Law Practice Management Asked and Answered Blog

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Mar 15, 2016

Law Firm Alternative Billing – What Do Clients Think

Question:

Our firm is a 18 attorney firm based in Tucson, Arizona. Our practice is a boutique general liability defense firm. Our clients tend to be self insured large corporations and smaller business firms. Currently all of clients are billed by the hour. Recently we have been discussing whether we should propose an alternative billing approach to our clients. We would be interested in your thoughts.

Response:

I do not want to discourage alternative billing – there are a lot of benefits that can be obtained – however I find that firms practicing your type of law and that have your type of clients that alternative is talked about more than actually implemented. You may find that your clients like the thought of the certainty of fixed fees but have concerns about the quality of representation under such arrangements. Recently, a litigation defense law firm asked me to interview their clients concerning their satisfaction with the law firm. When asking one general counsel about his thoughts regarding alternative billing he told me:

"My concern with fixed fee billing is that there might not be the financial incentive for the law firm to dedicate all the resources and best efforts to obtain the best results for our company. I prefer hourly billing with case management plans and budgets. I want our law firms to be financially successful as long as they achieve results for our company and not be penalized or constrained by fixed fee arrangements."

You may find that your clients are open to discussing alternative billing arrangements but may be hesitant when it comes to implementation. They are comfortable with hourly billing.

With this said I think you should explore the dialog with maybe one pilot client and see where the discussion leads. Insure that you do the proper analysis of that client's billing history, overall risks, and develop a fixed fee strategy that not only allows you to attain your desired billing rate but provides for a risk premium as well. Also build in ability to take exceptions for matters that fall outside the scope of the fixed fee arrangement.

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

 

 

Mar 08, 2016

Law Firm Administrators – New Administrator – Accounting vs. Human Resource Background

Question:

Our firm is a 18 attorney firm based in San Diego. We are considering hiring our first legal administrator and have interviewed several candidates and have narrowed our search down to two candidates. One candidate has a strong financial background and has worked as a director of administration in several very large firms – 200 plus attorneys. The other candidate has a strong HR background, a weaker financial background, and has worked as a firm administrator in two different law firms – a 30 attorney firm and a 20 attorney firm. We like both candidates. Which candidate would you lean toward?

Response:

I would lean toward the administrator that worked for the smaller law firms. Having worked in smaller firms this candidate would be a more hands on administrator which is what a firm your size needs. In a firm your size the critical need is people management and leadership. As long as the candidate has a working knowledge of accounting the candidate should do fine with the oversight of your CPA firm. If you have to you can supplement any accounting deficiencies with outside resources – you can't outsource people management.  

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

Mar 01, 2016

Law Firm Marketing – Estate Planning Firm & Importance of Lawyer Referrals

Question:

I am the owner of an estate planning firm in Oklahoma City. I have four associates that work for me in addition to two billable paralegals and three staff support members. I am looking for ways to improve our business development and marketing. The majority of our business comes from past client referrals and referrals from employees and friends. We spend a considerable amount on advertising which includes our website, print ads, collateral materials, newsletters, etc. We would like to do more to increase client business. I would appreciate your thoughts?

Response:

I find it interesting that you did not mention referrals from other lawyers. I have many estate planning/elder law clients that receive a major portion of their clients from referrals from other lawyers. This should be a key component of your marketing plan. Your business development and marketing efforts should address this potential referral source. You should be investing targeted time:

Review your website and see if it speaks to both your individual clients (mom and pop clients) as well as professional referral sources such as other lawyers.
 

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

 

 

 

Feb 23, 2016

Law Firm Partner Capital Contributions – How Much?

Question:

Our firm is an 18 attorney firm in Chicago that was formed by the existing four equity partners ten years ago. We have four equity partners (founders), eight income (non-equity partners), and six associates. The income partners are not required to contribute capital. We are considering admitting a couple of the income partners as equity partners and also approaching possible laterals. What should we require in the form of buy-in or capital contribution?

