Law Practice Management Asked and Answered Blog

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Jun 01, 2011

How Can Protect My Law Firm From Embezzlement?

Question:

At a recent managing partner forum several of the attendees at the seminar discussed recent experiences with embezzlement by employees. What can we do to protect our firms?

Response: 

During the past 25 years that I have been working with law firms I have been amazed at the number of embezzlements caused by unscrupulous attorneys, bookkeepers, office managers and other staff members. And yes – even partners. One out of five law firms in my client sample has actually lost funds due to some form of embezzlement and caught the offenders.  While some of the firms have prosecuted and taken other actions against the offenders the process was very painful, time consuming, and typically the funds are never recovered in entirety. Of course, this is if you catch the offenders.

Many small firms’ internal control procedures are so lax that funds could be lost through embezzlement and the firm would not even know it.

Only through effective internal accounting and financial controls can law firms protect their offices from theft. The goal is not to catch offenders – but to have a system in place that discourages and prevents the theft from occurring in the first place.

The process involves implementing internal accounting and financial controls. In essence – segregation of duties. Here is an overview of such a system:

                    Internal Control is the plan of organization and all of the coordinate methods and measures adopted within a business organization to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies.

The four basic elements considered essential in a satisfactory system of internal control are:

  1. A plan of organization that provides appropriate segregation of functional responsibility and duties.
  2.  A system of authorization and record procedures adequate to provide reasonable accounting control over assets, liabilities, revenues, and expenses. 
  3. Sound practices to be followed in performance of duties and functions of each of the organizational areas. 
  4. A degree of quality of personnel (competency) commensurate with responsibilities.

SUGGESTIONS:

 RECEIPTS

  1.  Have someone other than the bookkeeper open the mail. (i.e. receptionist) 
  2. Have the person who opens the mail prepare a list of all checks/cash received in duplicate. 
  3. Have person responsible for mail route one copy of the check/cash list to the office manager or managing partner and the other copy along with checks/cash to person responsible for making the bank deposit. 
  4. Assign someone responsibility for preparing the deposit and taking it to the bank. This person should verify the check/cash list against checks and cash, prepare deposit slip and make the bank deposit. 
  5. Upon return from the bank the deposit clerk should provide the bookkeeper with the deposit slip, receipt from the bank, and the check/cash list. 
  6. Bookkeeper enters the deposit into the computer system. 
  7. Office manager runs and mails monthly statements – not invoice fee bills – to clients.

DISBURSEMENTS

  1.  Don't give bookkeeper check signing authority.
  2.  Have someone other than bookkeeper approve vendor invoices. Require evidence of approval on all invoices. 
  3. Require purchases to be handled by someone other than the bookkeeper and the individual who approves vendor invoices for payment.

 GENERAL

  1.  Obtain adequate fidelity bonding insurance coverage. 
  2. Rotate duties when possible. 
  3. Have bank statements mailed to managing partner's home. He/she should bank statements and transactions and then give to someone other than bookkeeper and other personnel involved in processing receipts or disbursements. Some firms have their outside accounting firm perform this function. 
  4. Reconcile all bank accounts monthly. 
  5. Insure that adequate record retention systems are in place. 
  6. Formulate policies that provide for reasonable protection of assets. 
  7. Insure that adequate personnel selection methods, training programs,  supervision practices, and performance evaluation techniques conducive to control, providing assurance than an adequate number of employees are available to perform operational duties. 
  8. Insure that vacations are mandatory and contain provisions for competent replacements to perform all of the assigned duties of the vacationing employees. 
  9. Outline job duties in written job descriptions.  
  10. Develop an accounting manual. 
  11. Properly supervise, verify, and follow-up on all operations, people, and systems.

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

 

 

 

May 25, 2011

Improving Law Firm Profitability Through Cost Reduction

Question:

As the managing partner of a 12 attorney I have been asked to see what the firm can do to improve profitability by reducing costs. Do you have ideas or recommendations in this area?

Response:

In most law firms 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. 

 STRATEGY #6:  Telephone Service

Scrutinize your bills and examine rate tariffs as well as items that have been tagged to your bill by third parties. Negotiate and ask refunds for any discrepancies or abuse found. We have seen firms receive thousands of dollars in refunds.

