Law Practice Management Asked and Answered Blog

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Mar 11, 2014

Law Firm Billing Arrangements – Flat Fees

Question:

I am the managing owner of a four attorney estate planning firm in Phoenix. We also have two paralegals, a receptionist, and an office manager. We have always billed our clients by the hour but have been considering switching to a flat rate billing arrangement. I would appreciate your thoughts and suggestions.

Response:

I am currently working with quite a few estate planning/elder law firms. The majority of these firms are still using "time bill" billing arrangements. (8 out of 10 firms) A few firms are using flat fee arrangements for estate planning and asset protection matters and "time bill" arrangements for estate administration and other matters.

Few firms that are using flat fee arrangements are realizing effective billing rates even close to their standard "time bill" rates. In some cases I have found effective rates per hour $100 per hour less than their standard "time bill" rates. In some cases the problem is not working effectively or efficiently. In other cases the flat fee price has not been properly set or limits placed on the work that will be done for the flat fee – for example – number or document rewrites, etc. 

I believe that more than ever clients are wanting the budgetary certainty that flat fees provide.  I think that a flat fee pricing strategy is a good strategy but the scope of work and proper price point must be properly established. A couple of suggestions:

  1. Do some basic market research – secret shopping – and obtain the best information that you can on competitor pricing.
  2. Review time charges on typical estate planning matters and get a handle on the amount of time that it typically takes – by each office professional – for matters of varying levels of complexity.
  3. Based on these time estimates determine flat fees using the desired standard hourly rate and then add a risk premium of 10%. If a matters typically takes 10 hours and your desired rate is $200 per hour – set the flat rate fee at $2200.00.
  4. Incorporate into your engagement letters, fee agreements, etc.
  5. Get at least 1/2 of the fee before commencing work and the other half before deliveringand executing the final documents.
  6. Keep time sheets on the matters for time expended.
  7. Review at least quarterly effective rates realized on completed flat rate matters.
  8. If effective rates are below your target rate review the time detail and determine where the problem lies.
  9. Make changes and adjustments if needed.

I believe that properly implemented and managed flat fees can be a worthwhile strategy.

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

 

Mar 04, 2014

Lawyer or Businessperson

Question:

I am an attorney in Miami. I have been out of law school for five years. I worked with a small firm for a year and then went solo and have been doing contract work for other law firms for the past four years. For the past year I have been trying to get a position as an associate with a small firm – but have not had any success. Recently, I had an interview with a 2 attorney (2 partners in their early 70s) firm and I thought the interview went well – I believe that I impressed them with my legal knowledge and skills. However, I did not get the position. They advised me that they were looking for less of a lawyer and more of a business person. What am I doing wrong?

Response:

I help many of our law firm clients hire lawyers for associate and lateral positions as well as search for merger candidates. One of my favorite questions is – are you more of a lawyer or a business man or woman. Small firms are more often than not looking for candidates that are both. In a small firm you must be able to bring in clients, manage people (clients, lawyers, and staff), and perform quality legal work. There are a lot of good lawyers available on the market – there are less good lawyers that are also good business persons.

I suspect that the firm you interviewed with is looking at this hire to be part of the firm's succession strategy and the partners are looking for a lawyer/business person that can carry the firm to the next generation of practice.

Next time you interview with a firm in a similar situation – blend in a discussion of business topics as well. Even though you are a solo doing contract work you can still share some business experiences. You have had to bill for your services, manage your receivable and payables, market yourself and your practice, etc. Share your thoughts.

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

 

Feb 25, 2014

Law Firm Partners That Won’t Embrace Technology

Question:

I am the managing partner of an 8 attorney general practice firm located in Charleston, South Carolina. We have done a pretty good job of investing in technology. I am having problems getting our older partners to personally use the technology and this has resulted is our attorney staff ratios and resulting overhead to be higher than it should be. They seem to think that doing their own work is beneath them and want to have their own personal assistants. I would appreciate any thoughts that you have on the matter.


Response:

Few firms can afford the luxury of each attorney having their own secretary/assistant. The economics no longer support such staffing. Many firms today are operating with much leaner attorney/staff ratios – typically two to three attorneys for each secretary/assistant – some firms have four attorneys to each secretary/assistant. I suggest you build the economic case, encourage, train, and motivate these partners to learn how to use and to actually use the technology and if all else fails offset the economic impact as a direct charge against their compensation.

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

 

Feb 18, 2014

Law Firm Merger – Should We Merge

Question:

Our firm is a 16 attorney insurance defense firm in Central Illinois. We have 8 partners and 8 associates. We are in second generation, have inherited our existing clients from the original founders, and currently have no rainmakers. We need to bring some rainmakers into our partner ranks and have been discussing the possibility of merger. I would appreciate your thoughts.

Response:

While mergers can be a valid option making them work is often another matter. Research indicates that one third to one half of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don't try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone.