Response:

While capital contributions are all over the board ranging from zero to $100,000 in firm's your size I often see capital contributions ranging from $25,000 to $50,000. All depends upon the number of ownership shares being offered. I am seeing firm's requiring more as many firms are resisting the temptation to take on bank debt to finance their short-term working capital requirements. Citibank's Private Law Firm Group reports that between 2004 and 2007 capital contributions averaged 20 to 25 percent of a partner's income. Citibank's recent survey reports that partners are now contributing an average of 30 to 35 percent of their earnings. Thus, a newly admitted partner that will be earning $150,000 upon admission would be expected to contribute $45,000. Contributed capital is returned when a partner leaves the firm in full upon withdrawal or more commonly according to an incremental installment payment schedule.

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

Feb 16, 2016

Law Firm Acquisition – Acquiring a Personal Injury Plaintiff Practice

Question:

I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.

Response:

It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.

While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.

There are a variety of other approaches. I have never seen the same approach used twice.

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

 

 

Feb 09, 2016

Law Firm Marketing Director – Are We Ready For One – What Should we Look For?

Question:

We are a 25 lawyer insurance defense firm in Northwest Dallas. We are managed by a managing partner, firm administrator, and director of human resources. We have been discussing the need for a marketing director. Are we too small? If we decide to hire one what should we be looking for and where should we start our search?

Response:

There is no magic size. I have seen five lawyer firms effectively use a marketing director and thirty lawyer firms that do not have one. It all comes down to your firm's specific need, what you are wanting to accomplish, and what the lawyers are willing to let a marketing director do.

While the popular title is marketing director, director of client and business development, etc. some marketing staff in smaller firms often function more as marketing coordinators and event planners. If you are looking for someone to help the firm devise a competitive strategy, lead the firm's strategic planning effort, help diversify the practice, etc., you need to look for an experienced marketing director with five plus year's experience in law or other professional service firm marketing at a director level.

If you need someone to update the website, write bios, write blogs, update social media, create brochures, and plan and coordinate events – you may only need a marketing manager or coordinator with excellent writing skills. Prior experience in law or professional service firm marketing is a plus but not required. Journalism and mass communications are popular degrees for this position.

The Legal Marketing Association (LMA) is an excellent source for finding candidates. Here is a link to the LMA job bank

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

 

 

Feb 02, 2016

Law Firm Succession – Should I Close My Doors

Question:

I am a lawyer from Carbondale, Illinois area. Last week I attended you Illinois State Bar Association CLE Webinar – Law Practice Succession and Transition – Ideas for Getting Started. I am 66 years old and I fit the "Sole Owner" model that you discussed. I am the practice. I have one associate and one legal assistant and my associate has neither the desire or the ability to take over my practice. I am tired and want to retire by the end of the year. With no successors in site I am thinking that I should just close the doors at the end of the year. I welcome your thoughts.

Response:

It could come to that if you cannot find someone interested in taking over your practice. However, since you have almost a year before your planned retirement I would at least try to see if you can find another lawyer or law firm to buy or otherwise takeover your practice – preferable "buy". Start now as it often takes a year. Make a short list, make some phone calls, have some lunches, get to know some folks, and see what kind of interest there might me. Keep a continual momentum going. Since you are the practice – this will be a concern to a potential buyer especially if you are unwilling to stay on after the sale in a consultative transition capacity. You might want to rethink your timeline – otherwise you may have to simply close the doors and refer out the work and strike the best arrangement that you can.

Click here for a link to my book – The Lawyers Guide to Succession Planning – published this week by ABA

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

 

Jan 26, 2016

Law Firm Merger – Initial High Level Summary Financials to Provide

Question: 

I am the managing member of an 14 attorney firm in Miami. We initiated discussions with a large firm in Boston concerning the possibility of our firm merging with their firm. We met with one of their partners recently at their offices and he presented our interest to his other partners. He has advised us that there is an interest in having us meet the other equity partners and taking discussions to the next level. He would like some initial financial information from us. We feel that we must provide them with some financial information at this point but unsure as to what to provide them with at this stage. I would like to hear your thoughts.

Response:

Law firms exploring possible merger partners often move to quickly to financials and I try to hold on providing financial information until after three get acquainted meetings. I like to see the initial focus on the people, culture, and general fit. Poor fit causes more merger failures than practice economics. However, in your situation the door has been opened and the large firm is going to want to see some initial financial information to "qualify" you and determine whether further discussions is worth their time investment.

