Law Practice Management Asked and Answered Blog

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Jul 15, 2010

Getting Control of the Financial Side of Your Law Practice

Question:

I am a partner in a 14 attorney firm. Our bookkeeper has been with us for 20 years. We have a time and billing system, a separate bookkeeping system, and a separate database for clients, and something else for trust accounting. The other partners and myself do not know the name of the software that we are using, don't know how to access the software, and we have to ask the bookkeeper for any financial information that we require. We feel like "hostages". She gets offended when we ask questions. When we do receive information we don't know how to read or interpret much of the information. How can we get control of our firm back?

Response:

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

The owner (or an appointed partner(s) in larger firms) obtain detailed training on the accounting software system(s) along side the bookkeeper when the system is implemented. In addition to general operation of the software, special training should also be obtained on intepretation and use of the management reports.

In your current situation – this may be a good time to consider upgrading your system and at that time obtain training on the new system, review the roles of all parties, and current procedures.

Insure that you have accounting controls in place and appropriate segregation of accounting duties.

Outline your expectations and requirements of the bookkeeper, meet with her/him, and communicate appropriately.

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


 

  • Jul 15, 2010

    Valuation of My Law Practice For Merger or Acquisition

    Question:

    I have been thinking merging or selling my practice. How do I determine what my practice is worth?

    Response:

    You might want to consider retaining the services of outside advisors to help you with this process. There are a variety of methods used to value law practices including:

    1. Fair Market Value Methods
    2. Rule of Thumb Methods
    3. Price Earnings Ratio
    4. Discounted Cash Flow Models, etc.

    CPA practices are often valued using a rule of thumb method employing a multiplier of 1.0 to 1.5 times average gross revenues for the past five years. Thus, a practice with average billings of $400,000.00 per year might sell for $600,000 with 50% of the purchase price paid upon closing and the balance (50%) paid over a five year period based upon subsequent collections.

    Law practices are more difficult to value. CPA firms often have more repetitive work from ongoing clients and less risk in the practice – say compared to a personal injury law practice. CPA firms often have enforceable non-compete agreements which are non enforceable and therefore non existent in law firms. Law firms have much more fluctuation in practice valuation and no valuation model dominates. The rule of thumb model – when used – ranges from .5 to 3.0% – and will dependent upon the amount of repeat business, extent of institutional vs indivdiual clients, and the ability to sucessfully transfer clients to the acquiring practice.

    Look for ways to institutionalize your practice in a way that your practice is not "uniquely you."

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

    Jul 14, 2010

    Succession/Exit Planning Questions

    Question:

    I am sole owner of a 8 attorney firm in the Northwest. Two other attorneys are income partners – no equity – and the other five attorneys are associates. I am just turning 50 and am beginning to think about future retirement. What questions/issues should I be thinking about?

    Response:

    Fifty seems to be the point at which attorneys being thinking about their retirement and their future. Some even consider and in fact make complete career changes at this point in their lives. Here are a few questions to begin thinking about:

    1. Have you decided when you want to retire and leave your firm? Or do you want to work forever?
    2. What amount of cash or annual cash flow do you need when you exit?
    3. Do you presently have a retirement plan and how much income to you project that it will provide at different exit times?
    4. To whom do you want to transfer your interest? Family members in law school, other attorneys in the firm, another firm, etc?
    5. Based on future cash flow, do you know how much the firm is worth today?
    6. Do you know how to best maximize the income stream generated by the firm – in the years ahead while you are still with the firm and after you leave the firm?
    7. Have you been able to institutionalize the firm – or is it uniquely you?
    8. Is the firm even marketable?
    9. Do you have a succession/exit plan?
    10. Do you have a plan for your business if the unexpected happens to you?
    11. Have you taken steps to protect your family's wealth?

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

    Jun 23, 2010

    Law Firm Cost Cutting Strategies

    Question:

    Our firm is a 20 attorney defense firm in the Southwest. We are having a hard year and are looking for cost cutting ideas and strategies.

    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.

    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.

    Good luck!

     

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

    Apr 08, 2010

    Why Do Law Firm Mergers Often Fail

    Question:

    Our firm has been discussing the possibility of merging with another law firm of similar size. We are are 25 attorney firm. We have heard horror stories of firms that have merged and been unhappy with the experience. Why do mergers fail and what should we look out for?

