Law Practice Management Asked and Answered Blog

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Nov 17, 2015

Law Firm Fee Increases – Should We Increase Our Fees?

Question:

I am the partner in charge of finance at our 12 attorney litigation boutique firm located in downtown Chicago. For the past two years our profits have been down and we are considering raising our rates but we are concerned that we may lose some of our corporate clients. We welcome your thoughts.

Response:

Raising fees is one approach you might consider. Clients are starting to push back more and more concerning legal fees. If you are at the high end of the rate scale I suggest that before charging off and raising rates you step back and conduct a process review by using an approach similar to the following:

  1. Pull a random representative list (by timekeeper and type of matter) of matters that have been concluded during the past six months. Say 10-20 matters.
  2. Calculate the effective hourly rates for each matter overall as well as by timekeeper class. (partner, associate, paralegal)
  3. Compare the calculated effective rate to your internal standard time billing rates as well as to external benchmarks. (Other firms from published survey data) How do they compare? What did it cost to staff the matter?
  4. Review the time detail for each of these matters and ask questions. You might want to flow chart and document the work flow. Is the firm working smart? Is time being dumped on these flat rate matters so that a timekeeper's hours look good on the production reports?  Is the firm using the right mix of paralegals and attorneys to staff the work? Is there wasted or duplicative effort? Is technology being used? Can work steps be eliminated or reduced? Should the firm consider a "limited representation" unbundled option?
  5. Pilot test a few new approaches and measure the impact upon profitability.

Keep in mind that raising fees is one way of improving profitability. There are other ways as well. In today's competitive environment. Working smarter, efficiently, and more effective is another.

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

Nov 10, 2015

Law Firm Building Ownership

Question:

I am a partner in a fourteen attorney firm in Chicago's western suburbs. We have five equity partners and nine associates. We are currently leasing office space that we have outgrown. As we are approaching the end of our lease we are considering buying our own building. We would appreciate your thoughts?

Response:

I find that many firms have difficulty dealing with all of the moving parts of buying and building out a building and the distractions and time that it takes away from the law practice. Owning your own building can provide numerous financial and tax advantages and If you decide to go this route hire professionals to help expedite the process and a real estate building management company to manage the building when it is completed.

I strongly suggest that you create a separate entity that will own the building and separate building ownership from the law firm ownership structure. I suggest that participation in ownership of the building be optional for law firm equity partners that want to invest in the building.

It is hard enough for new partners to fund their capital accounts or buy-ins without having a mandatory building buy-in. Recently I have seen a few merger and lateral partner opportunities go south as a result of buildings, real estate, and mandatory buy-ins.

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

 

 

Nov 03, 2015

Law Firm Administrator – New and Struggling

Question:

I am a new administrator in a 17 attorney law firm in the greater Boston area. I am the firm's first administrator and this is the first law firm that I have worked for as a firm administrator. I been on the job for six months and I am struggling. I don't know whether I am living up to the expectations of the partners and I feel like I am lost. I would appreciate your thoughts.

Response:

While administrators have made great strides in terms of role and acceptance during the past decade, administrators in firms of all sizes still remain frustrated with:

– Poor, slow, and ineffective decision making
– Ineffective firm leadership and governance
– Internal politics and infighting
– Micromanaging
– Management by committee
– Lack of influence and ability to effect change

Being the first administrator for a law firm is tough. In additional to proving yourself to your partners you will have the additional task of justifying the position itself. After a few months when the honeymoon is over some partners will start questioning whether the position is necessary and worth the expense. Don't assume that the partners really thought through what their expectations were for the position prior to hiring you. Don't wait for them to manage you – you must take a proactive role – initiate discussions regarding expectations and identify priorities, projects, etc. Look for low hanging fruit when you can enhance revenue or reduce costs in the short term and track any results achieved.

Few things are as important to an administrator’s future as that person’s ability to influence the decision-making process and effect change.  Skills and competencies are important but so are results. In order to transcend to the next level and enhance their value to their law firms, administrators must help their firms actually effect positive changes and improvements and improve performance. This requires selling ideas to partners in the firm and having them accept and actually implemented. To succeed administrators must achieve three outcomes:

- Provide new solutions or methods
– The firm must achieve measurable improvement in its results by adopting the solutions
– The firm must be able to sustain the improvements over time.

