Law Practice Management Asked and Answered Blog

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May 22, 2018

Law Firm Financial Management – Using Credit Line to Purchase Equipment

Question: 

I am the financial partner with our sixteen attorney firm in Indianapolis, Indiana. The firm has had a rough couple of years. We had several partners leave the firm and they took several corporate clients with them. Unfortunately, this was ongoing consistent retainer and time bill work. While we still have some retainer and time bill corporate work, a much larger mix of our work is now contingency fee work. As a result we have had some cash flow challenges and for the first three months of this year there was no money to pay partner draws. We have a credit line with the bank of $125,000 that we have not used. We only use our credit line for long-term equipment purchases. We would appreciate any suggestions that you have.

Response: 

A line of credit is designed to be used for financing short-term working capital needs – not long-term financing needs such as fixed asset acquisitions. I would use either leases or long-term bank loans for equipment and other fixed asset financing secured by those assets. This leaves your your credit line available for short-term financing needs. While I hate to see a firm use a credit line to pay partner draws, often there is no other choice in law firms that are not adequately capitalized, especially contingency fee firms.  Partners have to eat too. Contingency fee practices can have wide cash flow swings and often have to use their credit lines to temporarily fund payroll and partner draws.

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

 

May 16, 2018

Law Firm Client Surveys – How to Collect and Report the Data

Question:

Our firm is a sixteen attorney firm in Chicago. Our marketing committee has been discussing implementing a client survey program. We are not sure where to start or how best to collect and report the data. Your thoughts would be appreciated.

Response: 

Surveys can be used for a variety of purposes including the following:

I assume that you are planning on doing a client satisfaction survey in order to solicit feedback on how well the firm is meeting client needs, quality of services being provided, and additional needs that the client may have where the firm can provide services.

The type of survey will depend upon whether your clients are individuals or institutional clients such as corporate or governmental. If your clients are institutional I recommend that you conduct telephone structured telephone interviews with these clients using a interview questionnaire consisting of quantitative and qualitative questions. If you have a large number of institutional clients then you may want to consider conducting these interviews with your top fifty, twenty-five, or ten top clients and use a paper mail survey or online survey for the remainder. For individual clients you may want to use a paper survey or online survey for your entire database of individual clients and thereafter a paper mail survey or online survey at the conclusion of a matter. Another option would be to survey a random sample of your clients.

Once the surveys are completed – whether telephone interviews or paper mail or online surveys the questionnaires/surveys will need to be tabulated and provided in some form of a report. Some firms use two Excel spreadsheets – one for the quantitative responses and one for the qualitative/narrative responses for interview and paper mail questionnaires.  Then averages, percentages, and other summary statistics can be calculated for the quantitative responses. If you use an online survey service such as Survey Monkey the tabulation and the statistics will be done already for these surveys. If you have a Survey Monkey account you could also enter your interview questionnaire and paper mail questionnaires responses into Survey Monkey and use it rather than Excel. If you want more sophisticated statistical analysis you might want to look into statistical software such as SPSS which is sold and marketed by IBM.

Once you have summarized analyzed the questionnaires you may want to prepare a summary report document using your word processing software. Include the tabulation, statistical calculations, charts, etc. as attachments to the report.

There are several articles on our website – see links below – that discuss client satisfaction survey programs and how to get started.

Click here for our blog on client service

Click here for our article on client satisfaction

Click here for our article on client surveys 

Click here for our article on analyzing survey results

Click here for our article on developing your client service improvement plan

Click here for our article on tips for rewarding and recognizing employees

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

May 08, 2018

Of Counsel Arrangement as a Law Firm Exit Strategy

Question: 

I am the owner of a solo real estate practice in Merced, California. I have two staff members that work for me. I am the only attorney in the firm. I am sixty years old. While I am concerned about the long term exit from the practice I am also concerned about office coverage in case something would happen to me in the short term. I appreciate any recommendations that you may have.

Response: 

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

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

 

May 02, 2018

Law Firm Overhead and Profit Margins

Question: 

I am an attorney in New Orleans that has been a lawyer for ten years. I practiced with a small firm for eight years as an associate and then opened my own firm two years ago. I primarily work from home supplemented with a virtual pay-as-you-go office. I do not have any staff employees. I have been approached by a fourteen-attorney firm that would like me to join their firm as an income partner. Their offer includes a salary which I feel is low and a bonus based upon a percentage after covering my salary, other direct costs, and indirect firm overhead. The overhead allocations seem extremely high to me. In my practice I am bringing in around $100,000 in gross fees and my overhead averages $10,000-$15,000 per year. My profit margin is around 90%. I feel like I am better off building up my practice rather than accepting their offer. What are typical overhead and profit margins for law firms?

