Law Practice Management Asked and Answered Blog

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Nov 08, 2011

Diversifying a Personal Injury Plaintiff Law Firm

Question:

Our firm is a personal injury plaintiff law firm located in Austin, Texas. We have 4 attorneys in the firm and all are partners who have been practicing for over 25 years. One hundred percent of our practice is PI plaintiff. We have been extremely successful over the years and handled some very large cases, have had some big wins, and handled several class action cases. Our current challenge is cash flow. The cases we are involved with seem to be bigger and more complex with fewer smaller cases that can be resolved quickly and contribute to cash flow. We are getting in deeper to our line of credit. Of late we have been discussing pros and cons of diversifying the practice and adding a non-PI practice area to our practice. What are your thoughts? Have you seen PI plaintiff firm do this successfully?

Response:

More and more of our PI plaintiff law firm clients have been raising this question during the past year. While a lot can be said about specialization – a firm can also sometimes be too specialized. I have seen many hybrid firms over the past 20+ years that have successfully combined a plaintiff personal injury practice with a transactional practice. As one firm told me "us transactional folks bill the hours and pay the bills while we turn the PI folks loose to go after the big hits." Firms that operate the firm as a "firm-first" firm tend to be more successful with such a practice mix than do firms that are "long ranger" firms operating as a collection of individual practitioners. In these firms compensation can become difficult and divisive due to the large swings that can occur in contingency fee work. However, firm-first firms look beyond this year's fee production, carry their contingency fee brothers and sisters when their numbers are down, and share the wealth when the big hits come in. Marketing and advertising came be more challenging – but it can be done. Practice areas might include commercial litigation, employment discrimination, business transactions, etc. High-end family and criminal practices have also been good candidates as well. It is not so much the type of practice as it is the type of practitioner and whether then be a good "cultural fit" with the PI folks.

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

Nov 01, 2011

Law Firm Partnership: Pros and Cons

Question:

I am a solo owner of a small law firm in Southern Illinois and have been solo for ten years. I have two staff members in the firm. Recently I have been contemplating either bringing in a partner or joining another firm? What are the advantages and disadvantages?

Response:

Partnership can offer its lawyers a measure of value independent of the skills, talents, and contributions of its individual partners?

Pros

The advantages that the best law firms have over sole practitioners or groups of lawyers who share overhead include:

 Cons

Like anything else in life nothing is free and there are tradeoffs. There can be conflict and interpersonal struggles, large capital contributions, requirements for you to be guarantor on huge firm debt balances, missed paychecks, and loss of independence.

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

Oct 26, 2011

Competitive Strategy for a Personal Injury Plaintiff Law Firm in Today’s World

Question:

We are a five attorney personal injury plaintiff firm in the central Missouri. In the last few years we have gone through tort reform, increase competition from other law firms doing extensive advertising, and now trying to weather the recession. From a profitability standpoint – we are holding our own. However, we are concerned about the future. What are your thoughts for firm such as ours?

Response:

We are hearing this question quite often and have provided some thoughts in past blogs and articles.

The majority of our PI law firm clients are advising that they are having to work much harder at getting clients and investing more heavily in marketing – both time and money. PI firms were feeling the most of these challenges before the recession. However, the recession may accelerate the pace with which law firms reevaluate existing processes and consider new business models. PI firms may want to begin by:

1. Develop a firm strategic plan and individual attorney marketing plans which include aggressive network/contact plans for past clients, attorney referral sources (non PI attorneys), attorney referral sources (other PI attorneys), and other referral sources.

2. Evaluate the feasibility of adding an additional practice segment to reduce the level of risk in the case portfolio and reduce cash flow variability.

3. Reduce case portfolio risk and improve case profitability by implementing a case intake system whereby all new cases over a specified level of projected case value are reviewed and approved by the partnership (or a client intake committee) in order for the case to be accepted by the firm. In other words – don't let one attorney expose the entire firm to either excessive levels of case risk or case investment (time and client cost advances) without other partners having a say on the matter.

4. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Metrics might include effective rate, return on LOADSTAR, dollar case profit after allocation of all appropriate firm overhead, etc.

5. Review and measure present marketing investments (time and money) and determine what is working and what is not. Reallocate resources if appropriate.

6. Insure that you are using an appropriate mix of marketing tools in your program.

7. Consider increasing marketing investments (time and money). Suggest a marketing budget be developed in the range of 8-12 percent of fee revenue. Also suggest that non case production (non-billable) time be budgeted for business development and marketing activities as well.

8. Look into defensive advertising.

9. Insure that you have a first-class website that goes deep and demonstrates expertise.

10. Maintain a yellow page presence – but gradually reduce investment and shift into website and other online vehicles.

11. Find ways to enhance the client's experience and deliver exceptional client service.

12. Use exceptional client service and bedside manner as a primary means of differentiating you from your competitors. Under Promise – Over Deliver in everything you do for the client.

13. Make your office client friendly.

14. Use end-of-case satisfaction surveys to measure the client's experience with the firm and to improve future service.

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

Oct 18, 2011

Law Firm Leadership: How do We Get Started

Question:

I am the managing partner of a 24 attorney firm in San Francisco. We are becoming frustrated at our inability to achieve a consensus and make timely decisions on matters of firm policy, strategy, marketing, and management. We are missing out on opportunities. We have no management scheme and no one to lead the charge – no team effort. The attorneys can't decide anything and firm management is a free for all. Things don't get done because no one is responsible. Conflict exists because anyone may be in charge. We are strong on ideas but weak on implementation. We lack leadership and focus. What are your ideas regarding leadership? Where should we start?

Response:

This is a common in firms of all sizes. In general, the foundation of leadership is built upon exhibited behaviors illustrating a proven track record of trust, respect, and accountability. These are the building blocks required for the development of leadership practices. Without these building blocks leadership cannot exist or be developed. The law firm culture must be nourished in such a way as to support these behaviors. These behaviors must become a part of everyday practice in dealing with clients as well as partners and others within and outside of the law firm. Law firm leaders must develop and practice the following behaviors:

The organizational structures, practices and procedures that exist in many law firms also discourage the development of leadership behaviors and practices. Many firms have a short-term production orientation focused upon individual lawyer productivity and production based upon billable hours and dollars billed and collected. A "me first" attitude rather than "firm first" "client first" attitude is frequently prevalent. Many lawyers hoard clients and consider them their clients as opposed to firm clients. These lawyers use individualistic approaches to client problems as opposed to team approaches. Compensation and other reward systems are not well suited to fostering leadership and developing teamwork in law firms. Firm governance, practice management, and performance management systems in law firms are also ill-suited to foster a climate encouraging and supporting leadership.

Law firms are finding that developing effective leadership skills can be a very difficult task. Dealing with leadership is a very emotional issue for most law firms due to the independent nature of most lawyers and the general unwillingness of firm lawyers to put aside their personal interests for the good of the firm. In fact, in many cases existing law firm partnership structures reinforce this tendency. What is needed is a balance between partner autonomy and partner accountability. Leaders will either have to be recruited externally (ie lateral partners) or skills will need to be developed internally.

The firm can begin by conducting a self-assessment using the following 10 point checklist:

  1. Only the best should lead and be placed in key leadership positions. Does the firm have its most capable people in leadership positions?
  2. Does the firm have partners or other lawyers with leadership skills or potential leadership skills? How many?
  3. How many lawyer leader positions are there in the firm that require leadership skills? How many lawyers have these skills?
  4. Does the firm's compensation system reward management and leadership activities?
  5. Does the firm's compensation system have a team reward component and are non-billable firm investment activities respected and rewarded?
  6. Does the firm's culture support a team orientated practice or an individual type practice?
  7. Does the firm's governance structure provide for administrative, management, and leadership roles and responsibilities?
  8. Does the firm have an in-house leadership training and development program?
  9. Does the firm invest and budget funds for leadership development?
  10. Is the firm willing to make the commitment?

