Law Practice Management Asked and Answered Blog

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Mar 14, 2017

Sixteen Characteristics of a Successful Contingency Fee Law Firm – A Guide for New Managing Partners

Question:

I am a newly appointed managing partner for an eighteen attorney law firm in Dayton, Ohio. We are a employment law litigation firm that represents plaintiffs on a contingency fee basis. We have been in business for five years and we are facing severe cash flow and profitability challenges primarily due to lackluster contingency fee outcomes. Do you have any guidelines or suggestions as to what we should be aiming for?

Response:

In general I find that successful contingency fee law firms are:

1. Sustainable over the long term
2. Are disciplined, have order and common vision, and manage the firm like a business.
3. Have long-term talented people that are passionate and team players.
4. Organized and have structure.
5. Have the right people on the bus and in the right seats.
6. Meet on a structured basis.
7. Have a long-range plan.
8. Have a budget.
9. Have fee goals for each producer.
10. Have a marketing plan.
11. Are consistently profitable.
12. Have solid cash flow.
13. Use metrics to manage the firm.
14. Are financially stable.
15. Have a succession plan.
16. Are diversified – both practice areas and case portfolio.

I would use this as sort of an initial performance checklist. You may need to examine your case portfolio and your contingency fee case risk profile and look for ways to diversify your case mix.

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Mar 10, 2017

Law Firm Merger – Are We a Suitable Candidate

Question: 

Our firm is a two partner firm in Columbus, Ohio. We have two staff members. There are no other attorneys in the firm. We have been in practice together for seventeen years. I am sixty two and my partner is in his fifties. My practice is limited to intellectual property and my partner’s practice is limited to medical malpractice defense. Recently, as a result of lack of coverage, our unwillingness to hire associate attorneys, and our frustrations with dealing with management issues we have decided that we would like to merge with a larger firm. However, we are concerned that our numbers may not be satisfactory. Our five year averages are as follows:

• Gross Revenue – $500,000
• Expenses           – $240,000
• Net Income       – $260,000

Since we split the pot evenly we each made $130,000 on average.

With these numbers are we a suitable candidate or are we just whistling in the wind? We would appreciate your thoughts.

Response: 

Obviously these are not great numbers. Depending on firm size and type of practice – most firms (small firms) are looking for revenue per lawyer in the range of $360,000 and up. Many firms are looking for books of business that will keep the candidate and an associate busy – $750,000 plus.

However, law firms are also looking for new sources of business (clients) and lawyer talent. There are firms out there that have the work and need help with the work and might be interested in your talent and skills as well as the clients that you could bring in. You may not be able to join the firm as an equity partner but may be able to join as a non-equity partner. (Depends on firm size) Due to the very different practice areas that each of you have you may not find opportunities in the same firm.

I encourage you to look around, start your search, and see what happens.

I have seen many situations similar to yours that have resulted in successful mergers and lateral or Of Counsel positions.

Feb 28, 2017

Personal Injury Law Firm TV Advertising – Prerequisites to Launching a Program

Question: 

I am the owner of a plaintiff personal injury law firm in Arlington, Texas. I have three associate attorneys, six non-lawyer case managers, and three other staff members. Our marketing consists of our yellow pages program and our website. I am considering TV advertising and I would appreciate your thoughts concerning venturing into this arena.

Response: 

This is a big step. TV advertising does work for personal injury plaintiff firms and can take your firm to the next level if you can afford it and are willing to stay the course. A few years ago the managing partner of a a very successful personal injury plaintiff firm stated to me “if I could only afford to do one marketing thing it would be TV advertising.” You can’t dabble with advertising – you must invest for the long haul and have the proper infrastructure in place to process new client inquiries, book appointments, and handle new client intake appointments. If this foundation is not laid you should not invest in a TV advertising program. Here are a few thoughts and observations:

1. Establish your advertising goals and objectives.
2. Retain a top notch media consulting firm with law firm expertise.
3. Establish an advertising budget for at least six months – one year is better.
4. Secure adequate capital to finance your advertising budget.
5. Be prepared for borrow money.
6. Develop your operational infrastructure. This consist of everything from your advertising tracking database, case management system, website, call center/telephone system, call scripts, documented intake process and procedures, dedicated intake call operators, designated people to take in new cases, and case evaluation protocols.
7. Have a process in place to handle and respond to new case calls after hours and on weekends including attorneys on call able to meet with prospective clients during these times.

We have all seen personal injury plaintiff firms that dabble in TV advertising – on TV today and off-air tomorrow. They spent a lot of money and were hoping for immediate gratification. When after running ads for a month or two and they have few or no new cases they concluded that TV advertising does not work. The truth is they were not prepared to stay in the game long enough. This does not work.

