Law Practice Management Asked and Answered Blog

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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

 

 

 

Mar 12, 2015

Law Firm Merger Preliminaries

Question:

Our firm is a 17 attorney firm in Dayton, Ohio. Several of our founding partners are retiring and we have been contemplating exploring a merger with another law firm but are not sure where to start. I would appreciate your ideas.

Response:

Start by determining your merger objectives. Why do you want to merge? What do you hope to achieve? Is merger compatible with your strategic plan? What size of firm are you considering?

Once you are sure that merger exploration – in general – makes sense – you should insure that your house is in order. In other words – can anything be done to enhance the value and/or marketability of your firm? For example:

  1. Do you have a business or strategic plan? If not – how will you convince a potential merger partner that you have a plan for the future and know where you are going? Maybe now is a good time to work on that plan. 
  2. Work on and clean up your financials. Improve the financial performance of your practice. Eliminate deadwood. Write-off uncollectable A/R and WIP. 
  3. Avoid entering into long term commitments that might make your firm undesirable to another firm. (new long term leases, risky client matters/cases, loans, admission of new partners, unfunded partner buyouts/retirements, etc. 
  4. Enhance firm image where you can. 
  5. Develop a first class firm profile.

Next, develop a merger marketing plan and begin working the plan. Try to generate enough leads that you can explore merger with several firms rather than engaging in "random merger talks" which often result in isolated merger offers with you having no framework for comparison.

Use an outside consulting firm if you need help organizing, identifying candidates, and managing the process.

Once you have merger candidates identified – the real work begins.

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

 

Mar 10, 2015

Law Firm Financial Management – Managing the Money

Question:

I am the managing partner of a 17 attorney firm in San Francisco. We have a firm administrator that we hired four years ago and he manages our financial and HR matters. I haven't a clue as to what goes on financially and this is becoming more of a concern for me and my other partners. You thoughts would be appreciated.

Response:

I believe that is imperative that owners and partners in a law firm have access to financial information on a timely basis, understand the information, and use the information in a proactive way to manage the practice. I suggest:

  1. The owner, or an appointed partner(s) in larger firms, obtain a basic level of understanding in basic accounting/bookkeeping and law firm financial management.
  2. The owner, or an appointed partner(s) in larger firms, obtain detailed training on the accounting software system(s) along-side the bookkeeper and administrator when the system is implemented. In addition to general operation of the software, special training should also be obtained on interpretation and use of the management reports.
  3. In your current situation – this may be a good time to consider upgrading your system and at that time obtain training on the new system, review the roles of all parties, and current procedures.
  4. Insure that you have accounting controls in place and appropriate segregation of accounting duties.
  5. Outline your expectations and requirements of the bookkeeper and administrator, meet with them, and communicate appropriately.

Don't allow your administrator to create a fiefdom and hold you and your partners hostage.

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

 

Mar 03, 2015

Sale of Law Practice and Alternative Approaches

Question:

I am the owner of a solo practice located in the western Boston suburbs. I have been considering selling my practice. Do you see many practitioners selling their practices?

Response:

Yes, I am seeing many solo practitioners selling their practices. However, I also see many lawyers looking to exit their practice start by thinking that they will sell their practice. However, when all is said and done the arrangements often take one of the following arrangements:

  1. Admitting an existing associate to partnership and then having the associate buy out the owners partnership interest in a retirement payout.
  2. Bringing in an associate and mentoring and grooming them, admitting the associate to partnership when he or she is ready, and then having the associate buy out your partnership interest in a retirement payout. Sometimes partnership interests are sold gradually over time.
  3. Merger with another law firm.
  4. A wind-down of the practice and then Of Counsel relationship with another firm with a client transition/payout arrangement.

Many solo practitioners are often taken back by the inflexibility of some of the various state rules of professional conduct concerning sale of law practices and find the above approaches more flexible.