    Response:

    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 excitment about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due dilligence on the people. It is critical that firms insure that cultural due dilligence 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.

    Do all the due dilligence that you can – start with the people – then move through the rest of the process.

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

    Dec 26, 2009

    Dialing For Dollars: Tips For Collecting From Your Clients

    Q.     These economic times have been challenging for our firm at best. A major problem for us is collecting our client receivables. Do you have any suggestions?  

     

    A.     Regardless of whether economic times are good or bad cash flow is always a matter of prime concern for law firms. With it taking in general 3-4 months to convert client work to cash anything the firm can do to speed up the collection cycle is always desirable. Here are a few ideas:      

      1. Do everything you can to keep receivables from going out to 90 days. Receivables aged one month are 93.2% collectable; three or more months are 72.3% collectable, and one year or more are 28.4% collectable. 
      2. Call – don't waste time with mailing follow-up letters. 
      3. Treat collection calls as an extension of client service. Calls should be treated as client service calls – not collection calls.
      4. Caller should be someone other than the attorney who did the work for the client, qualified staff member or outsourced Accounts Receivable Account Manager.
      5. Calls should be made by a trained Accounts Receivable Account Manager with client-friendly people skills.
      6. Calls should be made on each account as soon as it reaches the due date.
      7. Accept credit cards and offer it as a payment option.
      8. Discount bills when necessary if it will expedite payment and engineer payment plans.
      9. Diary, calendar, and follow-up.
      10. Consider outsourcing to an Accounts Receivable Account Manager – not a collection firm.

        Consider our firm for outsourcing this effort.

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


     

    Dec 22, 2009

    Is Your Firm Ready For the New Competitive Landscape

    Question:

    At a recent partner meeting we discussed the current economy and what changes we need to be thinking about both now and when we come out of the recession. What are your thoughts?

    Response:

    As law firms emerge from the current recession many will face many new business realities and be forced to consider whether existing business models are still appropriate for the future. Legal process outsourcing (LPO), off-shoring, virtual offices,  alternative billing, etc. We believe that the recession may accelerate the pace by which firms reevaluate existing processes and consider new business models.

    Ten years ago (1999) the ABA hosted the "Seize the Future" conference in Phoenix, Arizona.

    The conference predicted massive change fueled by the internet. Many of these changes we have already witnessed and experienced – others are yet to come – possibly in the near future. Richard Susskind's popular book "The End of Lawyers: Rethinking the Nature of Legal Services paints an interesting future. As we emerge from the recession pressures will exist that may excelerate some of the other changes that have been predicted.

    Here are some changes that some firms are already implementing:

    Here are a few examples:

    Direct Law

    Lawyers on Demand

    FSB Legal Counsel

    Virtual Law Partners

    Fronterion

    Talwar and Talwar

    The key ingredent is to not get stuck in the past. Incumbancy and pass success has never been worth less. Ask General Motors.

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

    Dec 16, 2009

    Off-shore Outsourcing Tips

    Question:

    Our firm is beginning to consider off-shore outsourcing. Our clients are asking about this as a service delivery option. Do you have suggestions?

    Response:

    Off-shore outsourcing is the new frontier. While there are opportunites and benefits that can result there are also pitfalls. Here are our thoughts:

    1. Do your homework. Proceed with caution and do extensive due dilligence.
    2. What are reasons, objectives, for such an arrangement? 
    3. Do a search for potential vendors? Ask other law firms who they are using and what their experience has been?
    4. Obtain a certified photo of the vendor's premises.
    5. Insure that the vendor has appropriate data security in place at their premises.
    6. Insure that the vendor has third party audits conducted.
    7. Obtain vendor references.
    8. Verify vendors past history with clients.
    9. Review vendor contracts.
    10. Determine how money will be transferred.
    11. Check into liability issues and coverage with your malpractice insurance carrier and insure that the vendor has professional liability insurance.
    12. Check ethic rules.
    13. Look into client privilege issues.
    14. Research export control issues.
    15. Obtain client consent in writing.
    16. Start with a small pilot project and then initially on small projects at are not subject to export control rules.

    Start slow with a small project and monitor results. Build up your initial experience.