STRATEGY #7:  Virtual Office

Do you need an office at all. Many solos are working out of virtual and home offices or a combination of same. Some larger firms are reducing the size of their primary expensive downtown offices by having some attorneys work from home offices or other locations.

STRATEGY #8:  Marketing

Many firms actually need to spend more money on marketing. However, this does not mean that it should be wasted on sacred cows. Review marketing investments, eliminate feel good items, and insure that they are producing results. Reallocate funds.

 STRATEGY #9:  Supplies and Other Purchases

Eliminate waste and unnecessary expenses. Consolidate with fewer vendors and solicit discounts for exclusive relationships.

STRATEGY #10:  Develop a Budget and Financial Plan

If you don’t have one – develop a budget and financial plan and work the plan.

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

 

 

May 17, 2011

Law Firm Strategic Plan vs Business Plan

Question:

I am the firm administrator in our firm. We have 24 attorneys and are just transitioning to the 2nd generaton of partners. I have been charged with obtaining information on strategic/business planning. Currently the firm does not have a strategic or business plan. What is the difference between a strategic plan vs a business plan? Do you have a recommendation as to whether we should consider implementing a business plan or a strategic plan?

Response:

Often the term strategic plan and business plan are used to mean the same thing. The general planning process is similar. However, I believe there is a difference.

I consider a business plan to be the primary tool of choice when starting a new business or venture. Typically the audience is external – bankers, investors, prospective partners, etc. Due to the external nature of the audience the business plan document needs to be detailed with supporting narrative, company history, market analysis, marketing strategies, personnel plan, management biographies, and pro-forma financial statements.

A strategic plan is typically the tool of choice for a going concern business or firm – such as an existing law firm such as yours. The intended audience is internal and its primary purpose is to focus the efforts of firm members and employees. Much less narrative and supporting detail is required. A strategic plan uses more of an outline format with bullet points and much less narrative and supporting detail. A strategic plan in small firms is often ten pages or less and consists of the following sections"

The key is to keep it simple and develop a plan that will actually get used, focus the firm's efforts, and hold specific people accountable.

I believe that what gets planned – what gets measured – is what gets done.

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

May 11, 2011

Using Legal Project Management to Improve Law Firm Profitability

Question:

I am the managing partner of our firm of 17 attorneys. Our practice is concentrated in insurance defense litigation. In an effort to provide the best services possible and differentiate ourselves we have been discussing whether we should implement a project management system. I have been reading more lately about legal project management and hearing more about it. Do you have any thoughts along this line?

Response:

Legal project management has become the hot topic of late and we are seeing articles, workshops, and seminars on the topic. Over the years project management has evolved into its own discipline with its own jargon, tools,  methodologies, software, etc. Project management as a discipline can become quite technical and complex. Many of the techniques such as PERT and CPM came from the department of defense and were initially utilized to manage projects such as the Polaris Submarine and space projects. The construction industry makes extensive use of project management techniques.

Considering that a legal matter is a project, particularly a large litigation matter, with many moving parts there has been a push by clients and an effort by law firms to look for ways to improve the management of matters and related resources, costs, timelines, etc. and to improve and streamline the overall process. Legal Project Management is a customized approach to matter management borrowing and applying some of the principles of project management and incorporating into a simpler and leaner model. Numerous workshops, training seminars, and publications are being offered on the topic.

The Hildebrandt Instute if offering a workshop in Chicago on June 21-22, 2011. Here is a link to more information on the workshop.  Here is a link to more information on the workshop. Ark Group also has a new publication out called – Project Management for Lawyers as well. Another good book, which can be ordered from Amazon, is Legal Project Management: Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity, by Steven Levy.

As more clients push for improved processes and outcomes in the area of matter management and force various forms of fixed-pricing – law firms will find they need to utilize more sophisticated tools to ascertain matter risks, price services, and manage matters.

So I suggest you at least begin to evaluate some of the tools and approaches being used and get educated on them. However, be careful of getting into overly complex approaches and methods that are simply trying to push generic project management for it's own sake.

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

May 03, 2011

Law Firm Strategy: Where to Start

Question:  I am the Executive Director of a 75 attorney firm in Miami. We are meeting in a few months to revise our strategic plan. Some of our partners have suggested that as a result of the current business and economic climate that we start with a clean sheet of paper. Where should we start? What do you see as the key questions that we should be addressing?

