Law Practice Management Asked and Answered Blog

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Jun 09, 2015

Improving Law Firm Profitability

Question:

I am the sole owner of a three attorney firm in San Francisco. I started the firm seven years ago. We are an estate planning firm. Everyone is working hard and putting in the hours but we are not making any money. I am only making around $110,000 net income/earnings after overhead. Should I take a meat ax to my expenses?

Response:

Surely you should examine your expenses to insure that you are not wasting money and resources. However, I find that in more cases than not the real problem is insufficient gross income and lack of sufficient investment (spending and time) on marketing and initiatives designed to stimulate client and revenue growth. For most firms increasing revenues is the most effective way of impacting the bottom line.

While unnecessary expenses should be reduced – once they are reduced a repeated effort to slash costs proves fruitless as a strategy to increase the firm pie. The vast majority of law firm expenses are fixed or production-related. The percentage of costs that are discretionary is low, typically in the 20-30 percent range, and the number of dollars available for savings is small. The available dollars available for reduction disappear after a year or two of cost-cutting, leaving the firm with dealing with the effects of further cuts on production capacity.

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

Jun 02, 2015

Law Firm Partner Compensation and Client Origination Credit

Question:

Our firm is an 8 attorney general practice law firm located in Kansas City, Missouri. Five of the attorneys are equity partners and the other three are associates. The two founding partners are the only ones in the firm that bring in clients – the other partners are just workers. Currently the partners are paid based upon their collections for cases/matters to which they are assigned. They are also credited for work that others do on their assigned matters as well. We are concerned that in a general practice firm such as ours, everyone must be bringing in clients and we are considering changing our compensation system to factor in credit for client origination – bringing in clients. I would appreciate your thoughts.

Response:

All law firms need a mix of finders, minders, and grinders. Finders (client originators) are needed to provide sufficient work to keep the workers busy. Minders (responsible matter attorneys) are needed to manage the portfolio of client work. Grinders (working attorneys) are needed to service and produce client services.  While there are exceptions, in most firms partners must hit on all three of these cylinders. In other words, most of the partners must do well at finding, minding, and grinding. Partners may perform some of these roles better than others, however overall they should be competently performing each of the roles. Very few firms can afford the luxury of having several senior partners only bringing in business without being required to maintain personal production levels as well. Partner compensation research concludes that the most a law firm can afford to pay a rainmaker – over and above his or her own billable hours (fee collections) is the marginal profit derived from the associates the rainmaker can keep busy, regardless of how many partners he or she occupies. The most valuable partners are those who offer a balance of skills: worker, delegator, supervisor, and rainmaker.

Since origination of new clients is the lifeblood of any firm it is a key factor that should be recognized in any compensation system. The exact weight that it is given will depend upon the firm and how dependent it is upon constant client replacement, only a few institutional clients, turnover of clients, leverage ratio, etc. A firm that has a well diversified base of institutional long time clients will typically weigh client origination much lower than a firm that has to constantly replace individual clients.

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

 

May 20, 2015

Law Firm Succession – Coming to Terms With Aging

Question:

I am the managing partner in a 12 attorney firm in Chicago. We have 6 partners and 6 associate. We a boutique litigation firm. Three of our partners are in their mid to late 60s and should be thinking about retirement but they seem to be in denial? How to we begin to addresses this issue?

Response:

Several years ago I was giving a presentation to an ALA (Association of Legal Administrators) Chapter and after the presentation an administrator came up to me and asked, “what kind of financial incentives can we put in place to encourage some of our senior attorneys to retire”? I responded by saying “help them identify some hobbies.” While my comment was partially in jest, many attorneys,
especially baby boomers, have invested so much into their careers and law practices they have not had either the desire or time to invest into other areas of interest.

The more difficult components of retirement include:

For some people the best way to retire may be to continue working.      

For others, rather than being a time of easing back and retiring into old age or continuing to work in one’s old job or career, it can be a time of personal growth and an opportunity to explore other interests, callings, and vocations. It can be a time of freedom to do what you always wanted to do but could not because you had to earn money and the pressure of work prevented you from pursuing you dreams and interests that were in tune with you values and beliefs. Here is a list of a few areas that lawyers approaching retirement might want to explore:

  1. Teaching courses at a local law school or university
  2. Pro-bono work
  3. Writing
  4. Photography, gardening, travel, or other hobbies
  5. Serving as a director on a profit or non-profit board
  6. Counseling
  7. Volunteering

Retirement planning begins with taking the time to think about how one will use their time.
If you live fifteen years beyond your retirement your will have 28,800 hours that will have to be filled with retirement activities. (five days a week, eight hours a day, 48 weeks, for fifteen years)

Find ways to encourage your senior attorneys to explore and think about their future and explore other interests - both at home and at the firm.

