Law Practice Management Asked and Answered Blog

Category: Firm

Jul 26, 2016

Law Firm Marketing – How Much Should We Be Spending on Marketing?

Question:

I am the managing partner of a 12 attorney firm in Providence, Rhode Island. In our recent partner meetings we have been discussing ramping up marketing. How much should we be spending on marketing?

Response:

Studies that have been conducted indicate that law firms that provide services to business firms (B2B) spend approximately 2.4% of fee revenue on marketing. However, law firms that focus on individual consumers (retail law if you will) spend much more – 10%+ of fee revenues on marketing – especially if strong referral networks are not in place. I have several PI, SSDI, Elder Law and Estate Planning firm clients that are spending 10%+ of their fee revenue or greater on marketing. I have some extremely successful PI firm clients spending 20% of their revenue on marketing. 

The amount of appropriate investment can depend upon referral networks in place. I have successful PI and Estate Planning firms that are spending very little on marketing, are getting all of their business from their referral networks, and spending next to nothing on marketing and advertising. (By referrals I am speaking about professional referrals not involving a referral fee and client referrals. If referral fees are involved they should be considered a marketing cost) So it depends upon your situation, the type of cases you are going after, etc.

Be careful of spending to be spending. Marketing expense scan be a deep hold that yields no return on investment. Insure that your marketing investments are targeted, well thought out, measured, and are working. Determine up from whether your goal is long term brand building or short term lead generation going in.

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

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 13, 2016

Law Firm Financial Management – Realization Rates

Question:

Our firm is reviewing its partner compensation system and one of my partners suggested that we incorporate realization rates. This term was new to me. Is realization the percent that we collect? Your comments would be appreciated by all of us.

Response:

Not exactly. There are the following three general types of fee realization.

Overall Realization which is the relationship between the standard value of time (standard billing rate) and the actual fees collected. This is calculated by taking the value of unbilled time at the beginning of the year plus fee accounts receivable at the beginning of the year plus value of billable time worked during the year minus the value of unbilled time at the end of the year minus fee accounts receivable at the end of the year – equals potential fees to be collected. Realization (Actual fees collected/potential fees to be collected.)

Billing Realization which are actual fees billed/potential fees to be billed. This is calculated by taking the value of unbilled fees at the beginning of the year plus fees recorded during the year minus unbilled fees at the end of the year – equals potential fees to be billed. Billing realization is then calculated by dividing the actual fees billed by the potential fees to be billed.

Collection Realization which are actual fees collected/potential fees to be collected. This is calculated by taking the value of AR fees at the beginning of the year plus fees billing during the year minus AR fees at the end of the year. Collection realization is then calculated by dividing the actual fees collected by the potential fees to be collected.

All three calculations are important and tell different stories. They can be calculated at a firm level, client level, timekeeper level. Realization reports are available in the better law firm time and billing software programs.

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

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.

Jun 28, 2016

Law Firm Succession – What to do When No One is Interested in Equity Ownership

Question:

I am the owner of a fourteen attorney insurance defense practice in Baltimore. I started the firm twenty years ago after leaving behind my partnership in another firm. Of the other thirteen attorneys there are four non-equity partners and the rest are associates. I am sixty three years old and beginning to think about retirement and how I am going to transition out of the practice. Two of the non-equity partners are well seasoned attorneys, have major case responsibility, and have developed solid relationship with clients. I have discussed equity partnership vaguely with two non-equity partners but their interests seem lackluster and they have been non-committal. I would appreciate your thoughts and advice on what my next steps should be.

Response:

It sounds like your non-equity partners are on the fence as a result of the "vague" nature of your discussions. It is hard for non-equity partners or associates to commit to equity and taking on the risk of ownership when they don't know what the deal is. This is a scary proposition for them and they need detailed information so they can evaluate and make an informed decision. A vague discussion doesn't cut it. I suggest that you put together an equity partnership proposal that includes:

1. Profit and loss statements for past the five years.
2. Balances sheets for the past five years.
3. A current accounts receivable and unbilled work in process report.
4. Tax returns for the past five years.
5. Malpractice insurance application.
6. Building and other leases.
7. Proposed Partnership Agreement
8. Proposed Equity Partner Compensation Plan
9. Planned date of admission
10. Governance and management plan
11. Ownership percentage being offered
12. Capital contribution or buy-in requirement

Jun 22, 2016

Law Firm Associate Satisfaction and Retention

Question:

I am the owner of a twenty attorney litigation firm in Seattle. The nineteen associates are all in the same tier or category and are paid a salary plus bonus. Their time with the firm ranges from one to fifteen years. I enjoy sole ownership but I realize that to continue to grow and prosper I must make some changes. I have recently lost several associates that I would have liked to have stayed with the firm. I am also getting stressed having all of the management responsibility since I currently make all of the decisions. Several associates have told me that the morale is low. I welcome your thoughts.

