works in the Chicago office and I work in the Rockford office. Prior to this associate I had two other associates that did not work out. My present associate has fourteen years’ experience and worked in three other law firms prior to joining my firm.  While he has been with me for five years I am not happy with his performance. The legal assistant that works with him has advised me that he often does not come in the office until ten and often leaves in the middle of the day. Clients have complained that he does not return phone calls or emails. His production is low – his annual billable hours have never been above 1200 hours. I am paying him a salary of $98,000. I have had numerous conversations with him about these issues to no avail. Frankly, I am sick of it – I don’t trust him and things need to change. What should be my next step?

Response: 

I find that often owners of law firms and partners in multi-partner firms when dealing with associates often fail to really lay their cards on the table when counselling associates. They beat around the bush and fail to lay out expectations and consequences for non-compliance.

As owner of your firm you can’t beat around the bush and be sheepish concerning your expectations concerning desired performance and behavior in the office. Confront the performance or behavioral problem immediately. Manage such problems in real time. Don’t wait for the annual performance review and don’t treat serious problem as a “self-improvement” effort. Tell him how you feel about the performance or behavioral issue, the consequences for failure to resolve the issue, your timeline for resolving the issue, and the follow-up schedule that you will be using to follow-up and monitor the issue. If he must resolve the performance or behavioral issue in order to keep his job tell him so. He may need this level of confrontation in order to give him the strength to be able to deal with his issues.

Being a wimp does not help you or him. Tell him like it is and conduct a heart-to-heart discussion. You will be glad you did.

I would set a timeline for his performance improvement – say 60 or 90 days with weekly coaching follow-up meetings. Document these meetings. If he does not meet your expectations by the timeline you should terminate his employment and look for a replacement.

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

Jun 27, 2018

Elder Law Firm Expanding into Personal Injury and Other Areas

Question: 

I am a partner in a four attorney law firm in a small town south of Waco, Texas. We have two partners and two associates. Our practice is limited to elder law, estate planning, and estate administration. The practice was formed thirty years ago by the  two partners. The firm has built a strong brand in elder law and estate planning/administration and does a significant amount of business in several other counties. The firm is doing well financially. Our main problem is that we are overwhelmed with work and we need to hire an additional attorney. We have interviewed an attorney that is a partner in another two attorney law firm in the area that has some limited experience in small business corporate work and estate planning. However, most of his experience is in personal injury plaintiff, criminal, and family law.  If he joins our firm he wants to continue to develop these practice areas as well as bring his personal injury, criminal, and family law cases with him. Bringing him on board could solve our lawyer staffing issue as well as increase our business. Should we bring him on board?

Response: 

It sounds like the attorney you are considering is a trial lawyer and has limited experience in your practice areas and he wants to expand his personal injury, criminal, and family law practice. You need help in your core practice areas.

This would cause your firm to become more of a general practice firm rather than the specialty firm that you are presently. While there are general practice firms that handle elder law and estate planning/administration, more of the successful firms your size are specializing in these practice areas. Bringing these practice areas into your firm would totally change the firm’s brand, image, culture, and strategy. Marketing will be more complex. The firm will have to fund client advances for the personal injury cases. You need to revisit your strategy and ask whether you want to go this direction. Personally, I think you should pass. If you want to expand into other practice areas you might consider real estate and corporate. I have several elder law/estate planning firms that handle real estate and corporate work.

I would cast a wider net and look for additional candidates. I would start by looking for an experienced elder law/estate planning attorney. However, these attorneys are hard to find. You might have to hire and train a recent law school graduate.

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

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