I suggest that both firms sign a non-disclosure statement and that you initially provide them with the following high-level summary information in a spreadsheet in columns for the last five years of history. The per lawyer/equity partner calculations can be calculated in the spreadsheet based upon the headcount data inserted in the spreadsheet.

I would not provide any more data at this stage pertaining to clients or detailed financials. The next step will be for the other firm to share information with your firm.
 
Good luck!
 

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

Jan 20, 2016

Law Firm Partner Compensation – Setting Up an Eat What You Kill System

Question:

I am a solo practitioner in Orlando, Florida with two secretaries and I am planning on merging my practice with another attorney in the same office location. He has three staff members. We have both been on our own for twenty years and have enjoyed our independence. We have decided that we want to setup an eat-what-you kill type of compensation sytem. We would appreciate your thoughts.

Response:

While I am not found of such systems as they lead to separate silos – separate firms within a firm - there are situations where they are appropriate. In some situations, the approach is to simply allocate revenue and use the percentage of fee revenue collected to determine a partners interest in the profit for the year. A determination must be made as to what the firm means by revenue collected for each attorney – working attorney allocated dollars, originated attorney dollars, or responsible attorney dollars, or a weighting of all of these. This only works if each consumes overhead at the same level.

If you are not consuming overhead at the same level some form of cost allocation must be made and included in the mix. Direct overhead items such as bar dues, auto expenses, CLE seminars, etc. could be allocated directly to each partner with each sharing equally in the rest of the indirect overhead. Then a net figure would be calculated to determine each partner's compensation based upon their share of the profit.

If you want to really get detailed your can setup a separate profit center for each of you in your accounting system, allocate all revenue and expenses using an agreed to allocation formula, Click here for sample allocation guidelines and then have the ability of generating a separate profit and loss statement for each of you. If you are using QuickBooks Pro you can setup classes to accomplish this. Your compensation would be the profit from your profit and loss statement. 

Good luck with your merger.

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

 

 

 

 

 

Jan 12, 2016

Retaining Key Law Firm Talent Through Remote/Virtual Work Arrangements

Question:

I am the owner of a five attorney firm in Austin, Texas. My accounting/office manager has just advised me that she is resigning her position as a result of her husband's job being relocated to another city on the west coast. She is the best employee that I have had the pleasure of working with and I am not sure where to start regarding finding her replacement. She will be hard to replace – – not just her skills – but her manner, relationship with me and other members in the firm, clients, etc. She is truly a class act. I would appreciate any thoughts that you may have.

Response: 

Maybe you don't have to lose her. Why not consider a remote/virtual arrangement. I know – it sounds crazy but I have several law firm clients that were in similar situations and decided rather that lose a key employee to have them work remotely.

The first situation occurred several years ago in Chicago. The firm was going to lose a key paralegal that had been with the firm for fifteen years when her husband was relocated to Washington state. The firm was already paperless and had an excellent computer system that facilitated remote communication. The missing link was the telephone system and how to handle client calls coming in for the paralegal. The firm installed a VOIP phone system that could seamlessly transfer a call as if the paralegal were down the hall. An office was setup in the paralegal's home in Washington state, procedures and protocols put in place, and other practices such as joining her in via Skype on the weekly firm meetings. The arrangement has worked out exceptionally well for five years.

The second situation occurred six months ago in Chicago. The firms accounting manager's husband was transferred to Florida and she tendered her resignation. The owner asked me to help him find a replacement and I asked what he thought about a remote arrangement. We discussed how the various accounting tasks would be handled and coordinated remotely from running pre-bills, making bank deposits, recording client payments, billing, paying bills vendor bills, etc. and he decided to give it a try. A virtual private network was installed, her home office was outfitted, and procedures, protocols, and checks and balances put in place. The arrangement has worked out well. Four months after the arrangement was implemented the firm merged with another firm and now has two office locations and the accounting manager is effectively handling the billing and accounting for both offices from her Miami Florida remote location. The owner is very happy with the arrangement.

So, before you accept her resignation and begin looking for a replacement – you might want to consider a remote/virtual arrangement.

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

 

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