Law Practice Management Asked and Answered Blog

Category: Law

« Earlier | Later »

Nov 08, 2017

Law Firm Retreats – Should Spouses be Invited?

Question: 

Our firm is a twenty-five attorney firm located in Austin, Texas. I am the firm administrator with the firm. We are planning on having a firm retreat consisting of the attorneys in the firm in February and are wondering whether we should included the spouses. Some of our partners think we should include spouses and others think that we should not. We had had retreats in the past and have not included spouses. I would appreciate your thoughts.

Response: 

Having spouses attend law firm retreats varies from firm to firm. The majority of the retreats that I have facilitated have not had spouses attend. The decision to have wives or husbands of attorneys attend the retreat depends on the retreat program and the retreat goals. Firms do not generally invite spouses when the retreat is devoted primarily to firm business and little time is available for recreation and informal socializing.

If social programs are planned, some firms do invite spouses and design special programs (e.g. sightseeing tours, tennis/golf games, lunches, special sessions) for them, with couples getting joining each other in the evening for dinner and evening programs.

Some firms will setup special sessions during the weekend to orient spouses to the firm’s organization, operation, and culture. In these special sessions, spouses are introduced to the firm’s history, culture, pecking order among the lawyer ranks, why attorneys work after hours and on weekends, and how career advancement works.

When wives or husbands occupy positions in the firm, special day-to-day programs are often created that deal with any problems that the firm may be experiencing as a result of their employment. Problems such as spousal conflict, differences in compensation, and work production are just a few examples of issues that can occur when spouses are employed in a law firm. Special pre-retreat consideration needs to be given to how the presence of family staff members would influence the retreat proceedings.

Click here for our blog on strategy

Click here for articles on other topics

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

Oct 31, 2017

Law Firm Strategy – What is a Strategy for a Law Firm?

Question: 

We are an Oklahoma City law firm of seventeen attorneys – ten of which are partners. Our firm does a little of everything. We have a three-member management committee of which I am a member. The firm was founded by four of the present partners twenty-two years ago. For many years the firms was very successful, however for the last five years financially we have been hard pressed and we have been stagnant. We have been discussing what to do about the situation. One of our partners suggested marketing and another suggested that we needed a new strategy. We do not have a marketing plan and I didn’t know we even had a strategy. I would appreciate your thoughts.

Response: 

A strategy is the firm’s decision on what services to sell, to whom to sell these services, and on what basis to sell these services. In other words a law firm must determine what legal services to be provided, to which clients and in what geographic locations, and how these services will be differentiated from those provided by other law firms. Law firms can choose a broad or narrow range of clients. Law firms can compete either on the basis of price, quality of service, or expertise. Firms compete on price by charging lower fees than their competitors. If the firm’s clients perceive that the firm has unique advantages over its competitors in the way services are provided, then the firm is competing on the basis of quality of service. If the firm offers its clients a superior knowledge base, it is competing on expertise.

Your strategy or lack of a strategy has been broad. A narrower strategy is appropriate in today’s competitive legal marketplace.

Here are a few suggestions for narrowing your strategy:

  1. Commit to one mode of competition – price, quality of service, or expertise.
  2. Select a strategy compatible with industry conditions.
  3. Select a unique niche.
  4. Diversity practice area risks.
  5. Select a strategy compatible with the firm’s internal environment.
  6. Look for practice areas in which the client is at great risks.
  7. Turn away clients.

I suggest that you study up on the strategic planning process and engage all of your partners in the process and comes to terms with an appropriate strategy for your firm. Then develop a strategic plan and use as your roadmap for getting there.

Click here for our blog on strategy

Click here for articles on other topics

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

Oct 18, 2017

Law Firm Merger – Pitfalls to Avoid

Question:

I am a partner in a twelve attorney firm in Rockville, Maryland. We are a corporate transactional and litigation firm. We are a first generation firm. The firm was founded by the present four equity partners twelve years ago. We have been very successful over the years and this is borne out by out by our excellent financial performance. While we have done well in our core practice areas we have been considering diversifying our practice into government sector work due to our proximity to Washington D.C. and we have been considering merging with a six attorney (three partner) firm in D.C. that is totally focused on such work. Can you share with us any pitfalls that we should look out for.

Response: 

It sounds like this might be an opportunity if the cultures and people are compatible, the practice area makes sense for your firm, there are no conflicts, the billing rates, and other factors are in line. Start getting to know the firm and its people. Then move to conflicts checks and ask for five year’s of financial statements and tax returns, internal financial reports, attorney and staff compensation data, partnership agreement and other partnership documents, schedule of billing rates, client lists, copy of building and equipment leases, and malpractice applications. Assess the stability of the revenue stream, repetitive ongoing clients, client dependency, etc. Make sure there are no pending malpractice claims or other liability issues.