Response:

Strategic planning is essentially a five step process. The first step begins be asking questions. Start by asking the following questions:

  1. What substantive issues does the firm face today?
  2. What issues will the firm face tomorrow?
  3. How has technology impacted (or will impact) how the firm conducts business and delivers services to clients?
  4. What are we doing and doing well?
  5. What are we not doing well?
  6. What do we need to improve or enhance?
  7. What metrics will tell us how we are doing?
  8. What should be eliminated?
  9. What are we not doing that we should be doing?
  10. What kind of training will we need to plan for?
  11. What demands are clients likely to make?
  12. What opportunities are we missing?
  13. What mistakes have been made recently by other law firms? Failed firms? Dissolved firms?
  14. What resources are we wasting by defending the past?
  15. What wheels have already been invented?
  16. How would we define our existing culture?
  17. What might our culture become?
  18. What makes us unique?
  19. What potential profitable areas (practice areas) are we overlooking?
  20. What are we doing to encourage creativity?
  21. What kind of uniqueness will we need in the future?
  22. What can we do to shape future outcomes?
  23. What do we want to be known for?
  24. What will future clients want?
  25. What is our existing vision?
  26. What form will future competitors take?
  27. What market trends should be we be paying attention to?
  28. What is our competitive edge?
  29. How can we expand our markets?
  30. What are our priorities?
  31. What are our values?

So take your time – remember strategic planning is a process – not a one-time event. The process is as important as the final plan itself. Don't try to get it done in a day or over a weekend. Rome was not built in a day. 

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

Apr 27, 2011

Contingency Fee Profitability: Can You Make Money From Contingency Fee Work

Question:

Our firm is a 12 attorney general practice firm located in the Phoenix metropolitan area. In additional to general practice, we do a fair amount of insurance defense work as well. In an effort to improve firm profitability we have been considering alternative fee arrangements – particularlly contingency fees – with some of our existing clients as well as venturing into personal injury plaintiff work. Can we improve profitability by doing more contingency fee work?

Response:

The CEO of the Howrey LLP, when interviewed about the law firm's recent dissolution, advised that deferred profits from contingency fee work led to the firm's demise.  Howrey is a good illustration of what can happen when the risks of contingency fee work is not considered or managed. Contingency-fee work can pose major risks for law firms, as they earn no fees if they lose those cases and sometimes have profits deferred in protracted litigation. In addtion, cases can be lost with no fee whatsoever recevied. Whether your firm is considering "big deal" litigation or bread and butter run of the mill personal injury litigation you may want to consider the following:

  1. Don't dabble in contingency fee work. Take it seriously and insure that your case portfolio is adequately diversified.
  2. Reduce case portfolio risk and improve case profitability by implementing a sound case intake system to insure that you are selecting quality cases.
  3. Realize that you have to spend money to make money and that you simply may not have the financial resources to take on certain cases. Learn how to say no and when to refer these cases out to others.
  4. Insure that you have an adequate portfolio of cases (number of cases, size and type) to insure diversification and manage risk.
  5. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Typical metrics include effective rate and/or LODESTAR.

In essence the fundamentals of risk and return is at work and should be considered when accepting contingency fee work. You are betting that you can beat your hourly rate that you receive (or would receive) on hourly work. Contingency fee work often involves the risk of no fee at all, financing the case, long time periods before the case is concluded and fees are received, client advance investments, etc. For these risks the firm should be able to expect a premium. In other words – the effective rate on contingency fee cases should (on average) be greater than that for hourly work.

Many law firms are not receiving a "risk premium" at all and are often, on average, obtaining an effective rate close to their bill rate. So, do consider the risk involved and evaluate methods of mitigating the risk as much as possible. In general – don't dabble – but work to a portfolio of cases large enough to diverisfy your risks.

Herbert Kritzer has done extensive academic research over the years on contingency fees which can be found in his book – Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States. The book can be ordered from Amazon.com. Link to Amazon

While I have outlined a cautious approach here I want to also clarify that I have many clients that are doing very well and making a lot of money doing contingency fee work. It is the firms that did not grow up doing contingency fee work that "dabble" where I see the problems.

