Law Practice Management Asked and Answered Blog

« Earlier | Later »

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/

Click here for articles on other topics

Click here for our archive blog on strategies

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

 

Jun 06, 2017

Law Firm Collections/Retainer Management – Using a Retainer Follow-up Report

Question: 

I am the managing partner of a nine attorney general practice firm in the Chicago suburbs. We practice in the areas of estate planning/administration and family law. While our estate planning and uncontested family law work is done on a flat fee basis our estate administration and contested family law work is time billed. We collect initial retainers for these matters but we fail to insure that the retainers are replenished. We are having accounts receivable collection problems as a result. I would appreciate your thoughts.

Response: 

This is a common problem that I see in firms doing estate administration and especially family law. The best way of managing your accounts receivable is to have less in outstanding accounts receivable in the first place. You do this by staying on top of your retainer balances compared to your work in process and ask the client for additional retainer before the work in process exceeds the retainer balance. In order to stay on top of retainer replenishment you need to develop what I call a retainer replenishment report and have someone assigned to reviewing the report daily and advising responsible attorneys to contact the client when work in process has hit a certain threshold (percentage of retainer used). Some firm’s present the report at a weekly attorney meeting and determinations are made regarding additional retainers to request. Other firms assign the responsibility to the firm administrator to automatically bill for the additional retainer. It is also important to insure that ongoing work is managed in a way that an excessive amount of work is not committed to a matter until the additional retainer replenishment is received.

A retainer replenishment report is not a standard report in many billing systems. You may have to create a custom report in your billing system using a report writer or in a worst case drop a accounts receivable report to an Excel file and add in some columns for the other information.

Here are the suggested data fields/columns for such a report:

Responsible attorney
Client/Matter name
Retainer Balance (typically this would be the balance in the trust account)
Unbilled WIP Fees
Unbilled Cost
Total Unbilled WIP
75% Retainer Threshold
Amount Over/Under Retainer
Additional Retainer Requested
Total Amount Retainer to Bill (Amount WIP over retainer plus additional retainer requested)

Many family law firms have advised me that after learning the hard way they are now doing a good job at this and advising me that they have minimal accounts receivable issues.

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

 

 

 

 

May 31, 2017

Law Firm Governance – Partner Participation in Management

Question: 

I am the founder, majority partner (80%), and managing partner of a twenty two attorney firm in Phoenix, Arizona. The firm practice is focused in the area of health care. There are twelve equity partners, five non-equity partners, and five associates. I manage the firm as a benevolent dictator. I am becoming overwhelmed trying to manage the firm and practice law and I believe the firm is now at a size where others must become involved in managing the firm. I have been considering forming a committee of all the equity partners to manage the firm. Your thoughts are welcomed.

Response: 

While I believe that you are of a size that warrants broader participation in the governance and management of the firm you can go too far. Broad participation in decision making and consensus building slows things down. It can also make it difficult to reach a definitive conclusion. Getting all the partners to agree takes time. Broad participation can also diffuse responsibility. If everyone is in charge no one is in charge. In law firms whose partners are overly deferential to their partners’ views, the decision-making process often seizes up. Unless firm partners who, when necessary, will assert themselves and use their influence to press for action, the only decisions it’s likely to make are decisions not to decide.

I believe that you should stop short of broad participation by all the equity partners. Consider a three member executive committee elected by the equity partners on three-year staggered terms. This committee would have responsibility for the general management of the firm not delegated to your firm administrator if you have such a position in your firm. Committee responsibilities would include financial management, human resource management/oversight, client development, IT systems oversight, procedures and policies, etc. Establish proper structure for the committee with a chair, identified roles and duties for each member, defined meeting schedule, and agenda and meeting minutes. Define in your partnership agreement those powers that are restricted to a vote by the full partnership and the rules for voting – one partner one vote or vote by percentage interest. Other than those powers restricted to the full partnership partners should let the executive committee manage the firm and not second guess.

Click here for our blog on governance

Click here for articles on other topics

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

May 23, 2017

Solo Practitioners Best Friend – Law Practice Continuation Plan

Question: 

I am a sole practitioner in Peoria, Illinois. My firm is a general practice firm that services clients throughout Central, Illinois. I have four staff members. I am fifty eight. While I have enjoyed having my own practice for the past twenty years I am concerned – what if something were to happen to me today or tomorrow – what is my backup plan in the event of short-term illness, disability, death, and even vacations. How would the firm keep operating? Who would take care of the client’s needs? How would my staff be taken care of?