Obviously you will want to do all the due diligence that you can.  Initially examine and make the following calculations:

Examine the balance sheet items such as bank debt, large tapped out credit lines, equipment leases and other liabilities. Take a look at the partner capital accounts. Then examine the items that are not recorded on the balance sheet – namely unfunded partner retirement buyouts and long term real estate leases. What are the ages of the partners in the candidate firm and are there partners close to retirement? What are their provisions for retirement of these partners? These are often major deal breakers in mergers and scare away potential merger partners.

Keep in mind that the financials are only part of the equation – the other part your gut feel. Does the potential deal make sense? Will one plus one equal three – will a synergy result? Do you feel comfortable with the people (partners) in the other firm? Do you share common vision and philosophies and will you make good partners?

Click here for our blog on law firm mergers

Click here for our article on law firm mergers

Click here for our law firm management articles

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

 

 

 

Oct 11, 2017

Law Firm Capitalization – Should There Be a Buy-In?

Question: 

I am a partner in a firm in Los Angeles. We have nine attorneys – four partners and five associates. We are a young firm in that we have only been in business for four years. The four partners started the firm together, we are equal partners, and we split the profits equally. When we started the firm we each made equal capital contributions. We do not have a partnership agreement. We are thinking about bringing in two associates as equity partners and are trying to think through the mechanics and one of our questions is whether there should be a buy-in and if so how should we determine it. We would appreciate your thoughts.

Response:

Law firms have different viewpoints on this subject. I have worked with some larger firms that are in second generation or later that do not require a capital contribution at all. They use end of the year distribution hold backs and credit lines to fund their working capital requirements. Other firms do require capital contributions upon being admitted as a partner and additional contributions over time when additional capital is needed or when partners acquire additional capital interests.

Smaller firms tend to require new partners/shareholders to pay for their interest in the firm. The buy-in can provide additional capital for the firm or can be used to compensate the existing partners/shareholders for their investment and sweat equity in creating the law firm or in growing it to its present size. One approach that some firms use it to include in the partnership/shareholder agreement the formula for determining the value of the firm, to which the new partner’s/shareholder’s percentage interest can be applied. This could include non cash-based assets such as accounts receivable, unbilled work in process, and goodwill. Another approach is to base the buy-in or capital contribution upon a the cash-based capital based upon the number of ownership shares a partner receives. Most firms allow for a buy-in over several years. Firms that do have a buy-in provision also typically provide for a payment to partners/shareholders upon departure for the value of their capital account. In recent years, an increasing number of large firms have adopted a free buy-in. Under that approach, there are no payments to departing partners/shareholders.

I believe that you should require at least a capital buy-in based upon the cash-based capital on the books and the number of ownership offered. This assumes that the partners still have capital accounts on the books. I also think you might consider them buying into the accounts receivable and unbilled work in process as well or be excluded from participating in compensation from those receipts. You should also get a partnership agreement in place as well.

Click here for our blog on partnership

Click here for our blog on financial management

Click here for articles on other topics

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

 

Oct 04, 2017

Personal Injury Law Firm Strategy & Strategic Planning

Question: 

I am a partner in a four attorney personal injury plaintiff in downstate Illinois. Three of us are partners and we have one associate attorney. We handle run of the mill slip and fall, vehicle and premises accidents, and products liability cases as well as workers’ compensation cases. We have a very aggressive advertising and marketing program. We are having issues with reduced case flow and dwindling and diminishing profits and earnings. For the past year the partners have been living off our credit line. We believe that we need to be thinking about doing something different and are not sure as to what that should be. However, we have agreed to start doing some long term planning. We would appreciate your thoughts.

Response: 

I believe that the very process of developing a strategic plan would be very helpful, beneficial, and enlightening. Strategic planning does not need to be the involved and complicated process that sometimes it becomes. It a nutshell it is nothing more than a series of logical steps. The process is often more important than the written plan. Most workable strategic plans are put in writing at the end of the process, and then often in summary or outline form. Generally, the steps include:

  1. Develop the mission statement
  2. Develop the vision statement
  3. Develop the long range goals statement
  4. Develop specific objectives
  5. Gather information – internal and external – identify the firm’s strengths and weaknesses
  6. Identify key issues
  7. Formulate strategies
  8. Develop detailed action plans
  9. Write-up the plan
  10. Implement the plan and monitor

Your first step will be the mission statement – you should take a hard look at who are you as a firm and who are you serving as clients? Many of our personal injury law firm clients across the country are facing similar problems that you are and they have been forced to take a hard look at their their practice and geographic area segments. Some firm’s have tried to balance the cash flow ups and downs of contingency fee work by adding time billing practice areas that provide consistent cash flow such as employment, family law, criminal, and bankruptcy. Other firms are extending their geographical reach through additional offices and some are getting involved in mass-tort cases.