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

Jan 24, 2017

Law Firm Practice Sale – Selling a Personal Injury Plaintiff Practice

Question:

I am the owner of a personal injury plaintiff practice in downtown Chicago. I am the only attorney in the firm. I have two legal assistants. I am sixty-six years old and am starting to think about retirement and how to exit my practice. I would like to sell the practice to another law firm or practitioner. Does my practice have any value and can it even be sold?

Response:

After you pull out all the cash and pay down any liabilities the general the value of your practice will be the value of your fixed assets, goodwill (if any), and the value of your contingency fee cases in process. The largest asset of value is your cases in process and often that value cannot be determined until the cases are concluded. If you are an advertising type firm and have   built a sustainable brand beyond your individual reputation there could be a goodwill value. However, since you are a solo I doubt that there is a goodwill value beyond the value of your cases – it all depends whether you end up farming out your cases to another firm or whether you can find someone to come in and take over your practice.

If you have to sell your practice to another firm they will probably not have a need for your fixed assets. You will have to sell or otherwise dispose of them. More than likely you will not be able to come to an agreement with the other firm on a specific sale price for the cases in process. Therefore, you will have to agree on a fee split formula where you are paid as the cases are concluded. This formula will need to consider a percentage of completion factor based on how much work was done while a case was in your possession and while in the possession of the new firm.

Your best bet would be to find an attorney that would come in and take over your practice. He or she would have a need for the fixed assets, your employees, and if you transition properly could benefit from the goodwill that you have generated. In this situation you could receive payment for fixed assets, goodwill, and cases in process. This would also provide continued employment for your employees.

Click here for our blog on succession

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

Dec 13, 2016

Law Firm Marketing – Marketing a Litigation Defense Practice

Question:

Our firm is a fourteen attorney general practice firm located in Dayton, Ohio. Two of our attorneys focus their practice on personal injury defense and the other attorneys are transactional attorneys. While the practice is doing well overall, our litigation work is dropping off. I would appreciate any ideas that you have pertaining to marketing a litigation defense practice.

Response:

Insurance carriers are a leading purchaser of insurance defense services – but so are self-insureds – big box retainers, national restaurants and food chains, sports arenas, shopping centers, and municipalities. Typical decision-makers:

• General Counsel
• Panel Counsel Members
• Litigation Managers
• Risk Managers
• Claims Managers

The law firm needs to know who they want to target and often have to make application to get on the panel/list of approved counsel, respond to RFP’s, submit proposals, etc. to get the business.  In other words, the law firm needs to first get on the list. Then the law firm needs to cultivate relationships with the typical decision-makers.  This is getting harder as many companies have policies against such other than education formats such as seminars, presentations, etc.

Some marketing tools needed to market a defense litigation practice:

• Target Client List/Action Plan
• Firm Resume
• RFP Screening Policy and Procedure
• Proposal Shell Document
• Presentations to client industry groups
• Published articles to client industry groups
• Interviews with national publications
• Structured Marketing/Business Development Plan – Firm Level and Individual Level
• Appropriate directory listings, speaking or publishing opportunities, marketing to current clients, and being proactive in terms of internet and social media marketing.
• Public relations to obtain media coverage.

I would start by developing a target client list, an action plan, and go from there.

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

Oct 11, 2016

Law Firm Management – Valuing a Personal Injury Practice

Question:

I am the firm administrator for a small personal injury five attorney practice in Des Moines, Iowa. The firm's owner is approaching retirement and is planning on approaching other law firms regarding sale of the practice or merger. He has asked me for reports in order that we can value the practice. QuickBooks is the only software that we use. What reports should I use to establish a value for the practice?

Response:

You will want to start by generating a profit and loss statement and a balance sheet from your software. I would run five years of profit and loss statements and the most recent balance sheet. The profit and loss statements will help you illustrate the revenue, expenses, and profit picture for the past five years. The balance sheet will provide a current financial snapshot of the firm's cash-based financial position. However, since most law firms keep their books on a cash-based basis the largest asset – contingency fee cases in progress – is not reflected on the balance sheet. Neither is any value for practice goodwill. Since you do not have a case management system you will have to setup a spreadsheet with columns for the name of the case, date opened, estimated settlement, estimated fee, client costs/advances, and projected date of receipt of fee. You will have to have the attorneys managing the cases help you with the estimates. These will be the key reports you will need initially.