Response:

Compensation and benefits is one determinant as to whether associates are satisfied with employment at a firm. However, compensation and benefits is not enough to motivate and retain top performers. Law firms must help their associates invest in their careers and motivate and help them develop competencies and skills to enhance their productivity. With the downsizing, push for 2000+ annual billable hour push, etc., associates are skeptical about their futures and feel they have no power or ability to influence their careers. Associates want:

• To learn
• To feel they are part of the firm and larger picture
• To know where the firm is headed
• To participate in management
• To know what is expected of them
• To know whether advancement is possible
• To know what they have to do to advance their careers
• To have control over their advancement

Here are a few thoughts:

1. Share more information about the firm where you can – its plans for the future, where it is heading, it's strategic plan, etc.
2. Improve and open up communications with associates.
3. If there are other tiers such as senior associate, non-equity partner, equity partner – prepare and share with your associates documents that outline what it means to be a member in each tier and what performance and other factors are required to advance to each tier.
4. Improve your review process and incorporate goal setting with each associate.
5. Consider a management advisory committee or other committees where associates can participate in firm management.

Jun 15, 2016

Law Firm Performance Management – Managing Performance Reviews

Question:

Our firm is a 15 attorney firm in Kansas City, Missouri. I am a member of the management committee and our committee is charged with the responsibility of determining partner, associate, and staff compensation. Several years ago we switched to a competency based goal driven system for partners, associates, and staff. The system requires self-evaluations, peer evaluations for partners and associates, and self-evaluations. This requires extensive performance reviews, tracking, scheduling, and documentation. We are using Excel spreadsheets and MS Word documents and having a hard time managing all of this. Do you have any ideas?

Response:

With 15 attorneys you probably have close to 30 people in the firm. I would look into performance management software (performance appraisal software) to management the process. Typical features of performance management/appraisal software, depending on the vendor, include:

• 360 degree feedback
• Ad-hoc reviews
• Alerts and reminders
• Appraisal history and tracking
• Goal setting and tracking
• Compensation management
• Competency tracking
• Custom rating scales
• Individual development plans
• Peer appraisals
• Review cycle tracking
• Self-guided portal
• Self-appraisals

Some vendors offer cloud-based solutions and others offer install software solutions.

Just a few of the vendors include:

• Halogen
• Performance Pro
• Trakstar
• Micron
• Reviewsnap

Some of these solutions can be pricey – so look into a solution is right-sized for your firm. I have firm's your size using solutions that are costing around $3000.00 per year.

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

Jun 07, 2016

Law Firm Executive Committee – Setting it Up

Question:

I am a partner in a twelve attorney firm in Downers Grove, Illinois. We have 8 partners and four associates. We are managed by committee of the hole – all partners are involved in all decisions. We have been considering moving to an executive committee. How do we set it up?

Response:

How you setup your executive committee will be key to the success of the management plan. How you setup and constitute your executive will be crucial. Selecting the right partners is paramount. How the partners are selected, who serves on the committee, how the committee operates, and other matters must be spelled out and communicated to all partners. Here are a few ideas:

1. Consider a three member executive committee.
2. Elect members to staggered three-year terms. On the initial election elect the individual with the most votes to a three- year term, the individual with the second most votes to a two-year term, and the individual with the least votes to a one- year term.
3. Hold elections annually to fill vacancies for the upcoming year.
4. Consider adopting a policy of requiring a partner whose term has expired to remain off the committee for one year before being able to run for another term.
5. Incorporate procedures for removal of members by majority vote of the partners. Specify the voting requirements.
6. Outline the decisions that are reserved for full partnership vote, decisions to be made by the executive committee, and decisions to be made by the office administrator.
7. Develop a job description for the partnership, the executive committee, and the office administrator incorporating the above. 
8. The committee should elect a chair annually, meet monthly with a prepared agenda, and have written published minutes or notes of what transpired at the meeting, action items to be taken, and who is responsible.
9. The firm administrator should attend all meetings except when his or her performance is being discussed.