I think this is the most important step if you don’t do anything else. You may have to consider expanding and diversifying your practice.

Click here for our blog on strategy

Click here for articles on other topics

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

Sep 20, 2017

Compensating Your First Associate Attorney in a Law Firm

Question:

I am the owner of a law practice in Belleville, Illinois. My practice focuses on real estate, estate planning and administration, and bankruptcy. I have three legal assistants. While I have been in practice for ten years, I have never hired an associate. I have a busy practice and now is the time. I have identified a candidate with six years experience that I want to hire. He has business that he can bring with him. He has been working with a larger firm as an associate and has been paid a straight salary. My next step is to make him an offer but I am struggling with how to pay him. I would like to hear your thoughts.

Response:

Some small firms put associates on an eat-what-you kill system based upon fee revenue collected from clients they bring in and fee collections from other matters they are assigned. They are they paid a percentage – ranging for thirty to forty percent when the fees are paid. However, in most firms associates are paid a salary and possibly a bonus based upon performance. Bonuses may be discretionary or formulaic based upon performance factors such as billable hours, working attorney collected fees, client origination collected fees, goal attainment, signed engagements, etc. Personally, I think a salary plus and discretionary bonus is the best approach for new associates.

However, in your case with an associate that is more seasoned and that has a book of business I think you should consider a salary with a formulaic bonus based upon his working attorney fee collections and client originations. Here are the mechanics:

I would also set a minimum performance expectation of $240,000 for the salary that is being paid.

You could also include non-billable goal attainment bonus as well but you can always add that later.

Click here for our blog on compensation

Click here for articles on other topics

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

Sep 05, 2017

Law Firm Key Financial Goals/Metrics

Question: 

I am a newly elected managing partner of a fourteen lawyer firm in San Diego. While I was elected to this position I feel handicapped since I don’t have a financial background. What metrics/measurements should I be looking at?

Response: 

Here are a few metrics that you might want to consider:

Once firm goals, financial and non-financial are formulated, either run reports that are available from your system or develop special Excel reports than measure goal accomplishment.

Click here for our financial management topic blog

Click here for our law firm profit improvement blog

Click here for articles on other topics

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

Aug 30, 2017

Law Firm Practice Acquisition – Acquiring a Personal Injury Practice

Question: 

I am a non-equity partner in a four attorney personal injury plaintiff law firm in Newport Beach, California consisting of the firm owner, two associates, and myself. The owner is planning on retiring and has provided me with a proposal to sell me his practice. How do I determine whether this is an opportunity or a potential curse? You advise is appreciated.

Response: 

I would start by asking yourself if you have the desire, inclination, and ability to manage a business – a law firm? Do you have the self discipline required? Do you have the needed capital or access to appropriate level of credit line? A personal injury firm will have to fund client advances as well as operations until cases are brought to conclusion and this will require capital or a credit line. I would check with the firm’s bank and other banks to see if you will be able to obtain the same credit line that the firm has enjoyed in the past.

Ask the owner for the following documents:

  1. Income tax returns for the past five years.
  2. Profit and loss statements for the past five years.
  3. Balance sheets for the past five years.
  4. Headcount expressed as full-time equivalents for the past five years by year for attorneys, paralegals, legal assistants, staff.
  5. Firm lease if the firm leases office space.
  6. A spreadsheet listing of all open cases providing the name of the case, the date opened, type of case, expected value of the case, expected referral fees due others, expected fee due firm, client advances invested in the case, and date the case is expected to conclude and fees will be received.

I would then prepare a firm financial profile spreadsheet spreading the revenue, total expenses, net income, owner earnings, and balance sheet summary over the five year period. Using the headcount data calculate fee per lawyer, expense per lawyer, and net income per lawyer and compare to general benchmarks. Hopefully fee revenue is in neighborhood of $400,000 or more per lawyer. Examine what the owner’s earnings have been over the five year period as well as the assets and liabilities on the balance sheet. Keep in mind that accounts payable and the firm lease are not usually reflected on a case-basis balance sheet. Consider the information that you have gathered and ask yourself the following questions:

  1. Has the firm been successful and well managed?
  2. Are revenues in line with what a four attorney personal injury firm should be generating?
  3. Is the firm’s overhead in line?
  4. How much additional income can I expect over the next five years?
  5. What is my “payback” period – in other words if I pay X for the practice how many years of extra income as an owner will it take me to pay for the practice?
  6. Considering what I have to pay for the practice, could I do better by starting my own practice?
  7. Where are the firm’s cases coming from and what is the quality of the existing cases in process?
  8. What level of case flow can I realistically expect when the owner is no longer here?
  9. Using the open case listing, what do the future cash flow projections look like?
  10. When the owner leaves will you have to hire another attorney? What level?
  11. How much debt does the firm have?
  12. What is the remaining lease obligation – term and amount?