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

 

May 12, 2015

Law Firm Marketing and Advertising – How Much Should a Bankruptcy Firm Spend on Marketing

Question:

I am the sole owner of a debtor bankruptcy practice. I have one other attorney and three staff members. Last year we spent $50,000 of advertising. Our fees collected were $550,000 and Net Income was around $160,000. Are we spending too much?

Response:

You are spending 9% of fee revenue. I believe that in a consumer practice such as personal injury and debtor bankruptcy you have to spend around 10% of fee revenue to get the business you need to sustain the practice. I have some practices spending 19% of revenue.

So, I don't think you are necessarily spending too much if the advertising is working for you. You have to constantly measure the ROI on your advertising and fine tune it when needed.

Also, insure that the business is actually coming from the advertising – in other words don't advertise to get business you would have had anyway or in a market that you have saturated and more advertising will not yield any additional business.

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

May 06, 2015

Law Firm Contingency Fee Practice – Surviving the Cash Crunch

Question:

Our firm is a six attorney personal injury plaintiff located in Kansas City. We have been in practice for 20 years and the firm has been very successful. However, in the last few years the cases are getting larger, more complex, and really putting a drain on our cash flow. We are always into our credit Line. You thoughts would be appreciated.

Response:

Cash flow has always been a challenge for contingency fee practices. However, times are getting harder. For personal injury plaintiff firms insurance companies are refusing to settle cases, stretching out timelines for settling cases that they do settle, paying less, and becoming even harder to deal with. Other contingency fee practices are also facing similar challenges and everyone is finding it harder to find adequate lines of credit. Many firms that were once 100% contingency fee practices are looking for ways to improve cash flow implementing different fee arrangements or by adding non-contingency fee practice areas.

I suggest that you evaluate ways that you might re-balance your case portfolio to say 60% contingency/time-bill mix. You might consider:

  1. Billing and collecting up front for all client costs even if the fee is contingent.
  2. Flat fee paid up front for a certain segment or phase of work – then contingency fees for the rest of the work.
  3. Actively marketing and targeting certain small business firms, establishing relationship, and seeking out defense employment work billed on a time-bill basis.
  4. Adding a different practice area that would not be billed on a contingency fee basis.
  5. Bring in a another attorney with a book of business in a complimentary non-contingency fee practice area.

Review your case pipeline report and your work habits to insure that you are putting the right effort and mix into the cases that you have so that when your time bill matters come up for billing at the end of the month – all can be billed.

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

 

Apr 28, 2015

Law Firm Merger – Finding Merger Candidates

Question:

I am the managing partner of a 14 attorney firm in Los Angeles. We are primarily a transactional practice and we are considering looking for a litigation firm to merge with our firm. I would appreciate your thoughts on locating merger candidates.

Response:

For larger firms that have a talent or book of business void or solo practitioner and sole owners’ merger is often an appropriate strategy and approach. It all comes down to the finding the right firm, the right culture, and the right fit. The search process can take time as we.Here are some suggestions to help get the search process started.

  1. Using the Internet and Google, start by thinking about possible target law firm candidates;
  2. Prepare a merger candidate short list based upon firms that your firm has worked with or have had contact; 
  3. Prepare a merger candidate short list based upon firms that your firm is aware of but have not worked with nor had any contact – cold leads;
  4. Decide on an initial contact strategy for each target firm and who in your firm will initiate contact;
  5. Begin contacting target firm and setting up initial meetings;
  6. Maintain and constant and consistent flow with prospective merger candidates rather than fits-and-starts;
  7. Work toward a specified target goal and maintain a timeline to avoid project drift;
  8. If your firm is unable to maintain a constant and consistent flow consider outside assistance;and
  9. If your firm is unable to identify suitable target candidates, consider some advertising vehicles such as Craigslist, Law Schools, Bar Association, Legal Publishers, Monster.com, Local Newspapers – print and online, and legal recruiting firms. 

My experience has been that for small law firms the most successful approach for locating merger candidates has been developing the short list and looking in their own backyard. However, other approaches, including advertising, have worked as well. If the firm decides to use advertising, the firm may want to keep from divulging the firm name too early in the process.