Response: 

Sound practice continuation arrangements can solve this dilemma and preserve practice value and can help prevent a lawyer’s spouse or immediate heirs from facing a hasty sale or disposition of the practice in an emergency. A practice continuation arrangement can also give lawyer practitioners, their staff, and their family’s peace of mind.

A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract made between an individual lawyer or a small law firm and another lawyer or law firm. The arrangement describes a course of action to transfer a lawyer’s practice and sets payment for its value. In the event of vacation, temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the business interests of the lawyer or law firm’s clients and the financial interest of the lawyer and his or her family.

Approaches

There are different kinds of practice continuation arrangements. Typically, a lawyer enters into a one-on-one agreement with another sole proprietorship, partnership, limited liability company, or professional corporation in the community. Agreements can range from simple “dual coverage for each other” for vacation or other temporary absences to sale of the practice in the event of long-term disability or death.

A practice continuation agreement’s provisions for the sale of a practice must contain a reasonable valuation and a realistic payment structure. What lawyers really want is to leave to their surviving spouses or heirs is something from all the hard years of work it took to build the practice. To accomplish this end, selling the practice at a buyer friendly price may be necessary. Law practices can lose value very quickly, so timing is vital.

Lawyers must invest time and effort to find suitable successors for their firms and to create useful, equitable, practice continuation agreements. The key is to finding the right person or firm. The investment of time is a good investment, however, because a good practice continuation arrangement will ensure that if a lawyer is unable to continue managing the practice, the value he or she has built over the years will not be lost. An orderly transfer of a practice to another lawyer or law firm is a substantial financial benefit to the lawyer’s family. At the same time, through the handpicked successor, the lawyer fulfills his professional responsibility to his clients. Lawyers who do not have these agreements should learn more about preserving the value they have created.

Click here for our blog on succession

Click here for out articles on various management topics

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

May 16, 2017

Setting up a Branch Office in Another State – Ask Your Clients

Question: 

I am the managing partner of a sixteen attorney insurance defense firm in Kansas City. Several of our insurance company clients have advised us that they are willing to send us cases in Texas. We have decided that we would like to establish an office in Texas. Our plan is to hire three lateral attorneys with seven to twelve years experience with Texas based insurance defense firms. We are not certain as to the best city to establish this office. We are thinking it should be a central location. We would appreciate your thoughts.

Response: 

Unlike many states that have one or two major cities Texas has several including Austin, Dallas, San Antonio, Houston, Ft. Worth, El Paso, Corpus Christi, and others. Austin, Dallas, San Antonio, and Houston are all desirable locations for branch offices. Austin is more centrally located if your goal is to service the entire state.

I think it would be risky to simply try to guess as to the appropriate location. Your clients may have law firms they are using in certain areas of the state and may be looking for you to serve a need in a particular area of the state. They may not be willing to pay your travel expense if you are on the other side of the state. If this is the case this is the area that you need to be. I suggest that you have a discussion with each of these clients and ask them where their cases are concentrated and where they would like to see you have an office. This should dictate the office location. Hopefully, each of these clients are on the same page. If each of these client’s cases are concentrated in different geographical areas ask your clients whether they are willing to pay for travel related expenses from a central location. This should guide your location decision.

I would also make sure that these commitments are solid from each of these clients. I would get commitments from each client as to the types and number of cases they envision sending to you so you can properly assess the profitability of establishing a branch office. Do some research on the availability of experienced lawyer talent in the area. I would also give some thought as how you plan to integrate these Texans into your firm and culture. See my prior blog on branch offices.

Click here for articles on other topics

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

 

May 10, 2017

Law Firm Billing Software – Cloud-Based vs. Desktop

Question: 

I am the managing partner of a twelve attorney firm in Toledo, Ohio. Our firm is evaluating new billing software and we are looking into some of the cloud-based solutions. We are currently using a desktop program that we have been using for fifteen years. The program handles our billing as well as our accounting. We have kept up with the updates to the program and the software has worked well for us. Several of our younger attorneys have used a couple of cloud-based billing programs in other firms and are trying to convince the firm to change over to one of these programs. They believe it is easier to enter their time sheets and they believe the software is easier to work with. What are your thoughts?