This review will give you a good idea of whether this is a deal that makes sense for you.

Click here for our blog on law firm mergers

Click here for our law firm management articles

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

 

Aug 22, 2017

Measuring Law Partners’ Performance

Question: 

I am a partner in a twelve attorney firm in Houston. The firm has five partners and seven associates. We are a first generation firm and we, the partners, have never practiced in other law firms. Currently, the partners have equal ownership interests and are compensated equally. We are experiencing issues with the present method of partner compensation and we are giving some thought to considering other approaches. One of the issues that we are trying to get our heads around is how to measure each partners’ performance – value – and overall contribution to the firm. Do you have any suggestions?

Response: 

The first step in a partner’s compensation plan is to develop a system for measuring each partner’s performance. Measuring performance involves selecting the appropriate: (1) performance measurement factors, (2) performance measurement programs, and (3) performance measurement reports.

Performance Measurement Factors 

Each firm must decide on its own particular basis for rewarding quality performance by its partners. Factors must be selected against which each partner’s performance can be measured. Then the firm must decide how much weight to assign to each performance factor. The performance factors commonly used to measure partner performance include: (1) professional competency, (2) business development, (3) productivity, and (4) profitability.

Professional Competence 

A partner’s professional competence is usually the most important factor in measuring partner performance and is the most difficult to measure because it cannot be easily quantified and it has to be determined subjectively. In addition to technical proficiency professional competence also includes leadership ability, associate mentoring and development, management contribution, and other contributions made to the firm.

Business Development 

In many firms a partner’s ability to generate new business is an important performance factor in measuring partner performance. Client origination can be measured in terms of fees generated from new clients and fees generated from new business for existing clients.

Productivity 

A partner’s productivity can be measured by determining a partner’s: (1) chargeable hours related to client matters and (2) nonchargeable hours related to those firm matters which the firm has recognized an important partner responsibilities. Another approach is measuring billed or collected fees. Another measure of a partner’s productivity is his or her pyramid of responsibility – the number of associates chargeable hours or collected fees for which the partner is responsible.

Profitability

A partner’s profitability can be measured using three factors: (1) fees billed to clients, (2) realization of fees billed and (3) speed of collection of fees billed. Other measures include collected, effective rate per hour, etc.

Click here for our blog on compensation

Click here for articles on other topics

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

 

Aug 08, 2017

Law Firm Strategic Planning – Reasons for Investing the Time to Develop a Strategic Plan

Question:

I serve on the management committee of our sixteen lawyer firm in Columbus, Ohio. We do not currently have a strategic plan and been discussing whether we should spend the time developing one. However, we are not sure what a strategic plan would do for us or why we should invest the time in developing one. We appreciate any thoughts that you may have.

Response: 

One of the major problems facing law firms is focus. Research indicates that three of the biggest challenges facing professionals today are: time pressures, financial pressures, and the struggle to maintain a healthy balance between work and home. Billable time, non-billable time or the firm’s investment time, and personal time must be well managed, targeted and focused. Your time must be managed as well.

Today well-focused specialists are winning the marketplace wars. Trying to be all things to all people is not a good strategy. Such full-service strategies only lead to lack of identity and reputation. For most small firms it is not feasible to specialize in more than two or three core practice areas.

Based upon our experience from client engagements we have concluded that lack of focus and accountability is one of the major problems facing law firms. Often the problem is too many ideas, alternatives, and options. The result often is no action at all or actions that fail to distinguish firms from their competitors and provide them with a sustained competitive advantage. Ideas, recommendations, suggestions, etc. are of no value unless implemented.

Well designed strategic plans are essential for focusing your firm. However, don’t hide behind strategy and planning. Attorneys love to postpone implementation.

A strategic plan is useless unless it is used. Don’t create a plan and simply file it. You must actively work your plan. Involve everyone in the firm, delegate action items, and require accountability. Consider it a living document – revise it – update it – change it as needed. Refer to it weekly and incorporate action plan items into your weekly schedule.

Use your plan as your roadmap to your future.

Good luck on your journey.

Click here for our blog on strategy

Click here for articles on other topics

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

 

Archives

Categories

    Subscribe to our Blog