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

 


 

 

 

Apr 22, 2015

Law Firm Associate Attorney Billable Hours

Question:

I am a solo attorney in upstate New York. My practice is limited to estate planning, estate administration, and elder law. I have just hired my first associate and am trying to get a sense of the number of billable hours I should expect her to produce. You comments would be appreciated.

Response:

For many years the national norm for all firms has been around 1750 billable hours – much higher for litigation firms – often in the 1800-2000+ range. In my experience I find 1650-1700 a good target for most firms. However, I am finding that 1500 is more the norm for estate planning firms such as yours, especially if the attorney is also doing new client intake interviews and meetings. As a general rule attorneys should be billing approximately 70% of their total worked time. Of course this all assumes that you have adequate work to keep you both busy on a full load.

Lexis has published a couple of studies on billable hours that you might find useful - Billable Hours Survey Report, Non-Billable Hours Survey Report and Where Do all the Hours Go

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

 

Apr 14, 2015

Law Firm Associate Compensation – Bonus Tied to Performance

Question:

I am a partner in a 14 attorney firm in San Francisco and I serve on our associate compensation committee. Presently associate compensation is based on a salary and discretionary bonus. I would like to see a stronger tie to performance. I would appreciate your thoughts.

Response:

I believe that salary should be the primary element in your compensation system for associates. However, you might want to pay a performance bonus for working attorney fees in excess of a certain threshold – say three times salary. So, if you are paying an associate $100,000 you might pay a bonus of 20% for fees collected in excess $300,000 ($75,000 per quarter) and pay the bonuses quarterly. In order to reward other contributions you might want to tie additional bonus to accomplishment of specific strategic goals agreed to in advance each year by you and each associate. For example:

Thus, a maximum of 10% of salary could be received by the associate in goal bonus ($10,000 for a $100,000 associate) and $20,000 could be received if $400,000 in fees were collected – for a total of $30,000 in bonuses.

The goals should be require some degree of stretch and should be result orientated rather than activity orientated. Chair on a bar association committee is a result – attending bar associate meetings without being notices is an activity.

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

 

Apr 07, 2015

Law Firm Website Search Results in Google – April 21, 2015 Google Update May Impact Your Google Ranking

Question:

I am the managing partner with a 14 attorney firm in Cleveland. A friend of my just advised me that Google was coming out with a change to their search engine that might impact our website. Have you heard anything?

Response:

Yes. Google is making a change to their algorithm on April 21, 2015 that will favor mobile-friendly websites.

If your website is not truly compatible with the hundreds of millions of mobile devices out there your search ranking will be penalized. Google is drawing a line in the sand when it comes to mobile functionality and search engine results.

I suggest that you update your site as soon as possible. We are having to upgrade our site as well. Weblinx from the ChicagoLand area is doing our upgrade 

Here is a link to a Google tool that will test your site. 

Here is a link to other information regarding the Google update

I believe that a firm's website and it's search engine optimization strategy is a top marketing priority for all law firms and worthy of appropriate investement to keep it working for you.

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

Mar 24, 2015

Law Firm Of Counsel Compensation/Adequate Profit Margin

Question:

I am the managing partner in an eight attorney firm in Phoenix. We are contemplating bringing in a senior lawyer as an Of Counsel that wants to gradually wind down his practice. We are thinking of paying him using an eat-what-he-kills approach whereby he would be paid 40% for his personal production (collected working attorney receipts) and 20% for bringing in the client (origination). Thus, if he brought in the client and did all of the work he would get 60% of the fee. What are your thoughts?

Response:

The approach is fine and I know several law firms that use this approach and these percentages. My concern is with the percentages. Don't forget the overhead. Lets say that he collects $300,000 and that he brought in the business and did all of the work. He would get 60% of $300,000 or $180,000 and the firm would get 40% of $300,000 or $120,000. Typical overhead per lawyer is $100,000 per year or higher. If the overhead is $100,000 there would only be $20,000 profit contribution or 6.6% margin. I believe the firm should make a margin of 25%-30% from associates and Of Counsels.

Examine your overhead. I would suggest 35% on working attorney receipts and 15% for client origination.

You may believe that the overhead consumed is far less that the firm's average overhead per lawyer and that a contribution cost allocation approach allocating only variable/direct costs is more appropriate. However, there are often other costs and I find that many law firms cut themselves short, only cover their overhead, and make very little or no profit margin.

Look over your overhead and determine the profit margin that you desire and go from there.

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

 

 

 

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