Jul 20, 2016

Law Firm Compensation – Moving From an Eat-What-You-Kill System to a Totally Subjective System

Question:

I am a partner in a 20 attorney firm in San Francisco. We have five partners. Two of the five partners are founders and the other three were made partners five years ago. Our firm was started twenty years ago by two partners of our existing partners. From day one our compensation system has been an eat-what-you-kill compensation system based on a formula with two factors – working attorney collections and client origination. While the system worked okay for the founders, it is not working for the present firm. The newer partners are unhappy with the system and believe that it does not consider other factors that a partner contributes to the firm. Some of the partners are hoarding work, refuse to serve on committees, and don't want to do anything but bill. A couple of my partners suggested that we move to a totally subjective system. I would appreciate your thoughts.

Response:

More and more firms are moving to more subjective based systems for some of the reasons that you have outlined – especially larger firms. Success of such a system is dependent upon the compensation committee that is put in place (typically a three- member committee elected by the partnership) and the level of trust that partners have in the partners serving on the committee. With only five partners you don't have a large enough partnership to put in place such a committee. It would have to be a committee of the five which would probably not be feasible. In addition, your culture may not be conducive at this time to such a system. Your founders have grown up under the present system and will more than likely resist such a formidable change. I suggest that you make some changes to the existing system and see how that works. For example:

1. Include responsible attorney as well as working attorney and originating attorney fee collection in the equation with a possible weighting of 60% working attorney, 20% responsible attorney, 20% originating attorney.
2. Factor in overhead or if not have a reduction provision for attorneys that are consuming un-fair share of overhead.
3. Factor in effective rate/realization and reduce compensation for realization that is below a certain threshold.
4. Setup a bonus pool (15% – 25% of firm net income) for exception performance decided by the five partners. If there is no exceptional performance or the partnership cannot agree the funds are cycled back into net income and distributed in accordance with the formula.
5. Provide production credit or paid special compensation for serving on management committee or as managing partner.

Jul 06, 2016

Law Firm Strategy – Building a Firm Brand

Question:

I am the owner of a fourteen attorney firm in the western suburbs of Chicago. I am 45 years old and I started my practice as a solo ten years ago. The firm focuses on business litigation exclusively. Like many law firms the name of the firm is My Name, LLC. The firm has grown rapidly and we have been successful. However, I am concerned that I should be building more of a "firm brand" and the firm is too much about me. I would appreciate your thoughts?

Response:

This is a common issue for solos and sole owners. While it may be an ego booster for you in the early days of your practice it can be a negative in future years, especially when you approach retirement and want to exit the practice. In essence the firm is all about you and the goodwill is you. This can have negative consequences when you:

1. Try to merge with another firm.
2. Try to sell your practice.
3. Try to approach certain clients.

I suggest that you consider the following to develop more of a firm image or brand rather than just you.

1. Do all you can to insure that the firm is not uniquely you.
2. Consider a firm name that does not include just your name. You might consider more of a trade name or a name that includes other partners or members if associates are made partners or members in the future .
3. Encourage your associates to develop their individual reputations/brands and feature their accomplishments in their bios on your website. (Writing, Speaking, CLE Presentations, Certifications, etc.)
4. Help your associates grow.
5. Consider at non-equity partnership for deserving associates.
6. Feature other attorneys in the firm in your marketing efforts and events.

Feb 16, 2016

Law Firm Acquisition – Acquiring a Personal Injury Plaintiff Practice

Question:

I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.

Response:

It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.

While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.

There are a variety of other approaches. I have never seen the same approach used twice.

Click here for our blog on succession

Click here for out articles on various management topics

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

Dec 15, 2015

Law Firm Retreat – Suggestion for a Firm Having Their First Retreat

Question:

I am a senior partner in a fourteen attorney intellectual property firm in Memphis. We are planning on having a firm retreat in January 2016. We have never had a retreat before. Our plan is to have a one day retreat facilitated by a consultant with specific focus on competitive strategy and marketing. We have just decided this week that we would like to do this and are just beginning the planning process. I would like to hear your thoughts and suggestions.

Response:

Here are my thoughts:

1. First of all it is now December and January is just around the corner and I believe that you need to have at least 60 days to properly prepare and plan for the retreat. Most management consultants that facilitate retreats, including myself, will want to get to know the firm and will want to conduct attorney interviews, (face to face or via telephone depending upon whether they are local), review financial reports and other documents, and prepare the retreat program. Participants (your people) may need time to prepare as well. Off-site facilities will need to be booked as well.
2. Decide in advance the outcomes that you would like to achieve. Is it to entertain, inform, educate, or to develop specific solutions or action plans.
3. Keep the retreat's focus narrow and concentrate on just a couple of topics – it sounds like you are doing this.
4. Establish ground rules upfront – example – off agenda items, day to day operations issues, etc. are off limits.
5. Building follow-up action plans into the program and identify who will be responsible for following up after the retreat is over.

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