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

Feb 24, 2015

Law Firm Succession Planning & Mid-Career Partner Roles

Question:

I am a partner and a member of the Executive Committee of a 250 attorney firm in the mid-west. We have had a succession plan in place for several years for our senior partners. Several have completed their phasedowns successfully and others are struggling. One of our challenges is many of our mid-career partners are simply not ready. I would appreciate your thoughts.

Response:

This is a common problem that many larger firms face as their senior partners phasedown to retirement and try to transition client relationships and firm managerial and leadership roles to the next generation. Often the focus of non-founders is on billable hours and working attorney fee collections as opposed to non-billable longer-term investment activities such as client development,  firm leadership, and management.

Unlike smaller law firms most large law firms do invest time and effort in developing mid-career partners in these areas. However, often more can be done. Here are a few thoughts:

  1. Profile and Personal Brand Building. While developing new clients and new sources of business is always a goal – another questions is – is the mid-level partner, who is planned as the future responsible partner, bio/brand strong enough to entice the client to stay with the firm after the senior partner retires? Often it is not. All mid-level partners should have active personal development plans that requires profile enhancement and personal brand development. These plans should include steps to be taken and tasks to be completed as well as a timeline including milestones and deadlines.
  2. Go Deep with Client Relationship Development. Clients hire lawyers – not just law firms. In fact, the law firm brand is what gets the firm on the client's short list – the lawyer and his or her personal brand is what lands the client – the lawyer's relationship with the client is what keeps the client. Clients work with lawyers they like and trust – transitioning this to another lawyer in the firm will take time and nurturing – more than one or two meetings.
  3. Encourage Mid-Level Partners to Invest the Time to Understand Their Client Business as Well as Their Industries. Clients of law firms are always telling us that their law firms do not understand their business.
  4. Encourage Mid-Level Partners to Raise Their Hands, Volunteer, and Take Baby Steps Toward Leadership and Management Roles in the Firm. Such steps will cause senior partners in the firm to take notice and eventually lead to appointments to various committees and possibly eventually to an appointment on the Executive Committee.
  5. Work at Producing Excellent Work Product. In addition to the above excellent work product and hard legal skills, client service, and personality are all critical as well.  

I would encourage mid-level partners to try to budget 70% of their worked time for billable client production and 30% for non-billable investment activities.      

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

       

 

 

Feb 17, 2015

Transitioning to a More Business-Like Law Firm

Question:

I am a partner in a 12 attorney general business firm located in St. Louis, Missouri. I was elected as managing partner earlier this year. I have been a lawyer and with this firm for eight years. I also have a MBA degree and managed a small business before becoming a lawyer. Frankly, I have been amazed at how law firms conduct business and I would like to change our thinking and our culture. Do you have any thoughts?

Response:

Here are five tips that you might find useful.

TIP #1: Work with the attorneys in the firm and help them develop more of a business mindset. Try to get them to become more entrepreneur and learn how to think like businesspersons. Encourage them to look at the world from their client’s perspective and consider their clients their business partners. 

TIP #2: Encourage all attorneys to select their clients carefully. Establish client acceptance criteria. Learn how to say no. Dump undesirable clients.

TIP #3: Encourage all attorneys to brand themselves. Ask them to look for was ways to differentiate themselves from their competitors and to become perceived as the only attorney that can do what they do. Ask them to make a decision – what do they want to be known and remembered for? Unique services, unique client groups, different service delivery strategy, personal style. Have the firm and each attorney create a five-year plan for goal accomplishment.

TIP #4: Encourage each attorney to become “solutions orientated” and become consultants – trusted advisors to their clients as opposed to simply their task and process attorneys. Solutions may involve activities and services other than legal services. Ask each attorney to think out-of-the-box and outside of typical frameworks in which they are comfortable.

TIP #5: Conduct a firm-wide management and leadership assessment and identify strengths and weaknesses. Enhance management and leadership skills through skill development training and personnel acquisitions.

Good luck!