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

 

 

Oct 27, 2015

Law Firm Succession/Transition/Exit Planning – Two Phase Deal Arrangement for Sole Owners

Question:

I am the solo owner of a five attorney estate planning firm in Los Angeles consisting of myself and four associates. I am approaching retirement and looking at my exit options. Since there are no heirs apparent in the firm I am looking to sell the practice. However, the potential buyer that I have been speaking with is nervous and concerned about client defections, proper transition, etc. Also, I would like to continue to practice for a few years and don't want to run afoul of the rules of professional conduct. I would appreciate your thoughts.

Response:

You might want to consider a two-phased approach. Merge with the other firm, continue to work for a few years, work on transitioning relationships, retire and sell your interests, and continue to work as an Of Counsel after that if you so desire.

For Example. A sole proprietor was generating $500,000 in annual revenues with one full-time senior attorney, a full-time paralegal, and a clerical person while netting 40%, including perks and benefits. This owner wanted to work three more years full time and several more years in a part-time role thereafter. The firm interested in acquiring the practice was a three-partner firm generating $2.2 million a year working with similar clients, under a similar culture and fee range.

Phase One consisted of a merger with the retiring owner agreeing to retire in three years and sell his ownership interests for an agreed amount. At its inception, the two practices were combined. The successor firm provided the practice with the same amount of labor required in the past through a combination of retaining and replacing staff, as both were deemed necessary by the parties. The successor firm took over most of the administration, and the deal was announced to the public as a merger. 

The transitioning owner was able to come and go reasonably as he saw fit, run his practice through the successor firm’s infrastructure, and retain significant autonomy and control. Because he historically generated a 40% margin, the successor firm agreed to assume all the operating costs of the practice and pay 40% of gross collections from the transitioning owner’s original clients as compensation. Phase One was set to terminate on the first of the following events: (1) the end of three years; (2) the death or disability of the transitioning owner; or (3) the election of the transitioning owner.

Phase Two was the buyout of the retiring partner's ownership interest, and it was set up in a traditional fashion. Phase Two kicked in at the end of Phase One. By deferring the buyout until the full-time compensation ceased, the transitioning owner could extend the period for his full-time compensation, and the successor wasn’t being asked to pay for the practice and full-time compensation at the same time."

Many firms have taken this approach and we have found that it increases the likelihood of successful client transitions, reduces the risk of client defections, and increases the value for the retiring owner.

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

Oct 20, 2015

Law Firm Competitive Strategy – Daring to Be Different

Question:

I am the managing partner of a 16 attorney business transactional firm in Chicago. Over the last five years we have lost several core clients due to client consolidation of their outside law firms and mergers of the clients themselves. Competition is getting fierce in our market, our services are being viewed as commodities, and it is getting harder to stand out. What can we do to differentiate ourselves from everyone else? We welcome your thoughts.

Response: 

Creating a competitive advantage that is sustainable over time is difficult at best. It is so easy for your competitors to copycat your recent innovations. Clients of law firms advise us that they hire the lawyer – not the firm. However, this only partly true. The firm – its image – its brand – provides a backdrop for the individual attorneys marketing efforts as well – makes marketing easier – and provides backup and bench strength that many clients require before retaining a lawyer.

In general the law firm is faced with the dual challenge of developing a reputation (brand) at both the firm and the individual lawyer level. In general – client delivery practices and behaviors that are part of the firm's core values and have been burned into the firm's cultural fabric are the hardest to copycat.

Areas in which you can consider differentiation strategies:

https://www.olmsteadassoc.com/blog/category/strategy/

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

 

Oct 13, 2015

Law Firm People Management and Accountability

Question:

I am the managing partner of a newly formed 8 attorney firm in Austin, Texas that was formed last year when several of us left another firm and started this firm. The most frustrating part of the managing partner job is managing the people – this includes other partners, associates, and staff. How do I deal with people that are not following firm policy or doing things they should not be doing?

Response:

Managing people is one of the toughest challenges that law firms face. Challenges often involve  people not following firm policy and doing what they should not be doing. It drives owners, managing partners, and administrators crazy.

