Law Practice Management Asked and Answered Blog

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Apr 29, 2014

Law Firm Associate Training and Mentoring – Ideas for Reducing Spin Time and Increasing Profitability

Question:

We are a three attorney personal injury plaintiff firm in Moline, Illinois. There are two partners and one associate in the firm. We handle a large volume of small PI files – currently we have 700+ open files handled by three attorneys and 5 assistants. We recently hired our fourth attorney – second associate – that came to us with 20 year's experience as an associate in several large firms (100 plus attorney firms). The attorney, who has been with us for about 8 weeks, has never handled personal injury cases and is having some problems getting organized. Do you have any suggestions?

Response:

I am a believer that time invested in orientation, training, and mentoring upfront can dramatically reduce a new associate's spin time, help them get online quicker, and improve overall profitability. Even though your associate has 20 year's experience in a large law firm – the work and the case management challenges are different. The associate may never have had overall management responsibility for cases or client relationships. The associate may have been assigned tasks to be completed with the partner having the case and client management responsibility. If the attorney did manage cases there is a major difference between managing say 25-50 large cases versus managing 150 small cases. There are new case management and client management skill sets and practices that will have to be developed and practiced in addition to the new area of law.

Invest time training and mentoring and share case and client management tools that can help your associate get off to a faster start.

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

 

Apr 22, 2014

Law Firm Financial Management – Higher Profit – Lower Partner Compensation

Question:

Our firm is a 7 attorney firm in Evansville, Indiana – four partners and three associates. I am one of the partners in the firm. Each month we are provided with a profit and loss statement, a billable hours report, fees received reports broken by lawyer, and accounts receiveable reports by lawyer. In 2014 our fee collections are up significantly over 2013 – our expenses are lower – profits are up – yet the money is not there for partner draws and we are having to draw less than we did in 2013? What do you think is happening?

Response:

A couple of reports that are missing from your list - a balance sheet and a statement of cash flows. Even if you are on cash-based accounting not all cash disbursements flow through the profit and loss statement which is the report that reports profit/loss. For the following types of cash disbursements flow through the balance sheet and are not considered expenses:

So while the profit and loss statement may be showing a higher level of profit there could have been other uses of cash that are not reflected on the profit and loss statement. Take a look at the balance sheet and the statement of cash flows reports.

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

Apr 15, 2014

Buying a Law Practice: What Should I Be Considering

Question:

I am an associate in a law firm in Akron, Ohio. The firm is an estate planning practice consisting of the owner/founder of the firm, myself, and two legal assistants. I have been with the firm for ten years and this is the only firm that I have worked with since law school. The owner is 67 and has announced that he wishes to retire. He has approached me and provided me with a proposal to buy his practice via an arrangement where I would initially pay him a down payment of 50% of his asking price and after two years the other 50% would be paid over a period of five years. The arrangement would be structured as a partnership and for the two year period we would be 50-50 partners. Compensation would be based upon these ownership percentages. The owner's asking price is two times his average net earnings ($125,000) – $250,000. Average revenues – $210,000. I would appreciate your thoughts and suggestions:

Response:

Buying a law practice is a major commitment and major investment. To a large extent you are buying a job as well as hopefully a book of business. Here are a few ideas that you may wish to consider:

  1. A general rule of thumb for establishing a value for when a law practice is being sold to an outside buyer is a multiple of 1.0 times average gross revenue or a multiple of 2.0 times average net earnings. Typically this is a best case scenario for an outside buyer. Buy-ins for associates that have invested "sweat equity" over the years is usually less. In addition you must consider the extent of repeat client business, talent of those that will remain with the firm, management skills and ability of the new owner, and management infrastructure. (IT, databases, case and document management systems, automated billing and accounting systems, etc.) Personally, I think the asking price/buy-in figure is high. Try to get the owner to do better for you.
  2. Review at least the last five years financial statements and insure that there are no surprises.
  3. Insure that all debt and potential malpractice claims are disclosed.
  4. Review the office and equipment leases.
  5. Create a demographic profile of the firm's clients and referral sources.
  6. Have you been able to generate a book of business? If no, why not? Do you believe you will be able to in the future?
  7. Create a business plan for the future practice and share with the bank when applying for any needed financing.
  8. Are you sure you want to own and manage a business?
  9. If you will be borrowing money from a bank determine all the interest that you will be paying as well as any interest on the five year payout to the owner. Determine the time it will take to receive a return on your investment – how many years. If you pay $250,000 for the practice plus interest – say $300,000 over five years – will you earn this amount in additional income over and above what you are presently earning and is there upside potential? Does the deal make sense?
  10. Insure that you develop a partnership agreement for the new partnership. Insure that is provides for retirement of the owner after two years – if not be careful of the compensation arrangement.
  11. Insure that the owner makes a commitment to timely transitioning client and referral source relationships.

Good luck!

Click here for our blog on succession

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

 

 

 

 

Apr 08, 2014

Law Firm New Business Development – Finding New Startup Companies Before They Startup

Question:

I am the managing partner of a 17 attorney law firm located in Rockford, Illinois. While we have an active business law practice representing small companies we are planning on beginning to work more with entrepreneurial and startup companies. How can we go about finding and identifying these companies earlier in their development – possibly even before they have actually launched their businesses?