The key ingredient of a successful executive committee is that partners perceive the committee as competent, fair and without personal agendas, and that it gets things done in a timely and efficient manner. The process is as important as the outcome.

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

May 31, 2016

Law Firm Succession – Transitioning Clients to the Next Generation

Question:

I am a member of a three-member executive committee for a 34 lawyer firm in Austin, Texas. We have been in practice for over one hundred years. While we have had partners retire in the past with no issues we are now facing a situation where seven partners are approaching retirement at the same time and each of them controls significant books of business. What can the firm do to ensure that retiring partners properly transition their clients so the firm can continue to flourish after the partners are no longer here? We would appreciate your thoughts.

Response:

This is problem that many law firms are facing as baby boomers approach retirement. Rather than one or two partners coming up for retirement many firms are experiencing a "bunching of retirees" all at the same time. This can have a significant impact upon cash flow planning, client development, and attorney talent management.

Here are a few thoughts:

1. Access your lawyer talent pool to insure that you have people in place that can service the needs of the retiring partner's clients. If your talent pool is insufficient develop a strategy (lateral recruitment, merger, etc.) and develop a plan for locating lateral/merger opportunities.
2. If the firm does not have a plan for dealing with the upcoming partners retirements and the transition of their clients write a client transition plan and commence its implementation. The plan should include an action plan that is structured like a project plan with beginning and ending dates, specific times, and individuals assigned to specific tasks. The plan should serve to keep things moving over a three to five year transition time period.
3. Your committee should be communicating with your partners approaching retirement, talking with them about their goals and timelines concerning retirement, and getting them to commit to a date certain even if it is many years into the future.
4. The compensation should include incentives that encourages retiring partners to transition rather than hoard clients.
5. Determine a shortlist of who in the firm should take over clients.
6. Begin client introductions to successor attorneys early. Go deep with relationship building – not just a simple introduction. Your committee and the retiring partners should monitor and follow-up with successors to insure that they are developing relationships with these clients.
7. Assign co-responsible attorneys to all matters that a retiring partner is assigned.

There are a lot of other ideas that you can explore. The key point is to communicate with your senior partners, get them thinking about retirement rather than pushing it under the rug so there is a three to five year transition period, and start early. I have seen too many situations where a partners walks in and announces that he wants to retire in the sixty days, six months, or one year. This is not enough time if the firm wants to retain retiring partner's books of business.

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

May 24, 2016

Law Firm Marketing – Using Webinars to Market an Estate Planning Practice

Question:

I am the managing partner of a six attorney boutique estate planning practice located in Madison, Wisconsin. We had a great year last year financially as we have the last several years. However, this year (2016) we are off to a terrible start. Our new matter intakes are down by twenty-five percent. We have a very proactive marketing program – print advertisements, directory listings, top notch website, and we do seminars for prospective clients. I know other estate planning attorneys that do more seminars than we do. Should we be doing more seminars? I would appreciate your insight. 

Response:

I have other estate planning law firm clients telling me that their new client intakes are down this year as well. I think it is a demand/timing issue. Regardless of the amount of advertising I find that most estate planning firms receive the bulk of their clients from past client referrals, referrals from friends, and referrals from other professionals including lawyers. Some of my estate planning law firm clients that spend the least on advertising are the most successful financially.

Regarding seminars, I believe they are not having the same impact that they did in the past. More and more people are going to the internet for information and content. State Bar Associations are reporting that more and more CLE programs are being delivered electronically via the internet in the form of webcasts and webinars. College degrees, law degrees, and LLM degrees are being offered via the internet. I believe that traditional face-to-face seminars will draw less qualified prospective clients than in the past.

I would still look for opportunities to "partner up" with organizations that are willing to sponsor seminars but I would resist the temptation to sponsor and fund seminars yourself.

You might want to experiment with sponsoring your own educational webinars for clients and prospective clients and look into webinar products such as www.GoToWebinar.com. The expense would be minimal and you may have better results.

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

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