Response: 

We have to be careful how we define overhead. Overhead is generally to be considered all law firm expenses less attorney salaries and sometimes less paralegal salaries. The overhead ratio would then be the overhead divided by firm revenues. Profit margin is  expressed in terms of owner (partner, shareholder, etc.) earnings. In other words what is going into the owner’s pockets in terms of salary, share of profit, etc. Owner earnings is firm revenue less all firm expenses including associate and paralegal salaries but not including owner salary or compensation. The profit margin is total expenses (excluding owner compensation) divided by firm revenues.

A desirable profit margin range for law firms is thirty-five to forty-five percent.  Some firms are able to attain fifty percent. Profit margins depend upon the type of law practice, leverage ratios (associates to partners), how well the firm is managed, etc. I have some very successful firms with profit margins as low as twenty percent but the partner earnings are very high.

Your current overhead and profit margin is not sustainable in the long-term. While you have low overhead and a high profit margin you also have low earnings. You are only earning $85,000. You will soon reach a point where in order to increase your revenues you will have to hire people, acquire office space, and buy phone systems and other equipment. When this occurs you will be in a similar situation as to the law firm you are talking with.

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

Apr 25, 2018

Law Firm Management Committee vs Full Partnership

Question: 

I am a partner in a fourteen attorney firm in San Antonio, Texas. We have eight partners and six associates working in the firm. The firm was founded twenty years ago, so we are a first-generation firm. Two of the partners were the founders of the firm and the other six were made partners in later years. Currently our method of governing the firm is handled by the full partnership. While each partner has one vote, we try to manage by consensus. We do not have a managing partner or any committees. We have an office manager that primarily handles the accounting and the staff oversight. The partners meet weekly to discuss issues and make decisions. We are beginning to have issues with our management structure. Partners are not showing up for the weekly meetings and complaining about the amount of time it is taking away from servicing their clients. Should we consider a different approach? We would appreciate your thoughts.

Response: 

You are at a difficult size, still a small partnership but big enough that management by all may no longer be working for you. I believe that you should consider either a managing partner or a management committee of three partners elected by the partnership. For this to work all of the partners must agree to surrender some degree of independence to a managing partner or a management committee. I would start with putting together a list, or job description, for the managing partner or management committee. Partnership agreements often outline management decisions (powers) reserved for the partnership with all decisions handled by the managing partner or management committee. If your partners are unwilling to  surrender some degree of independence then changing to a managing partner or management committee may prove to be wasted effort.

Click here for our blog on governance

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

Apr 17, 2018

Subjective Law Firm Partner Compensation Systems

Question: 

I am a partner in a twelve attorney commercial litigation law firm in Palm Beach, Florida. There are five partners in the firm. We are contemplating merging with another firm in the area of similar size. We have done our due diligence and have come across a possible non-starter – the compensation system. Our compensation system is totally objective – formula-based very close to an eat-what-you-kill system. The other firm has operated under a subjective system and they are pushing for the firm to operate under this type of system. We would appreciate your thoughts and enlightenment concerning subjective-based systems.

Response:

Subjective-based systems are the most commonly used approach to setting partner compensation, especially in larger firms. More and more firms your size and larger are moving to subjective systems as a result of the failure of other systems to account for the full range of contributions that partners make to the law firm. Subjective systems can take on a variety of forms but the central theme of such systems is that they rely on a subjective assessment of partner performance, without reference to specific weighting of factors or a set formula. This is not to say that subjective systems lack structure or predictability, or that they don’t consider objective financial data. Successful subjective compensation systems include these elements and more.

Subjective compensation systems vary widely. Here are some of the most common elements found in subjective systems:

In additional to subjective compensation systems some firms used hybrid systems that employs objective (formula) and subjective components.

Subjective systems are not for all firms. They will fail with out strong, trusted, leadership. In very small firms it is difficult to structure a compensation decision making body.

It sounds like your firm and the firm you are thinking of merging with may come from two very different cultures. Subjective systems work well for firms that are “firm first” firms but not for lone ranger firms that often operate under eat-what-you-kill systems. If you firm is not a long ranger firm and your are in fact a “firm first” firm or aspire to be such you may be able to adapt to a subjective system. However, you may need a post-merger phase-in period. Another comprise approach might be a hybrid system.