So proceed with caution – but go for it if it makes strategic sense for your firm.

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

Apr 20, 2011

Law Firm Financial Statements

Question:

I was just elected by my other partners to serve as managing partner of our 17 attorney firm. We are based in Nashville, Tennessee. I do not have an accounting background and I have questions about our financial statements:

  1. Why does the income statement not reflect all disbursements for the month? For example it does not reflect partner draws, client advances, or payments on the firm line of credit?
  2. I have only been receiving the income statement. Should I been receiving other financial statements?

Response:

Getting a handle on the financial aspects of your firm will be your most important role – whether you have a firm administrator or not.

You should also be receiving a balance sheet which reflects the firm's financial position as of a particular point in time. The income statement only reflects income and expense accounts and reports net income for a reported period of time. The income statement is different that a statement of cash flows which reports cash flows during the period. Partner draws, client advances, and line of credit payments are not expense accounts (they are asset, liability, and capital accounts respectively).  Consequently, they will not be reported on the income statement. These accounts will be reported on the balance sheet.

Other than reviewing the balance sheet for activity in accounts such as discussed above the balance sheet (without adjustment) has limited use. It's purpose is to reflect the firm's financial position as of a point in time. However, since most law firms maintain their books on a cash basis – the largest assets – accounts receivable and unbilled work in process – are not reflected. Accounts payable and other such liabilities are not reflected either. If you are interested in a true picture of the firm's financial position as of a point in time you must take these items into consideration.

Another report that you may wish to receive is a statement of cash flows. This statement will report actual flows of all cash – in and out of the firm – regardless of account time.

There are additional schedules and reports that you should receive as well. Suggest you review your system and create a report distribution policy as to which reports you and the other partners receive each month.

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

Apr 13, 2011

Balancing the Law Firm Trust Account

Question:

I am the managing partner with a 14 attorney firm in Chicago. We recently hired a new accounting manager/bookkeeper. While she has worked in a few other law firms these firms did not require her to manage a high volume trust account. Our firm has a high volume of transactions that flow through the firm's trust account. We have had problems in the past with prior bookkeepers and outside accountants that did not balance/manage our trust accounts properly. What suggestions do you have or resources do you suggest?

Response:

Failure to properly manage, balance, and reconcile the firm trust account can be a major problem for law firms - from professional responsibility, accounting, and tax aspects. From a bookkeeping standpoint – failure to maintain a trust account sub-ledger for each client that has money in the trust account and insuring that all of the sub-ledgers balance and reconcile back to the trust account bank statement in the biggest problem that I see. You must do more than simply maintaining a checkbook journal register – you must have a sub-ledger for each client. If the firm reflects the trust bank account on it's balance sheet there should be either a contra asset account or a liability account relecting the same amount reflected in the cash account. The total of all of the sub-ledgers should also equal the number in each of these two general ledger accounts. All should reconcile back to the trust account bank statement. If the firm does not reflect the trust account on the balance sheet – then the trust account bank statement should be reconciled to the sub-ledgers.

Many time and billing programs have trust accounting modules that fully automate the trust accounting management function, maintain the sub-ledgers, write trust account checks, and reconcile the bank statement against the client trust sub-ledgers.

There are a whole array of issues that you need to be aware of and stay on top of concerning retainers generally, firm trust accounts, and other matters. You, your bookkeeper, and your CPA need to get educated on all of the ramifications.

Here are a few additional suggestions:

  1. Get a copy of your local rules and read them. For Illinois lawyers – get a copy of the Illinois Rules of Professional Conduct of 2010 published by the Attorney Registration and Disciplinary Commission of the Supreme Court of Illinois. www.iardc.org.
  2. Insure that your bookkeeper and CPA read these rules and implement appropriate systems to ensure compliance.
  3. Get your hands on a copy of the book – ABA Guide to Lawyer Trust Accounts, by Jay Foonberg. Book can be obtained from the American Bar Association website. www.abanet.org
  4. Reconcile monthly.
  5. Use appropriate software to write checks, record deposits and transfers, renconcile bank statements, and maintain the client trust sub-ledger.
  6. Maintain a journal.
  7. Maintain a client trust sub-ledger.
  8. Insure that funds are transferred to the firm's operating account when fees are earned and appropriate accounting entries made at that time in the firm's books.
  9. Stay on top of the trust account.
  10. Insure that your bank and credit card company are following proper procedures. Insure that your bank takes services charges, charges for printing checks, etc. from your operating account rather than the trust account.