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

 

Oct 11, 2011

Controlling Cost and Managing Overhead in the Law Firm

Question:

As the administrator of our 17 attorney law firm I am charged with the responsbility of managing and controlling costs. Our management committee is always complaining about our overhead – – and then looking to me for solutions – with the focus usually on cost reduction. Do you have any recommendations?

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. However, we do find that there is waste and unnecessary overhead that eats away at profits and a cost control program is also recommended and implemented. During recessionary times such as we are currently facing – drastic cost control are often the only option. Reducing overhead can immediately and effectively improve a firm’s bottom line.

The first step in an expense control program is to identify those areas where potential savings exist. Review your profit and loss statement. Resist the temptation to arbitrarily cutting costs which could cut the muscle with the fat and result in revenue loss as well. You have to spend money to make money – so if cost cutting is the appropriate strategy – cut the right costs. Think strategically about cost reduction.

After you have identified areas where savings can be made prioritize and develop specific strategies and implement action plans to achieve the savings.

 Here are a few ideas:

STRATEGY #1:  Reduce Headcount

This is the largest area for potential savings. Downsizing is a strategy that has been used by many firms this past year. However, it can have long term negative consequences for revenue and talent management. Consider all levels – non-productive partners, associates, paralegals, and staff. Be prudent and sensitive in implementation.

STRATEGY #2:  Reduce Compensation

Obviously one way is to cut salaries – a strategy to be used as a last resort. A better approach is to reduce fixed salary (paying people for showing up) and add a variable pay component which will allow employees to earn additional compensation in the form of bonus for results achieved. Another approach is to freeze salary increases.

STRATEGY #3:  Benefits

A major area for cost savings – especially health insurance. Determine which programs are most important to employees. Do your best to protect those and reduce or eliminate programs that are less important. Consider offering more than one health insurance plan. Pay the premium for the lowest cost plan and provide options for employees to “opt up” to the better plans by paying the additional premiums. Consider increasing deductibles and requiring employees to pay a portion of the base premiums.

STRATEGY #4:  Outsource

Examine potential for outsourcing – from copy services – IT management – to your legal team.

STRATEGY #5:  Occupancy

Review your lease invoices and question increases and escalators for which you have been charged. Consider renegotiating your lease and ask for a lower rate. Reduce excess space either through a renegotiated lease or through sub-leasing.

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

 

Oct 05, 2011

Managing Law Firm Cash Flow

Question:

Our five lawyer firm has had a very successful past couple of years. We have been growing in terms of clients, billings and revenues. However, we are getting deeper into our credit line and we simply don't have adequate cash to pay our bills. I would appreciate your thoughts on this matter.

Response:

Sounds like you are caught in the growth-cash flow trap. Growth puts strain on cash and increases demand for additional working capital. There have been many law firms and small businesses that were profitable – but failed due to simply running out of cash. While you cannot escape this paradox – by actively managing your cash flow (timing of the intake of cash against the outflow of expenses) you can minimize the impact of the following traps:

  1. Lack of Attention Paid to Financial Management. Many law firms, especially solos, often give this task a low priority on their to do list. Servicing clients and new client development are given higher priorities. There is often a lack of understanding of financial reports and statements. Understanding financial reports such as income statements v.s. cash flow statements are important is providing early detection of potential cash problems requiring corrective actions. Law firms should develop reasonable monthly, quarterly, and annual cash flow projections as well as income and expense projections.
  2. Poorly Managed Accounts Receivable. Cash is king. Law firms need to improve client payment terms and cash collections by speeding up billing cycle, getting more upfront through initial retainers, requiring retainer replenishments, and staying on top of retainers. Use your billing software reports to review retainer useage weekly, if not daily. Billing and accounting software should be implement any potential delinquent accounts and someone in the firm, or outside of the firm, should be responsible for prompt follow-up to collect all outstanding invoices. Depending on the resources available, a law firm may decide to out-source accounts receivable management and collections to industry professionals and specialists.
  3. Heavy Investment in Client Advances. Many law firms have large investments in client advances. For firms that book these expenditures as an asset – these items will not be reflected on an income statement as expenses. Be aware of their impact upon cash flow and look for ways have the client pay these directly, and bill sooner with cost only out-of-cycle invoices. Contingency fee firms will have to cover with additional working capital or line of credit.
  4. Paying Invoices too Quickly. Another way of improving cash flow is to slow down the outflow of cash by insuring that payables are not paid until they are due. I find many firms simply pay invoices when the invoice comes in the door – way before they are due. Monitor payment terms and pay when due.