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

 

 

Apr 11, 2018

Law Firm Practice Groups

Question: 

I am a partner and a member of our three-member executive committee. Our firm is a twenty-five attorney litigation defense firm in Kansas City, Missouri. We handle matters such as personal injury, medical malpractice, professional malpractice, products liability, and health care law. Each attorney handles and manages his or her own cases and operates in isolation of the other partners in the firm. Other than attending a quarterly partnership meeting there is little interaction among the partners. We have been discussing whether we should form practice groups. We would appreciate your thoughts.

Response: 

Practice groups can be excellent vehicles for enhancing communications, attorney and staff skill development and training, practice management, and marketing. Practice groups should share the mission and vision of the firm as well as goals of enhancing services to clients by developing the skills of the members of the group in a particular legal specialty or industry niche and developing business for that particular group. Practice groups should not operate as isolated islands but should be structured and integrated with the firm. Specifically, functional practice groups should:

Practice groups can be structured around legal specialties such as personal injury, product liability, and professional malpractice. Other practice groups can be structured around industry niches such as energy, health care, etc. In cases where a firm has a very large client a practice group can established for that specific client.

While practice groups can have their advantages, I have found that in many firms they are dysfunctional. They do not meet on a consistent basis, have no goals, or direction, poor leadership, and seem to accomplish little. To be effective  practice groups must:

  1. Be setup by the executive committee with specific goals and have a written charter developed by the executive committee.
  2. Effective leaders should be appointed by the executive committee to serve as chair of the practice group assigned. Specific roles should be identified as well as expectations.
  3. Practice group chair leadership effectiveness should be a factor in the compensation system.
  4. Practice groups should have written strategic plans that integrate with the firm’s strategic plan.
  5. Practice groups should meet monthly.

I believe a practice group would be a logical direction for your firm. You might want to start slow and try a “pilot” test group where there appears to be significant interest and see how it develops.

Click here for our blog on governance 

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

 

 

Mar 28, 2018

Law Firm Growth Planning

Question:

I am a partner in a six lawyer firm in Jackson Mississippi. There are three partners and three associates in the firm. The firm is a insurance defense litigation firm. Our firm has been at its present size for many years, revenues have been flat, and profits have been shrinking. The partners have been discussing the pros and cons of growth and we would like to significantly grow the practice. A couple of our insurance company clients have asked us to open offices in other states and we are giving this consideration. Initially, we would open two other offices and we anticipate that this would require us to hire six additional attorneys. We appreciate any thoughts that you have.

Response: 

This is a huge step and I suggest that you give it careful thought. Here are a few of the issues you should consider:

  1. Firm Size – opening two branch offices and hiring six additional attorneys all at once is a major undertaking. This would double your firm size. A twelve attorney firm is quite different that a six attorney firm and requires a different approach to management, structure, etc. This would tough enough if the expansion were not in remote offices but in remote offices I believe the growth is too aggressive. I would start with one branch office and phase in the work and attorneys. Hopefully, you have a commitment from more than one client to send you work for a given location.
  2. Branch Office Staffing – staffing the office, especially with attorneys, will be a major issue. Unless you have attorneys in your office now that are licensed in these states you are going to have to hire local talent. How will you integrate the cultures of the two firms, prevent the remote offices from operating as separate silos, and keep the new offices from splitting off in a few years and starting a competing firm. Quality attorney talent will be hard to find and those that you do find will be reluctant to want to work for a small firm with no footprint in the local area. It is always preferable to staff a branch office, at least initially, with attorneys from the home office.
  3. Structure and Management – a larger firm will require a more sophisticated structure and approach to management. Will the attorneys hired for the remote offices be partners or associates? Will you need to create a non-equity tier? Who will manage the remote offices? Will you need to hire a firm administrator?
  4. Cash Flow – Growth will put a strain on the firm’s cash flow and will require additional working capital. Your partners will have to invest additional capital or the firm will have to take on debt.
  5. Systems – Growth will require you to examine your IT systems and software that you are currently using. They may not be sufficient. Consider how you will connect the computer system of the main office to the remote offices. How will phone systems be connected?
  6. Policies and Procedures – policies, procedures, and protocols will need to be developed and documented.
  7. Compensation – You present attorney compensation system may no longer be adequate. Consider whether a new approach will be required to attract new attorney talent.
  8. Financial Management – Your approach to financial management may need to be more formal that it is now. Budgeting will be a necessity.
  9. Facilities – Office space will have to be located and leases signed unless you start out with an executive suite type of arrangement, such as a Regus office. There are pros and cons to starting this way. One the one hand it provides a low risk way to enter a new market but on the other hand it signals that you are not committed to the market and you have just one toe in the water.