There can be a whole list of reasons for failure including poor financial performance, attorney defections, loss of key clients, and leadership and management issues. However, it has been our experience that most failures have been the result of poor cultural fit. The merging firms – after they have moved past conflict checks and excitement about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due diligence on the people. It is critical that firms insure that cultural due diligence is a key component of the merger assessment process. Philosophies, personalities, and life styles should be generally compatible. The partners should like each other and the deal should make sense.

The question is not the what (merge) but the who (people).

I would suggest that you consider a lateral strategy as well as a merger strategy and let the WHO and right fit direct your thought process. Also insure that you have fully explored whether you have really developed the business development potential of the partners you have now.

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

 

Feb 11, 2014

Law Firm Business Models – Alternatives to Consider

Question:

Our firm located in Grand Rapids, Michigan consists of 12 attorneys – 8 partners and four associates. We are a litigation firm and a relatively young firm. We started the firm six years ago as a result of several of us leaving larger law firms and wanting to start something new and different. We have been discussing our current approach to law practice and want to consider alternative business models. We would appreciate your thoughts?

Response:

The current economic climate has caused law firms to question many of the fundamental business models that have served at the core of law firm practice management for many years. Many law firms are exploring revolutionary business models while other firms are actively discussing whether changes to their traditional approaches are needed. 

Suggest that you start by conducting a review of the following areas and develop strategies for each area:

The key is to look for ways that you can differentiate yourself, make your firm distinctive, establish a lasting competitive advantage, and determine your competitive strategy.

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

 

Feb 04, 2014

Law Firm Succession – Is There any Real Future Value in My Solo Practice?

Question:

I am a 64 year old solo practitioner in Arlington, Virginia. There are no other attorneys in the firm – I have one legal assistant. My practice is concentrated in estate planning and estate administration. I have just started giving thought to retirement and what to do with my practice. I want to provide continuity for my clients, security for my employee, and salvage any sweat equity from my practice if there is even such a thing? Personally, I question whether there is any potential for receiving any value from the practice – I think when you are done – you are done? What are your thoughts?

Response:

It all depends upon the practice, not waiting too long, and finding the right WHO.  About a year ago I had this discussion with an owner of a practice and he held the position that when you are done – you are done. However, after we assisted him with a year-long hunt – he successfully sold his practice for a multiple of 1.0 times average of the last five years fee revenue with 85% paid at closing and the remainder paid out over three years.

Another sole owner recently sold a practice for $50,000 at closing and 20% of gross practice revenue for five years paid when fees collected.

So I believe if you don't wait too long and take the time to look for the right WHO – value from your sweat equity can be realized.

However, if you don't do your homework and start early – you are right – when you are done – you are done.

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

Jan 28, 2014

Law Firm Partner Compensation – Separate Silos – Profit Sharing

Question:

Our firm is a 9 attorney firm in Orlando, Florida. We have three equity partners and six associates. Currently partners are compensated in accordance with their ownership interest percentages which are 35%, 35%, and 30% respectively for the newest partner. There is growing discontent with this arrangement. We have already evaluated several alternative approaches to compensation and do not believe that they would work for us. Two of the partners share common goals for the firm, have compatible practices and clients, and use almost all of the associate attorney's time and other firm resources. The other partner has a transactional practice (the other two of us are litigators) and operates more as a lone ranger and a separate silo. We are considering creating two profit pies for each of these two silos. I would appreciate your thoughts concerning such an approach.

Response:

I don't run into this approach as much as I did 30+ years ago. In essence this is the profit (or silo) approach to partner compensation. This approach is typically found in firms that believe that the cost of production and consumption of firm resources are disproportionate. Usually there is strong competition in these firms. Small personal injury plaintiff firms are sometimes structured in this fashion.

Using the separate silo (profit center) approach fees and costs (overhead) are allocated to each partner (or partner group or silo) profit center and profit determined for each profit center resulting in separate compensation pies for each profit center. Then each partner draws his or her profit center pie or participates in a sharing arrangement with other partners that are members of the profit center in accordance with an agreement of other partners in the profit center or silo.

The devil lies in the details and the trick is to develop a fair and balanced allocation formula that can be used to allocate fee revenues and costs to the silo or profit center.

Silo, lone ranger, or pure profit center approaches usually results in separate firms operating with a firm (a confederation), each sharing overhead in various proportions. Such firms are usually divisive and the form of organization does not encourage specialization or sharing of work. More often than not there are frequent disagreements over fee and overhead allocations.

Often this approach is the next stop to separate firms – separate books – space sharing arrangement.

Thirty years ago I worked in such a firm – the firm is no longer in business.

So proceed with caution – develop written allocation guidelines and test run the numbers before jumping off the cliff.