Law Firms often experience these top cash flow problems when they do not manage the store and practively manage their income, receivables, and payables. Many are left wondering how they went out of business while their clients and revenues were growing substantially.

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

 

Sep 27, 2011

Law Firm Upstream Mergers/Acquisition – Merging With a Larger Firm

Question:

Our firm is a three partner general practice firm in a small community. Our ages are 72, 68, and 64 respectively.  Our firm has not adequately prepared for succession/exit of the partners. We have over the years hired associates but have been unable to keep them – they have all left for greener pastures. We are now contemplating merger with a much larger firm that has 40 plus attorneys. We have had several meetings at the office and we have provided them with our financials. They have not provided us with detailed information. We are getting frustrated. It has been over four months since we began talking with this firm and we seem to be "stuck" and not maintaining momentum. We have other options that we have just begun exploring. How can we get "unstuck" and move this process along?

Response:

Right off the bat – admit that this is not a merger of equals – it is more of an acquisition.  Hopefully, you have discussed firm name, whether your existing office will be retained or closed, and the future roles of each you as well as your staff. These are often deal breakers and many firm merger talks never get past this point.

You really need a project plan – or timeline – for a project like this with due dates and milestones. Otherwise, the process will continue to drift. You need a timeline for this merger candidate as well as other options that you are pursuing. I would contact your contact in the larger firm and agree on a timeline. You might want to ask them to provide you with a proposal within an agreed date – say 30 days and see what they come back with – it could turn out that their partners are not able to come to any consensus – and the merger simply dies.

If the firm does come back to you with a proposal – now it is your turn to do your due diligence. Start with the people – do you like these people and do you believe you would enjoy working with them? You should insist on a few social functions, etc. so you can get a feel for their people. Don't take a shortcut here.  Ask for their financials, personnel rousters, clients lists, partner demographics, list of partners that have retired and are receiving payouts and upcoming retirements in the future.

Insure that you obtain an understanding for the work culture of the firm? Are you compatible? Obtain all the detail that you can about governance and structure, the compensation system and how it works, retirement of partners – whether funded or unfunded, and complete details on the mechanics. How will the merger/acquisition be implemented? Will accounts receivable and work in process be pooled in the new firm – or worked off and collected in the old firm? How many shares etc will you have in the firm? Are ownership shares and compensation shares different?

All of these questions, and many more, need to be addressed in order to decide whether the merger makes sense. If it does and you decide to move ahead – then you and the firm can begin putting a implemention/integration plan together. 

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

Sep 21, 2011

Law Firm Strategic or Long Range Plans – Why Does a Small Firm Need One?

Question:

I have a small firm in Indianapolis. I am the only attorney in the firm and I have three staff members. I have been in practice for 30 years. I have been reading your posts on strategic planning. Why do I need one for a small practice such as mine?

Response:

A strategic or long range plan serves as the roadmap for your practice. When you go on vacation do you head out without a map, plan or your GPS. Probably not. The same should be true for your practice. A plan defines who you are, where the firm should be heading, and how you get there. It helps focus you as well as your staff and improves productivity, accountability, and alignment with your goals. It identifies what work your firm does (or sometimes more importantly) what it does not do. In essence it outlines what services your are selling, to who, and where. Your plan then lists out the steps you should be taking to move to your desired future.