These are just a few of the issues that you will need to consider. Do your homework and due diligence on this before you jump feet first.

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

 

 

 

Mar 07, 2018

Law Firm Marketing – Using Articles to Demonstrate Expertise

Question: 

I am new non-equity partner in a sixteen attorney firm in Phoenix, Arizona. My equity partners are telling me that I now have to do more than generate billable hours and perform quality work for clients. They now expect me to begin bringing in clients. I am not sure where to start.

Response: 

I often advise attorneys that while what you know is important what you want to be known for is more important. Just having your name known is pretty useless unless it is known for something. An outstanding personal injury plaintiff lawyer – not just a good lawyer. In law firms it is the reputation for expertise that matters, not just the reputation. Therefore, a successful marketing program must project and demonstrate expertise. This can be accomplished in the following ways:

  1. Byline Articles
  2. Authored Books
  3. Presentations
  4. Client Testimonials on the firm’s website.

While biographies on the website are important, prospective clients and referral sources are looking for proof of expertise. Articles, authored books, presentations, and client testimonials provide such proof.

One of the best and reliable ways of providing such proof is the article. In a byline article, you don’t have to say that your are an expert – the fact that you wrote the article, discussing a particular legal topic, says it for you. Its your expertise on display whether the article be in a print publication or posted on your website, blog, or other location.

An article is one tool that you can use where you have control – you can say what you want to say and say it in your way. In most cases, if an article is acceptable to a publication, an editor won’t change the thrust of it.

For most legal and business trade journal publications that accept articles you do not have to be a well known writer to write an article that will be accepted by these publications. You simply have to know what you are talking about. Editors will help with the formatting, style, and syntax.

If you retain the copyright to your article you can re-purpose your article and use it on the firm’s website, reprints, firm brochures, and as a future chapter in your first book.

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

 

 

 

Feb 21, 2018

Law Firm Staff Work Distribution Analysis

Question: 

I am a new firm administrator with a thirty-five attorney litigation firm in Los Angeles, California. In my accounting department I have seven staff members handling a variety of tasks. My partners are concerning that we are inefficient and over staffed. I am having a hard time finding where to start so to get a handle on  this issue. Please provide any information that you are willing to share.

Response: 

There are questions that you must ask yourself in order to analyze the work distribution of your accounting department. Such questions as the following will help you in knowing what to look for:

  1. What activities take the most time?
  2. Is there any misdirected effort?
  3. Are skills being used properly?
  4. Are you staff doing too many unrelated tasks?
  5. Are tasks spread too thinly?
  6. Is work distributed evenly?
  7. Are the right people on the bus?

Before you can analyze your accounting department you must be able to see clearly, in one place, all the activities of your accounting department and the contribution of each employee on each activity. A work distribution chart is the easiest and best way to arrange these facts in simple form. A properly made work distribution chart will help you determine if the largest time of your staff is devoted to the major function of your department. (Operations list down the left rows and staff names listed across the columns) It may indicate that more time is being devoted to other functions than is necessary. A function or task may require a more detailed study, as might be indicated where total hours seem unreasonable. You may discover that your accounting department is spending too much time on relatively unimportant or unnecessary work. Misdirected effort appears on the work distribution chart when staff are involved in tasks not contribution directly to the mission of the accounting department.

Here is an overview of the process:

  1. Have each staff member prepare a task list.
    1. List specific and clear activities for a specific time period with time listed for each activity.
    2. Task lists should cover a complete cycle of work. (Weekly, Monthly, etc.)
  2. Determine operations performed
    1. Prepare an operations list grouping related or same kind of tasks (operations).
    2. Check operations list against breakdown of department mission.
  3. Complete the work distribution chart
    1. Complete heading.
    2. List operations.
    3. Enter staff names in a column of the chart.
    4. Enter tasks, time, and work count for each operation.
    5. Total the columns and rows.
  4. Examine the present work distribution
    1. What operations take the most time?
    2. Are they essential?
    3. Is there misdirected effort?
    4. Are skills used properly?
    5. Are you staff doing too many unrelated tasks?
    6. Are tasks spread too thinly?
    7. Is work distributed equitably?
    8. Is the department overstaffed?
    9. Are the right people on the bus?
  5. Improve work distribution
    1. Consider eliminations, additions, and rearrangement of tasks and operations.
    2. Prepare a proposed work distribution chart.
    3. Discuss proposed changes with your partners.
    4. Put proposed changes into effect.

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

 

 

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