Response: 

I agree that the subscription cloud-based billing programs are easier to learn and use. In part this is due to limited function and capabilities. However, user simplicity is only part of the equation. The bigger question is whether the software will meet your needs. Many of the cloud-based programs were designed for solo practitioners or very small firms with limited reporting requirements. While these programs are getting better and inheriting more features they are still not up to par with the older desktop programs. Limitations include:

By the time you add in the cost of additional accounting software that you have to buy and maintain and factor in the number of users – subscription cloud-based solutions can get expensive for a firm such as yours that may have twenty users. The cloud-based billing software alone may cost between fifty to one hundred dollars per user per month – in your case one thousand to two thousand dollars per month. This cost will be offset by savings on hardware, IT support, user training, managing software updates, etc.

Cloud-based subscription billing software is getting better every year, is the wave of the future, and is a good solution for solo attorneys and very small practices. However, it may not have the functions and features that you need in your twelve attorney firm. Analyze the reports you are using now and what you need out of your system and then compare your requirements against the capabilities of each cloud-based system that you are considering.

Click here for our blog on technology

Click here for articles on other topics

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.

Click here for our blog on marketing

Click here for articles on other topics

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

 

 

Apr 25, 2017

When Should a Law Firm Partner Compensation System Be Changed?

Question: 

I am a partner in a fourteen attorney business litigation law firm in New Orleans. There are five partners in the firm. We are a first generation firm and all of the five partners are the original founders. Each of the partners have equal ownership interests and are compensated based upon ownership points. While this approach to compensation worked for many years this system is no longer working for us. Performance used to be pretty close but this is no longer the case. Your suggestions are welcomed.

Response: 

This is a common problem that new law firms eventually face. Here are a few thoughts:

Click here for our blog on compensation

Click here for articles on other topics

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

Apr 18, 2017

Law Firm Succession/Exit Plan – Merger, Selling, Laterals, or Promoting Associates to Equity

Question:

I am the owner of a small estate planning firm in Worcester, Massachusetts. I have three associates and three staff members. I am fifty five and am wanting to begin putting in place my succession/exit plan. I would like to retire and exit the practice in ten years. Would I be better off selling to another firm or attorney, merging the practice, bringing in laterals, or selling to one or both of my associates? I am interested in your thoughts.

Response: 

The biggest challenge for many firms, is finding the right WHO.

The who dictates the what – the actual succession/transition/exit strategy. In other words, many law firms find that they start down one path and end up on another. Not all non-equity partners and associates want to own a law firm. Not all lateral and merger candidates will be a good fit for your firm and culture. The key is the right relationship and sometimes that takes the form of making someone at the firm a partner, bringing in a seasoned lateral, merging with another firm, or selling the practice. Therefore, succession/transition plans have to be flexible and often the key is not get stuck in creating complex succession plans at the onset. Establish timelines, outline a general course of action, generate some momentum and see where that takes you. Then build the plan when you can see where the firm is headed.

Unless the retiring partner in a larger firm has a unique practice that requires the firm to conduct a search for lateral or merger candidates, larger firms will not have to embark on a search. However, solo practitioners and often sole owners will have to explore their options and conduct a search for the following:

This search and exploration often is the most time consuming and difficult part of the process and often the options identified through this process ends up dictating the succession/transition/exit strategy.

If a firm has associates, does the firm have the right associates on the bus for the long term? In other words, has the firm hired associates that want to be business owners and own a law firm? Many owners and senior partners in law firms are approaching retirement age and are beginning to think about succession strategies. As they examine their associate lawyer ranks, some partners are often surprised to learn that there may be few takers. While their associates may be great lawyers, they may not bring in business and may not be interested in ownership or partnership. Such firms have hired a bunch of folks that just wanted jobs and have no interest in owning a law firm. While this hiring approach may have satisfied the firm’s short-term needs – it may fall short in the long term.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

 

 

Apr 11, 2017

Client and Management Transition in a Larger Law Firm

Question:

I am a member of the executive committee of a seventy-five attorney firm in Houston, Texas. We are a first generation firm. Several of our founders are in their sixties and we have recently begun discussing succession planning and how clients and management duties will be transitioned. We would appreciate your thoughts in these areas.

Response:

In larger firms, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phase down programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

Archives

Categories

    Subscribe to our Blog