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

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

 

Feb 11, 2015

Law Firm Succession – Client Transition Plan

Question:

I am a founding partner in a 17 attorney firm with nine partners and eight associates located in Chicago west suburbs. We represent business firms and other institutional clients. I am the primary rainmaker in the firm. I am 60 and am planning on retiring when I am 65. My concern is how to effectively transition clients. I would appreciate your thoughts.

Response:

Successful client transition – moving clients from one generation to the next – is a major challenge for all law 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:

Transitioning client relationships effectively can and where possible should take a number of years – preferably five years – typically not less than three years. 

The following client transition plan might be an approach you could take to transition clients over a three to five year period:

  1. Review your Top Client List and develop and implement a detailed action and milestone plan for each significant client.  
  2. In consultation with the Firm Executive Committee, designate one or more Co-Responsible Attorney(s) for each existing client, and each new client as to which you are the Responsible (Primary) Attorney. You, in consultation with the Firm Executive Committee, may for cause adjust or amend the Co-Responsible Attorney(s) designation as to any Transitioning Client. The stated goal in designating one or more Co-Responsible Attorneys for each client is to facilitate the transition and retention of your clients upon your retirement and phase-out from the practice of law. You will agree to introduce the Co-Responsible Attorney(s) to the client when you are reasonably available, and work with the Co-Responsible Attorney(s) to transition the client and client matters to the Co-Responsible Attorney(s). You and the Co-Responsible Attorney(s) shall meet to discuss and evaluate the timing for the transition of each client. However, notice to clients shall be solely at your discretion. The Co-Responsible Attorney(s) may, at your discretion, prepare all invoices for legal services rendered. You will review and approve all invoices unless you agree to the contrary in writing. The client’s wishes shall be paramount in the designation or selection of any Co-Responsible Attorney(s) and client satisfaction shall at any time allow for change of the designation of same.    
  3. You will perform such duties as the Firm Executive Committee of the Firm may from time to time determine to be in the best interest of the Firm and which are agreeable to you. You will  agree that your professional procedures will be in accordance with the rules and regulations promulgated by the Firm Executive Committee. You will also maintain the records as reasonably required by the Firm Executive Committee. 
  4. Of Counsel. After the conclusion of the final transition year, the firm may enter into an “Of Counsel” relationship with you. In that event, you would be listed as “Of Counsel”. The relationship would be subject to both parties agreeing on the terms and conditions of the “Of Counsel” relationship.

Effective client transition takes time so start early. Clients hire lawyers not law firms.

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

 

 

 

 

Feb 04, 2015

Law Firm Financial Performance – Billable TIme and Fees

Question:

I am the managing partner of a four attorney (all partners) estate planning firm in Tulsa, Oklahoma. We are all working hard but I do not believe that we are making the money that we should be. Last year our fee collections were $600,000 and our net income $250,000 which was the total amount that was available for partner compensation. Thus, we each made $62,500.00. Each of us have been practicing for over 20 years and I believe this is totally unacceptable. We appear to be busy and have plenty of work. I would appreciate your thoughts.

Response:

I agree that the firm should be doing much better. Regardless of practice area (unless you are an insurance defense firm) and where you are located I believe you should be averaging $300,000+ fee collections per lawyer. You are averaging $150,000 per lawyer. You expenses of $350,000 ($67,500 per lawyer) is actually low and not the problem. You need to dig into the numbers and look into why the revenue numbers are not higher. Usually the culprits are lack of business, inadequate billing rate (or effective rate for flat fee matters), not putting in the hours, or poor time management and time keeping habits. Each attorney should strive for 70% of worked time to be billable (client production) time. 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

I find that many estate planning firms that do much of their work on a flat fee basis often are not realizing effective rates anywhere near their target time billing rates.

Look into the numbers and determine the culprit or culprits and then develop a strategy for dealing with each one – marketing to improving work ethic and time management and time keeping habits.

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

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