My advice to frustrated owners, managing partners, and administrators – tell them to stop. Seriously. As the managing partner 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 them 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 they must resolve the performance or behavioral issue in order to keep their job tell them so. They may need this level of confrontation in order to give them the strength to be able to deal with their issues.

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

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

Oct 06, 2015

Law Firm Growth – Associate Hiring and Retention

Question: 

Our firm is a two partner firm located in Rochester, MN. We have been approached by a solo practitioner that wants to sell us his practice. The price and terms seem fair but we are concerned about staffing and managing the other office. His practice consists of himself and two staff members. We would have to maintain a second office, hire an associate or two for the office, and then manage both operations. We have recently tried to hire an associate without success by reaching out to targeted lawyers that we knew in our local area. Frankly, acquiring this practice is a little daunting. We would appreciate your thoughts.

Response: 

I believe the first issue is whether you are looking to grow the firm and are willing to undertake the additional management responsibilities that comes with growth. Some firms are ready for growth and others are not. Larger is not necessarily better. 

I would not let your unsuccessful associate hiring attempts discourage you from acquiring the practice if you desire to grow and the price and terms are acceptable. You may need to cast a wider net and be more focused in your efforts. Recently a two attorney firm in Mid-Missouri hired an associate from St. Louis. A two attorney firm in Central Kentucky hired an associate from Lexington, Kentucky. It may take some time but a concentrated recruiting effort usually pays off regardless where you are located – even in small communities. 

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

 

 

Sep 29, 2015

Improving Law Firm Profitability – Revenue vs. Expense Control

Question:

I am a new recently elected managing partner of our 14 attorney firm in Orlando, Florida. For the last three years our financial performance has been stagnant and my partners are asking me to cut all the overhead expenses possible in order to improve profitability? Suggestions?

Response: 

I am often asked to help law firms design and implement profitability improvement programs. In most of my engagements, 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.

Many law firms waste considerable time trying to find ways to cut a pie that is too small up differently by implementation of new compensation systems or increasing the size of the pie by decreasing costs. 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.

The lesson here – certainly get control of run away expenses – but focus on revenue generation.

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

 

Sep 22, 2015

Law Firm Budgeting – Is a Budget Necessary

Question:

I am the managing partner of our six attorney firm in Fresno, California. I recently went to a management seminar that stressed the importance of creating a budget for the firm. We currently do not have one. The budgeting process looks like a lot of work. Is it really worth the effort?

Response:

I believe that a revenue goal budget is the most important aspect of the budget and it does not take that much time to develop. It establishes revenue accountabilities for the revenue producers (attorneys). Insufficient revenue is the most common financial challenge that most law firms face.

While expenses are important and should be managed as well – the bulk of a law firm's expenses are office rent, employee cost, and in some firms marketing expenses. Most of these costs are fixed and once set in motion can't be managed.

Unless you have an office administrator that you want to hold accountable for managing the operations of the firm and the expense side of the ledger – you could start by just budgeting the revenue and see how that works for you. If you have an administrator a revenue and expense budget is important so that you can delegate and allow the administrator to manage operations without having to second guess each and every operational decision that they need to make. The budget provides the accountability tool.

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

Sep 15, 2015

Law Firm Succession/Exit Planning – Sole Owner Practice

Question: 

I am the owner of an estate planning practice in northwest suburbs of Chicago. I have two associates and for staff members. I am sixty seven and would like to retire when I am 70 (3 years). I have no idea as to where I should start and the approach I should take. I would appreciate suggestions.

Response: 

Sole owner firms and solo practitioners face a real challenge when deciding what to do with their practices. While many of the issues are similar to those faced by multi owner firms, sole owners and solo practitioners must also face the following additional challenges:

As with multi owner firms the key is to start early and not wait until the last minute. I suggest that you put in place your succession/exit plan as soon as possible – not just for retirement but for unexpected situations as well – so that your family, employees and clients are not left in the dark if something should happen to you.

Just because you have associates – don't assume they want to be owners and own a law firms. Look into this early as it may impact your hiring strategy as well as your overall strategy and whether it will be an internal vs. external succession strategy. 

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

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