Law Practice Management Asked and Answered Blog

« Earlier | Later »

May 08, 2018


Of Counsel Arrangement as a Law Firm Exit Strategy

Question: 

I am the owner of a solo real estate practice in Merced, California. I have two staff members that work for me. I am the only attorney in the firm. I am sixty years old. While I am concerned about the long term exit from the practice I am also concerned about office coverage in case something would happen to me in the short term. I appreciate any recommendations that you may have.

Response: 

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

May 02, 2018


Law Firm Overhead and Profit Margins

Question: 

I am an attorney in New Orleans that has been a lawyer for ten years. I practiced with a small firm for eight years as an associate and then opened my own firm two years ago. I primarily work from home supplemented with a virtual pay-as-you-go office. I do not have any staff employees. I have been approached by a fourteen-attorney firm that would like me to join their firm as an income partner. Their offer includes a salary which I feel is low and a bonus based upon a percentage after covering my salary, other direct costs, and indirect firm overhead. The overhead allocations seem extremely high to me. In my practice I am bringing in around $100,000 in gross fees and my overhead averages $10,000-$15,000 per year. My profit margin is around 90%. I feel like I am better off building up my practice rather than accepting their offer. What are typical overhead and profit margins for law firms?

Response: 

We have to be careful how we define overhead. Overhead is generally to be considered all law firm expenses less attorney salaries and sometimes less paralegal salaries. The overhead ratio would then be the overhead divided by firm revenues. Profit margin is  expressed in terms of owner (partner, shareholder, etc.) earnings. In other words what is going into the owner’s pockets in terms of salary, share of profit, etc. Owner earnings is firm revenue less all firm expenses including associate and paralegal salaries but not including owner salary or compensation. The profit margin is total expenses (excluding owner compensation) divided by firm revenues.

A desirable profit margin range for law firms is thirty-five to forty-five percent.  Some firms are able to attain fifty percent. Profit margins depend upon the type of law practice, leverage ratios (associates to partners), how well the firm is managed, etc. I have some very successful firms with profit margins as low as twenty percent but the partner earnings are very high.

Your current overhead and profit margin is not sustainable in the long-term. While you have low overhead and a high profit margin you also have low earnings. You are only earning $85,000. You will soon reach a point where in order to increase your revenues you will have to hire people, acquire office space, and buy phone systems and other equipment. When this occurs you will be in a similar situation as to the law firm you are talking with.

Click here for our financial management topic blog

Click here for our law firm profit improvement blog

Click here for articles on other topics

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

Apr 25, 2018


Law Firm Management Committee vs Full Partnership

Question: 

I am a partner in a fourteen attorney firm in San Antonio, Texas. We have eight partners and six associates working in the firm. The firm was founded twenty years ago, so we are a first-generation firm. Two of the partners were the founders of the firm and the other six were made partners in later years. Currently our method of governing the firm is handled by the full partnership. While each partner has one vote, we try to manage by consensus. We do not have a managing partner or any committees. We have an office manager that primarily handles the accounting and the staff oversight. The partners meet weekly to discuss issues and make decisions. We are beginning to have issues with our management structure. Partners are not showing up for the weekly meetings and complaining about the amount of time it is taking away from servicing their clients. Should we consider a different approach? We would appreciate your thoughts.

Response: 

You are at a difficult size, still a small partnership but big enough that management by all may no longer be working for you. I believe that you should consider either a managing partner or a management committee of three partners elected by the partnership. For this to work all of the partners must agree to surrender some degree of independence to a managing partner or a management committee. I would start with putting together a list, or job description, for the managing partner or management committee. Partnership agreements often outline management decisions (powers) reserved for the partnership with all decisions handled by the managing partner or management committee. If your partners are unwilling to  surrender some degree of independence then changing to a managing partner or management committee may prove to be wasted effort.

Click here for our blog on governance

Click here for articles on other topics

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

Apr 17, 2018


Subjective Law Firm Partner Compensation Systems

Question: 

I am a partner in a twelve attorney commercial litigation law firm in Palm Beach, Florida. There are five partners in the firm. We are contemplating merging with another firm in the area of similar size. We have done our due diligence and have come across a possible non-starter – the compensation system. Our compensation system is totally objective – formula-based very close to an eat-what-you-kill system. The other firm has operated under a subjective system and they are pushing for the firm to operate under this type of system. We would appreciate your thoughts and enlightenment concerning subjective-based systems.