Response:

Many of the larger law firms are developing entrepreneurship and startup practice areas as a means of beefing up their business practices with new sources of business. So, I believe that your plan to reach out to entrepreneurs is a worthwhile strategy if you can learn to think like an innovator rather than being trapped by precedents of the past and become part of their network. Here are a few ideas:

  1. Learn to think like an innovator, embrace opportunity, and react quickly. Precedent can be the enemy of innovation.
  2. Go where entrepreneurs go – don't just hang out with lawyers.
  3. Join business/entrepreneurial trade associations.
  4. Speak and present at entrepreneuria trade conferences.
  5. Attend entrepreneuria trade conferences and go to the educational sessions.
  6. Write and publish in entrepreneuria trade association publications.
  7. Get a booth and exhibit at small business trade shows. For example – in St. Louis we have the Small Business Expo – http://www.stlouisbusinessexpo.com/
  8. Become involved with (possibly sponsor) startup incubators in your local community or universities.
  9. Scan public documents (i.e. Secretary State, etc.) concerning new business startup filings.
  10. Become active in your local chamber of commerce.

You will increase your odds if you can develop relationships with entrepreneurs before they have launched their businesses – this may be when they need a trusted advisor the most.

Good luck!

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

 

Apr 01, 2014

Law Firm Governance – Firm Administrator With Managing Partner or Management Committee

Question:

I am a partner in a 9 attorney firm in Topeka, Kansas. There are three active partners in the firm. For years day to day management has been the responsibility of a managing partner that we appoint from time to time. We have just hired our first firm administrator - starts in two weeks – who is experienced and has worked in other law firms. Should we continue to have a managing partner or consider a different structure?

Response:

Typically firms your size that have professional firm administrators empower the firm administrator to manage the business side of the law firm and have either a managing partner, management/executive committee, or all partners manage the client service side of the practice. The firm administrator typically reports to the managing partner, management/executive committee, or all partners. In essence there are three levels of management – the partnership which services like a board of directors, the managing partner or management/executive committee that oversees the professional side of the practice, and the firm administrator that manages the business side of the firm.

I find that in firms your size with firm administrators a three member management/executive committee is more common. Since your firm only has three partners – initially your management/executive committee would be all three partners. As you add more partners you would move toward electing your management/executive committee.

While either form would work in your situation – I suggest you consider eliminating the managing partner position and having the three partners serve as the management committee and have the firm administrator report to that group.

Click here for our blog on governance

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

Mar 25, 2014

Law Firm Associate and Non-Equity Partner Compensation: Is There a Cap or Ceiling?

Question:

I am the managing partner of a 16 attorney insurance defense law firm in Kansas City. We have two equity partners, four non-equity partners, and ten associates. Only the two equity partners bring in client business. Since our clients are insurance companies most of our work is new business from existing clients. Unlike other firms doing insurance defense work our billing rates are low and we have to put in a lot of billable hours and maintain a high ratio of associates and non-equity partners to equity partners.

In the past our associates stayed for a while and left after several years. As a result about the time they reached the higher compensation levels they left and we replaced them with lower cost associates. In the last few years – with the economy and the oversupply of lawyers – they are staying much longer. While we – the equity partners – want to be fair and are willing to share – we are concerned about our reducing profit margins and at what point an associate or non-equity partner's compensation is "maxed out." We would appreciate your thoughts.

Response:

Law firms of all types of practice are experiencing this dilemma. The problem is even more evident in insurance defense firms where much of the work is routine discovery work that can be handled as well by an attorney with two years' experience as by an attorney with ten years' experience at lower cost. Here are a few thoughts:

  1. Use the formula – 3 times salary as a general guide to determine where you are regarding working attorney fee production from each of your attorneys. If you are paying an associate or non-equity partner $100,000 a year salary you should be collecting $300,000. The goal is that 1/3 of each fee dollar goes to association of the attorney, 1/3 to overhead, and 1/3 to profit – this a 30% profit margin.
  2. Dig into your financials and determine your contribution to profit from each of your attorneys. Allocate all direct expenses and indirect overhead and calculate profit margin. Click here for an illustration on how to allocate overhead
  3. Profit margin should be between 25%-30%.
  4. Use the margin to establish a theoretical salary limit in absence of other contributions such as management, client origination, additional business from existing clients, etc.
  5. Cap salaries with the exception of periodic cost of living adjustments.
  6. Use a client or referral commission bonus, production/hours bonus, and bonus pools to reward exceptional performance.

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

Mar 18, 2014

Law Firm Websites – Videos on Site

Question:

I am the partner in charge of marketing for our 12 attorney firm located in the Dallas suburbs. We are an estate planning/estate administration firm exclusively. We have a pretty good website with attorney bios and photos, articles, practice area descriptions, client testimonials and a blog that is updated weekly. We have been discussing the pros and cons of adding videos to the site. I would appreciate your thoughts.

Response:

I believe that videos can add to the quality of the site if done properly. A quality video can help you showcase your personality and bedside manner and help a potential client "get to know you." What you say may not be as important as how you say it. However, unless the video is a quality video and well done – it can do more harm than good. Here are a few thoughts:

  1. Consider a video introduction by the managing partner introducing the firm linked off the home page.
  2. Consider a video by each attorney linked off their bio pages.
  3. Consider your audience – mom and pop individual clients as well as potential referral sources. Since your clients are individuals – dress and set your tone accordingly. Be a little less formal – speak to your client concerns. Think about their concerns.
  4. Smile and be friendly.
  5. Hire professionals to help you script and film professional quality videos. (Quality lighting and sound separates professional looking quality from homemade looking videos.)
  6. Provide on-camera training and have your attorneys – Practice – Practice – Practice before live filming.
  7. If you don't have anyone that looks good on camera – don't do it.
  8. Use your own attorneys – don't hire outsiders to be presenters in the videos.
  9. Don't let the videos sound like ads or commercials.
  10. Presentations should be educational in nature and goal should be to enable viewers to get to know you. Presentation style is critical.

Done well – quality videos can improve the performance of your website – done poorly videos can reduce the performance of your website.

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

 

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.

Click here for our blog on financial management

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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

 

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