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

    Dec 13, 2009

    Insurance Defense Law Firm Strategy

    Question: I am a legal administrator with a 14 attorney law firm in the Chicago area. It seems that it is becoming more and more difficult to deal with insurance company clients.While we have always had to deal with low billing rates and unrealistic controls mandated by insurance companies, recent trends have reached levels that threaten the business relationship which has reached an all time low. We must now jump through even more hoops to be able to play in the insurance defense arena. What are your suggestions?

    Response: The present state of the insurance defense practice presents numerous challenges to the law firm. These challenges simply cannot be ignored – they will have to be faced head-on. The solutions are complex and will require time to sort through. While solutions can come in different varieties, they will take the form of one of two general strategic approaches.

    Reinvent The Practice – Stay In The Game

    For many firms the appropriate strategy may be to stay in the game. These will be firms that have a well-established reputation in insurance defense, where insurance defense represents a major source of their revenue, and where adequate leverage and profitability and leverage exist. These firms will not be firms that dabble in insurance work. These firms will be committed to this practice area and will focus on it exclusively. They will be innovative client-market driven firms that blend contemporary approaches with the lessons learned from the founding fathers.

    Exit Or Diversify The Practice 

    This strategy will be appropriate for firms that desire to get out of insurance defense work entirely or that desire to reduce their dependence on insurance defense work by diversifying the practice. In this way the mix of the practice can be altered. This strategy will not be easy. It will be a rough road and will take time.

    Insurance defense attorneys typically do not have the expertise, experience, or the client contacts in other practice areas such as corporate business. Another factor is perceived image. The business community often views insurance defense firms as second rate firms. Often the law firm has in essence branded itself as an insurance defense firm. This can be a difficult obstacle to overcome. Client law firms with whom this author has worked have found that it can take five years or longer to accomplish such objectives.

    Specific tactics will depend upon the firm’s size and the amount of insurance defense work in the practice mix. One of the first steps is for insurance defense firms to try to leverage their litigation experience in order to obtain the defense work from self-insured corporations and general corporate representation. In some instances it may be possible to pick up some of the general corporate representation of insurance companies. This will be a tough road.

    Larger firms will require some new blood in the firm with expertise, experience, and a book of business in the desired practice areas. This will require insurance defense firms to consider merger or acquisition. Smaller firms may be able to accomplish these objectives completely internally or with lateral partner acquisitions. Both large and small firms should begin extensive programs of continuing education in desired practice areas. Firm and personal marketing plans should place strong emphasis on creating new business relationships as well.

    Much work needs to be done by management of insurance defense firms. The process will take time, hard work, and dedication regardless of the strategic options chosen. Now is the time to get started. Click here for an article on the topic.

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

    Dec 13, 2009

    Feasibility of Home and Virtual Offices

    Question:

    I am a solo attorney in private practice. I have been practicing for two years. The bulk of my practice is in the wills, trusts and estates area. I occasionally handle real estate transactions as well. I work from a home in office and meet clients in their homes at night. I have given thought about moving to an office outside the home, but even if I did I think I would still end up meeting clients in their homes at night. My clients seem to really appreciate this and as a result I have yet to walk away from a potential client's home without a signed retainer agreement. What are your thoughts on home offices?

    Response:

    Sounds like working from home has worked well for your practice and it has caused you  to deliver personal attention to your clients which is so necessary in your practice area. I opened my consulting practice 25 years ago and had the overhead of an office and staff from day one. So much has changed since then. Now I have both – small office in St. Louis and home offices that the rest of us work from remotely – Less staff – and less space. We have downsized our office dramatically over the years and now primarily use it for client meetings/presentations when needed. Our infrastructure – phone systems, files, copiers, file servers, and people are primarily housed out of remote home offices. More and more of our work is being delivered remotely/virtually using GoToMeeting and other such tools.

    Take a hard look at your purpose and cost for the office and then go from there. Also, consider that sometimes we have to spend money to make money. The increased visibility than the office may give you generate more revenue than its cost? Also, as you get busier and need to boost up infrastructure – staff, systems, etc., you may need a place to house the infrastructure. If you just need a place for client meetings occasionally you might be better off having a virtual office suite arrangement where you pay and use a space as needed with some of the companies that provide such as service. If you have a Regus in your area – you might look into that option. http://www.regus.com/

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

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