Response:

Subjective-based systems are the most commonly used approach to setting partner compensation, especially in larger firms. More and more firms your size and larger are moving to subjective systems as a result of the failure of other systems to account for the full range of contributions that partners make to the law firm. Subjective systems can take on a variety of forms but the central theme of such systems is that they rely on a subjective assessment of partner performance, without reference to specific weighting of factors or a set formula. This is not to say that subjective systems lack structure or predictability, or that they don’t consider objective financial data. Successful subjective compensation systems include these elements and more.

Subjective compensation systems vary widely. Here are some of the most common elements found in subjective systems:

In additional to subjective compensation systems some firms used hybrid systems that employs objective (formula) and subjective components.

Subjective systems are not for all firms. They will fail with out strong, trusted, leadership. In very small firms it is difficult to structure a compensation decision making body.

It sounds like your firm and the firm you are thinking of merging with may come from two very different cultures. Subjective systems work well for firms that are “firm first” firms but not for lone ranger firms that often operate under eat-what-you-kill systems. If you firm is not a long ranger firm and your are in fact a “firm first” firm or aspire to be such you may be able to adapt to a subjective system. However, you may need a post-merger phase-in period. Another comprise approach might be a hybrid system.

Click here for our blog on compensation

Click here for our blog on mergers

Click here for articles on other topics

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

 

 

Apr 11, 2018


Law Firm Practice Groups

Question: 

I am a partner and a member of our three-member executive committee. Our firm is a twenty-five attorney litigation defense firm in Kansas City, Missouri. We handle matters such as personal injury, medical malpractice, professional malpractice, products liability, and health care law. Each attorney handles and manages his or her own cases and operates in isolation of the other partners in the firm. Other than attending a quarterly partnership meeting there is little interaction among the partners. We have been discussing whether we should form practice groups. We would appreciate your thoughts.

Response: 

Practice groups can be excellent vehicles for enhancing communications, attorney and staff skill development and training, practice management, and marketing. Practice groups should share the mission and vision of the firm as well as goals of enhancing services to clients by developing the skills of the members of the group in a particular legal specialty or industry niche and developing business for that particular group. Practice groups should not operate as isolated islands but should be structured and integrated with the firm. Specifically, functional practice groups should:

Practice groups can be structured around legal specialties such as personal injury, product liability, and professional malpractice. Other practice groups can be structured around industry niches such as energy, health care, etc. In cases where a firm has a very large client a practice group can established for that specific client.

While practice groups can have their advantages, I have found that in many firms they are dysfunctional. They do not meet on a consistent basis, have no goals, or direction, poor leadership, and seem to accomplish little. To be effective  practice groups must:

  1. Be setup by the executive committee with specific goals and have a written charter developed by the executive committee.
  2. Effective leaders should be appointed by the executive committee to serve as chair of the practice group assigned. Specific roles should be identified as well as expectations.
  3. Practice group chair leadership effectiveness should be a factor in the compensation system.
  4. Practice groups should have written strategic plans that integrate with the firm’s strategic plan.
  5. Practice groups should meet monthly.

I believe a practice group would be a logical direction for your firm. You might want to start slow and try a “pilot” test group where there appears to be significant interest and see how it develops.

Click here for our blog on governance 

Click here for articles on other topics

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

 

 

Apr 04, 2018


Associate Attorney Motivation

Question: 

Our firm is a fourteen attorney firm in Chicago. There are nine partners and five associate attorneys in the firm. Our practice is limited to insurance defense. I am one of the founders and senior partners in the firm and have been practicing for 35 years. We are having problems getting our associates to produce at the levels that we need for the firm to be profitable. We have a 1800 annual billable hour requirement and several of our associates aren’t even close. We have a bonus system that pays associates a bonus based upon billable hours exceeding 1800 billable hours. What are we doing wrong?

Response:

It often takes more than setting up a bonus system and then leaving it on autopilot. I am finding that the intrinsic reward of doing a good job and meeting the expectations of the firm’s partners are as important as the bonus system. In client law firms that have had similar problems we have found that by supplementing the bonus system with monthly reviews and coaching sessions with associates not meeting their targets has made the difference. Here is an outline of the process:

  1. Review you monthly billing/hours reports for all associates each month.
  2. Identify those are below targets and expectations.
  3. Meet with those associates that are below targets and expectations.
  4. Discuss why there are having problems meeting expectations. Lack of work, not working enough hours, poor time management habits, or poor timekeeping habits.
  5. Identify solutions to the above problems.
  6. Monitor and follow-up.
  7. Continue to meet every month until such time as the associate is meeting targets and expectations.