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

 

 

Jan 20, 2014

Law Firm Associate Compensation – Incentives for Improving Production

Question:

I am the managing partner for a 18 attorney insurance defense firm in Atlanta. We have 6 partners and 12 associates. Most of our associates are seasoned associates and have 10 years plus experience. We are presently paying them a salary plus discretionary bonus. We are having problems with six of the associates not reaching performance goals. (1800 minimum billable hours per year.) While we have some attorneys billing 2400+ hours per year – these six are not – some are billing 1400 hours. What sort of incentive should we be thinking about to improve their performance?

Response:

The incentive is to get to continue their employment, maintain a full work schedule, progress to partnership, and to receive future pay raises and bonuses.

I know of some insurance defense firms that pay a billable hour bonus above a certain level. However, this approach often causes other problems such as milking hours in client files and overbilling often resulting in client dissatisfaction and potential loss of key clients. In addition other factors are also important – quality of work, results obtained, teamwork, client relationships (minding) etc. that are often not considered and left out of the equation. Before charging off on such an incentive approach I would first see if you can determine the reasons behind the low hours of the six associates. Do they have enough work? Do they put in enough hours? Are they good time managers and good time keepers? If they have enough work – then meet with each of them – lay out the expectation of 1800 hours and consequences for non-achievement. If they have issues with time management or time keeping impress upon them the importance of improving these skills – in the meantime they may have to simply put in the extra time to get in the hours.

Suggested consequences:

  1. For those not meeting expectations. Manage and coach them in real time- but be firm about your expectations. You are paying them a salary for a certain level of expectations. If there is not enough work reduce their working hours and compensation. Consider production in future salary reviews and bonuses. Don't pay them an incentive bonus to perform the work you are already paying them to do.
  2. For those exceeding expectations. Reward them with a discretionary bonus. But when advising them of the bonus advise them specifically what it is for and that is it a variable bonus and award for specific performance exceeding expectation. 

Often motivation is more about getting the right people on the bus than incentive programs. See article on the topic below.

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

Jan 14, 2014

Law Firm Administrator/Business Manager – Essential Skill Sets

Question:

Our firm is an eight attorney firm located in Minneapolis. We have 5 partners and three associates. I serve as the managing partner and frankly I do not have the time or the skills to do an effective job. My performance as managing partner is marginal at best. We have recently been discussing hiring a professional legal administrator to manage the firm. What are the essential skill sets that we should be looking for?

Response:

Larger firms that have several administrators/managers can have the luxury of having specialists – for example a HR manager, a IT manager, a Marketing Manger,  a Finance/Accounting Manager, Executive Director, etc. In a firm your size you need a hands-on generalists that can perform all of these roles. The top three skill sets that you should look for are:

  1. Accounting/Bookkeeping/Financial Analysis Skills
  2. Human Resources – especially leadership and strong interpersonal skills
  3. Marketing

I would look for someone with 5 years or more experience in managing a law, CPA, or other professional services firm and a B.S or B.A. degree in business, management, or accounting.

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

 

Jan 07, 2014

Law Firm Marketing – Improving Advertising Results

Question:

I am the owner of a 5 attorney estate planning/elder law firm in Boston. Our business volume is been stagnant for the past several years and down substantially this past year. We try to do all the marketing that we can. I do at least one seminar a month, we are in key directories, have a good website, send out paper and print newsletters, etc. In the past we have experimented with TV and radio advertising where we used professional narrators/actors. The results were dismal at best. Frankly, I feel we need to spend more on advertising but we are undercapitalized and funds are tight. I would appreciate your thoughts.

Response:

I am working with several firms that are facing similar challenges. Here are a few comments and thoughts:

  1. A different strategy is required for firms marketing to smaller wealth clients than larger "well-healed" wealthier clients.
  2. Advertising can be effective for the smaller wealth clients that have never had a relationship with an attorney. However referrals from referral sources and past clients are still the primary source that generates the majority of new client business.
  3. Advertising is less effective in generating business from wealthier clients. A majority of business from these clients is typically generated from referrals from referral sources, past clients, and relationship marketing activities. 
  4. Some of my most successful estate planning firms, especially those that represent wealthier clients, spend almost nothing on advertising and their major marketing investment is on relationship nurturing.
  5. You might want to look into a cable TV ad or Radio Program but proceed with caution, only if you can afford to have a sustained program, only if you are in the ad and the ad is done in a way that creates a relationship with the client (not perceived as a commercial), the results and effectiveness are measured, and an effective system is put in place for responding to inquiries on a 24/7 basis.
  6. Before investing in radio or TV ads – do all that you can with the website. Insure that it enables your clients to get to know you (personally and professionally) and feel that they have a relationship with you. Consider educational FAQ videos and a video center on the website. You might use these as "baby-steps" to TV advertising.
  7. Create a marketing plan and budget to focus your activities and help you avoid random acts of marketing.
  8. Insure that your client services are top notch and actually measure client satisfaction. Since referrals is often the major source of new business, you cannot afford to have unhappy clients or referral sources.

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

 

 

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