You are right in desiring to get a handle on this sooner than later. Sit down with your bookkeeper and CPA, get educated on the rules and procedures, and implement appropriate policies and systems now. It is always easier to prevent a mess than to clean up one.

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

Apr 06, 2011

Law Firm Succession – Transitioning and Grooming the Next Generation

Question:

I have a general practice firm in Southern Missouri. I am the sole owner and I am 64 years old. There are three associates in the firm and four staff members. I have recently been giving some thought to my future, what to do with the practice, and how to salvage any sweat equity or value from the practice when I am ready to retire. The problem is that I love my work and really want to work forever. Suggestions?

Response:

Succession and exit questions are a hot topic in law firms of all sizes today. I find that in small firms it is not unusual for partners and owners to want to work as long as they can. In fact, in approximately 75%-80% of the firms that I am working with this is the case. Many attorneys enjoy their work and obtain great fulfillment from the work that they do.

The key is to start early and develop a transition strategy and plan. In your situation since you, health permitting, want to practice as long as you can, a sale of your practice is not really your best option. I would think that you need to focus on grooming your associates and gradually, over a phased basis, transitioning interests to them. Get a feel for the value of the practice, put together a firm financial profile and a quality proposal, dress up your financials, and sit down with you associates and discuss your ideas and plans with them. Determine their state of readiness. If they are not interested – keep your succession plans in mind when hiring others and screen for new hires that have an interest in owning a law firm.

As you look toward grooming the next generation keep in mind that you must find ways to get your associates invested in ownership both financially and emotionally. They need to believe that they are part of the firm and that down the road that it is in their best interest to someday own your firm rather than start their own. This will mean gradually giving up some control. You can't have it both ways.

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

Mar 29, 2011

Marketing a Personal Injury Plaintiff Practice

Question:

I am a partner in a five attorney PI plaintiff law firm in Central Kentucky. We have three partners and two associates in the firm. We are first generation. Our practice is focused 100% on PI plaintiff cases. While we focus on all types and sizes of PI cases we are not a high volume advertising PI practice. Our practice has been built upon our successes and referrals from past clients and other lawyers. We have never done much in the way of other forms of marketing and advertising other than a small yellow page ad and a Martindale Hubbell listing. We are finding it harder to obtain a sufficient quantity of quality cases as a result of increased competition from the advertising PI firms, statutory changes, tight fisted insurance company claim managers, etc. We believe that we may need to being doing more to market our practice. What are your suggestions?

Response:

We are hearing similiar stories from our PI plaintiff law firm clients across the U.S. Case counts are down, quality of cases are not what they used to be, competition is fierce, and cases are getting harder to settle. The strategy is different from a firm that wants to build a high volume practice (build a factory) from a firm that desires to build a reputation-based practice. In essence you need to determine whether you want to build a high volume practice (a factory) or continue with a high quality reputation-based practice. Assuming that you want to continue your reputation-based practice here are a few suggestions:

  1. Develop a long range strategic business plan – 10 pages or less
  2. Enhance and broaden the firm-wide marketing program to increase market awareness (referral sources and potential clients) and generate new client business. Review ROI from the firm’s marketing expenditures. Consider increasing marketing budget to 5%-10% of fee revenue.
  3. Develop the firm’s marketing infrastructure to include:

–    Adequate budget
–    First Rate Web Site
–    Appropriate directory listings
–    Inside Marketing Coordinator
–    Relationship Management Database
–    Capability Materials
–    E-News Letters via Service
–    Articles
–    Testimonials
–     Public Relations
–     Accountability by all attorneys and staff

4.    Develop a program for increasing the firm’s exposure to the newer younger generation non-PI and solo attorneys and small firms.

5.    Provide excellent client service

6.   Keep your yellow page ad for now but reduce investment

7.  Understand the power of PR in Trial Strategy.

8. Develop a formal lead tracking process and invest in resources

9. Organize to maximize contact with potential clients.

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

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