The bonus rewards those that want to push beyond the 1800 billable hours but does nothing to solve the problem of those not meeting the 1800 billable hour expectation.

Click here for our blog on career management

Click here for our blog on human resources

Click here for our blog on compensation

Click here for articles on other topics

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

 

Mar 28, 2018


Law Firm Growth Planning

Question:

I am a partner in a six lawyer firm in Jackson Mississippi. There are three partners and three associates in the firm. The firm is a insurance defense litigation firm. Our firm has been at its present size for many years, revenues have been flat, and profits have been shrinking. The partners have been discussing the pros and cons of growth and we would like to significantly grow the practice. A couple of our insurance company clients have asked us to open offices in other states and we are giving this consideration. Initially, we would open two other offices and we anticipate that this would require us to hire six additional attorneys. We appreciate any thoughts that you have.

Response: 

This is a huge step and I suggest that you give it careful thought. Here are a few of the issues you should consider:

  1. Firm Size – opening two branch offices and hiring six additional attorneys all at once is a major undertaking. This would double your firm size. A twelve attorney firm is quite different that a six attorney firm and requires a different approach to management, structure, etc. This would tough enough if the expansion were not in remote offices but in remote offices I believe the growth is too aggressive. I would start with one branch office and phase in the work and attorneys. Hopefully, you have a commitment from more than one client to send you work for a given location.
  2. Branch Office Staffing – staffing the office, especially with attorneys, will be a major issue. Unless you have attorneys in your office now that are licensed in these states you are going to have to hire local talent. How will you integrate the cultures of the two firms, prevent the remote offices from operating as separate silos, and keep the new offices from splitting off in a few years and starting a competing firm. Quality attorney talent will be hard to find and those that you do find will be reluctant to want to work for a small firm with no footprint in the local area. It is always preferable to staff a branch office, at least initially, with attorneys from the home office.
  3. Structure and Management – a larger firm will require a more sophisticated structure and approach to management. Will the attorneys hired for the remote offices be partners or associates? Will you need to create a non-equity tier? Who will manage the remote offices? Will you need to hire a firm administrator?
  4. Cash Flow – Growth will put a strain on the firm’s cash flow and will require additional working capital. Your partners will have to invest additional capital or the firm will have to take on debt.
  5. Systems – Growth will require you to examine your IT systems and software that you are currently using. They may not be sufficient. Consider how you will connect the computer system of the main office to the remote offices. How will phone systems be connected?
  6. Policies and Procedures – policies, procedures, and protocols will need to be developed and documented.
  7. Compensation – You present attorney compensation system may no longer be adequate. Consider whether a new approach will be required to attract new attorney talent.
  8. Financial Management – Your approach to financial management may need to be more formal that it is now. Budgeting will be a necessity.
  9. Facilities – Office space will have to be located and leases signed unless you start out with an executive suite type of arrangement, such as a Regus office. There are pros and cons to starting this way. One the one hand it provides a low risk way to enter a new market but on the other hand it signals that you are not committed to the market and you have just one toe in the water.

These are just a few of the issues that you will need to consider. Do your homework and due diligence on this before you jump feet first.

Click here for our blog on strategy

Click here for our blog on profit improvement

Click here for our blog on offices and facilities

Click here for articles on other topics

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

 

 

 

Mar 21, 2018


Law Practice Acquisition Proposal

Question:

I am a partner in a three partner six attorney in Chicago. We have been having discussions with another law firm in the city regarding us acquiring their practice. The owner is seventy years old and wanting to retire and exit his practice. My partners and I have looked over the numbers and believe this would be an excellent opportunity for us to expand our client base. The practice handles the same type of work that we do. We are unsure what our next step should be? Do you have any suggestions?

Response: 

I would start by asking for all the due diligence information that your can get your hands on. For example:

  1. Profit and loss statements and balance sheets for the past five years
  2. Income tax returns for the past five years
  3. Copy of office lease
  4. Copy of all equipment leases
  5. Copy of most recent malpractice application
  6. Equipment and furniture inventory list
  7. Personnel list with current compensation and benefits paid, length of time with the firm, current job duties, etc.
  8. Information pertaining to benefits offered employees.
  9. Copies of marketing and business plans.
  10. Reports showing billable hours, fees collections by timekeeper, etc. for past five years.
  11. Reports showing fees collections by clients and practice areas for past five years.
  12. Current work in process and accounts receivable report.