I have seen solo practitioners time after time reach their 60s and realize that if they had it all to do over again they would do things differently. Often they have completely failed to put in place solid succession strategy and realize no value for their sweat equity when they retire. A plan or roadmap can help direct your efforts over the years.

The important thing is to it keep your plan simple and update it often. Ten pages or less – in outline form. I have seen excellent one page plans. When circumstances change – change it. Review it every month.

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

Sep 14, 2011

Law Firm Succession: Opportunities for Solos and Small Firms to Join Other Small Firms Looking for Talent to Implement Their Succession Strategies

Question:

I am a solo practitioner located in the Chicago suburbs. I have one staff member. I am 53 and have been practicing law for over 25 years. I try to limit my practice to estate planning and estate administration. However, I do have to take on other general practice type matters to stay busy. Practicing law by myself is beginning to take its toll on me – it gets lonely practicing alone, coverage and backup for clients is difficult, and I have the full burden of the worry 24/7. What do I do with the practice when I get older and reach retirement age? I have not taken a vacation in years. I have been thinking about the pros and cons of joining another firm? What are your thoughts?

Response:

One option would be to grow your practice internally. You could add a younger associate attorney. However, it sounds like you currently don't have the business that would support the position. Then you would have to train the mentor the assoicate and pray that once they become productive – two or three years down the road that they stay with you and don't leave for greener pastures.

Another option would be to bring in a more senior lateral attorney with experience and a book of business.

A third option would be to look around for another solo or small firm that is looking for someone to carry the firm into the next generation as a part of their succession strategy.

According to a 1995 American Bar Foundation Lawyer Statistical Report the number of bar admissions has been consistently around 30,000 each year since 1977. Further, the number of lawyers by age reached 30,000 for lawyers under 50. Those lawyers in 1995 who were in their late 40s will be reaching retirement age between 2010 and 2015. Law firms have a larger population of lawyers in their 50s and 60s that will be approaching retirement and must develop strategies for transitioning their legal and leadership skills as well as their client relationships and market presence.

Sixty-five percent of law firms’ equity partners are in their late 50s or early 60s. Over the next 10 years there are going to be a lot of successions.

There are a lot of firms looking for someone just like you.

I am currently working with several firms in the ChicagoLand area that have asked us to help then find someone just like you. So there is a lot of opportunity to join a firm that is looking for a succession strategy that will carry the firm into the next generation.

The big questions is always the "who" more than the "what". So put together a plan and start looking around and see if you can find a compatible firm.

Click here for our blog on succession topics https://www.olmsteadassoc.com/blog/category/successionexit-strategies/

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

 

Sep 07, 2011

Increasing Law Firm Profitability: Using Metrics and Measurements to Focus Performance

Question:

Our firm does mostly flat fee work. I am the sole owner of the firm and am considering hiring my first associate. Each of us work as a team and do a lot of cross-over work on all client/matters. I have two paralegals. We don't keep timesheets on our flat fee cases. Do you have any suggestions as to how to proceed with the hiring of this associate?

Response:

It sounds like your firm is relucantly approaching the next step in its growth. Adding your first associate will change the dynamics of your firm and will require you begin to implement more formal approaches to performance management for all members of your team – the new associate, your staff, and yourself. I would start by thinking through the exact tasks and roles that you would like the associate and other staff members to perform. In other words define the associate position. Do to expect the associate to bring in business? Are you willing to train a new associate without experience or are you looking for someone with experience. Can you structure work so there is less crossover of team members on files? If not, how are you going to measure their performance and production? (Time, their production fee dollars, file or case counts, etc.) Are you going to incorporate a variable pay or incentive bonus component into the compensation plan for the associate as well as the other staff members? (More firms are doing this) Define the position first and then decide on the "who".

I encourage you to begin establishing production (performance) goals for all employees and then measure performance against these goals. Tied at least a portion of compensation to accomplishment of these goals. More firms are starting to pay for performance and less for simply showing up.

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

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