Insure that you have done a thorough conflict of interest check and insure that you review the Illinois rules of professional conduct concerning sale of law practice. Give consideration to the value of the firm and what you are willing to pay for it and how? What assets do want to purchase – just the goodwill or will fixed assets be included? What about work in process and accounts receivable? Is there a building involved and if so do you want to purchase the building and real estate? Do you want to take on any of the employees? Do the numbers work for you? What terms would be acceptable to you?

The next step is to prepare and present a proposal. Some of the following elements would be included in a proposal:

Once you have prepared the proposal present it to the owner of the firm and go from there.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

 

 

 

 

 

Mar 14, 2018


Attorney Career Progression – Competency Model

Question: 

I am a member of a three member executive committee with our twelve-attorney firm in San Antonio, Texas. One of our responsibilities is oversight of our career development program for associates and non-equity partners. We  have been discussing our policy of admitting associates to non-equity partner and non-equity partners to equity partner. Presently, we do not have anything in writing regarding timeline for consideration or what qualifies one to move to the next level. Associates and non-equity partners are unhappy with the present process. They want more clarity concerning their career advancement within the firm. You advise would be helpful to us.

Response: 

Several of my clients are developing career advancement programs that incorporate a competency-based approach that  outlines specifically what is takes to be successful and advance from associate to non-equity partner and from non-equity partner to equity partner. Rather than leaving the formula for success in the minds of the equity partners, a competency model gives each attorney in the firm an understanding of how he or she will need to perform in order to be perceived as progressing, an ultimately, as successful. Competency models offer transparency and clarity. The model outlines specific behavioral observations as the primary source of performance information. Benefits are as follows:

Associates are presented with clear information on expectations for their level of experience and a road map of what is expected as they progress. Specific expectations are laid out for progression to non-equity partner as opposed to a specific timeline.

Non-equity partners are presented with clear information on expectations for their level of experience and a road map of what is expected as they progress. Specific expectations are laid out for progression to equity-partner as opposed to a specific timeline.

Equity partners and senior lawyers benefit from a consistent description of performance standards that allow them to access performance, assign work effectively, and offer more meaningful career guidance.

The firm has a consistent methodology for making and compensation decisions.

In order to work, a competency model should be integrated with attorney recruiting, performance evaluations, training, and compensation systems. Associates and partners must invest time in attorney development.

Click here for our blog on career management

Click here for our blog on human resources

Click here for articles on other topics

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

 

Mar 07, 2018


Law Firm Marketing – Using Articles to Demonstrate Expertise

Question: 

I am new non-equity partner in a sixteen attorney firm in Phoenix, Arizona. My equity partners are telling me that I now have to do more than generate billable hours and perform quality work for clients. They now expect me to begin bringing in clients. I am not sure where to start.

Response: 

I often advise attorneys that while what you know is important what you want to be known for is more important. Just having your name known is pretty useless unless it is known for something. An outstanding personal injury plaintiff lawyer – not just a good lawyer. In law firms it is the reputation for expertise that matters, not just the reputation. Therefore, a successful marketing program must project and demonstrate expertise. This can be accomplished in the following ways:

  1. Byline Articles
  2. Authored Books
  3. Presentations
  4. Client Testimonials on the firm’s website.

While biographies on the website are important, prospective clients and referral sources are looking for proof of expertise. Articles, authored books, presentations, and client testimonials provide such proof.

One of the best and reliable ways of providing such proof is the article. In a byline article, you don’t have to say that your are an expert – the fact that you wrote the article, discussing a particular legal topic, says it for you. Its your expertise on display whether the article be in a print publication or posted on your website, blog, or other location.

An article is one tool that you can use where you have control – you can say what you want to say and say it in your way. In most cases, if an article is acceptable to a publication, an editor won’t change the thrust of it.

For most legal and business trade journal publications that accept articles you do not have to be a well known writer to write an article that will be accepted by these publications. You simply have to know what you are talking about. Editors will help with the formatting, style, and syntax.

If you retain the copyright to your article you can re-purpose your article and use it on the firm’s website, reprints, firm brochures, and as a future chapter in your first book.

Click here for our blog on book writing

Click here for our blog on marketing

Click here for articles on other topics

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

 

 

 

    Subscribe to our Blog