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Feb 14, 2017

Law Firms Moving to the Cloud

Question: 

Our firm is a twelve-attorney business litigation firm in Sacramento, California. I am one of three members on our technology committee. Our IT infrastructure consists of an in-house Microsoft file server, a separate Microsoft Exchange e-mail server, document management as well as time billing and accounting software. Our documents are stored locally and managed by the locally installed document management software. Several of our partners have talked with other firms that are operating totally in the cloud. We would appreciate your thoughts on whether moving to the cloud is something that we should consider?

Response: 

It would be interesting to know the size of firms that your partners have been talking with. I am seeing many solo and very small firms operating completely in the cloud using cloud-based time and billing applications such as Clio, Rocket Matter, and QuickBooks online with their e-mail hosted using Microsoft Office 365. Some are using products such as DropBox and Microsoft One Drive to store their documents in the cloud. These billing applications do not provide the functionality and reporting that larger firms require and as a result larger firms are still using systems that firms have been using for years. Some firms that are using these systems are having them hosted in the cloud. These firms have no premises file servers. All of their data is hosted in the cloud – applications, documents, and e-mail. (Note this is different that cloud-based applications).

Firm’s your size are taking a more cautious approach to moving to the cloud. Many firms have large investments in their existing hardware and software and also have concerns about security and confidentiality issues. While it is tempting to look to the cloud as our savior from constant hardware and software upgrades as well as IT providers, moving to the cloud should not be explored without doing your homework.

Personally, I believe that in many cases the cloud may be more secure than the security that exists in many law firms on premises systems. Law firms and law departments are increasingly adopting the cloud. Fifty-six percent of the Am Law 200 firms polled in the Partnership Perspectives Survey use some form of cloud computing and 47 percent of those polled in the 2016 ITLA/InsideLegal Technology Purchasing Survey predicted that over a quarter of their firm’s software and service offerings could be cloud-based in the next one to three years. Sixty-one percent of small firms polled in the ILTA survey said that over half of their firm’s software could be cloud-based in the next one to three years.

Here are my thoughts and suggestions:

  1. Don’t rush off without doing due diligence on the application or hosting vendor. Checkout their security both while your data is in transit and at rest on their computers. Read all their whitepapers and contracts. Check references.
  2. Be careful of implmenting existing billing and accounting cloud-based applications. You may be going backwards until these systems mature and incorporate many of the features and reporting needed by larger firms.
  3. Don’t go with the new kid on the block. Insure that you go with a vendor that has staying power in the market.
  4. Take baby-steps – you might want to start with:
    1. Having your e-mail hosted.
    2. Later – implement a cloud-based document managment system.
    3. Later – have your existing billing and accounting applications hosted with a cloud provider.
  5. See where the time-billing and accounting cloud-based applications are in a few years and whether you should consider moving to such a system.

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

 

 

 

Sep 07, 2016

Law Firm Profitability – How Do I Know if We Have Enough Work for the Attorneys?

Question:

I am the owner of an eight attorney estate planning firm in Jacksonville, Florida. Our firm handles estate planning and estate administration. For this entire year our financial numbers are way down and I am getting concerned. For example, compared to last year:

I would appreciate any ideas on what I should do next.
 
Response:
 
Several of my estate planning/administration firms from different areas of the country are advising me that business is way down this year and they can't put their finger on the problem other than demand and timing.
 
I would start by:
 
  1. Take a look an your new matter intakes for the year – month by month.
  2. Examine the referral and marketing sources as to where this business is coming from.
  3. Prepare a open matter inventory report by attorney and matter type to get a count of the number of matters each attorney is handling
  4. Examine billable hours, non-billable hours, collected working attorney fees and realization rates for each attorney.
Compare each of the metrics above with last year and prior years. Meet with all of the attorneys and review their matters in progress and discuss their workloads. Also review your marketing budget and marketing programs to see if changes are warranted.
 
This should give you a feel for what is going on. You could have problems in the following areas:
 
While you may find that you have problems in each of the above areas I suspect that your biggest problem is that attorneys do not have enough work and your business is down. If this is the case I would question how they are using their non-billable hours – are they doing more business development and marketing – or they simply pacing their time so they fill an eight hour day.
 
If your problem is lack of work you are going to have to see if additional marketing can generate the business needed to support the attorneys you have on board or reduce your attorney headcount.
 

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

 
 
 
 

 

Aug 09, 2016

Law Firm Financial Management – What Reports Should I Give To the Attorneys in My Firm

Question:

I am the firm administrator of a sixteen attorney firm in San Diego, California. We have six equity members, four non-equity members, and six associates. We also have four paralegals and six staff members. We are managed by a three member executive committee. Each month I provide the equity members and the executive committee with the same reports from our software system. They are quite numerous. The equity members and the executive committee complain that they get too many reports and they don't look at them while the non-equity members and the associate complain that they don't get access to any financial information. Do you have any suggestions?

Response:

Less is often more. I would rather see partners receive less reports and read and use the reports they do receive. They can always request additional detail reports if they desire them. Think of a pyramid – at the top are equity members, then non-equity members, associates and then the executive committee and the firm administrator. At the top of the pyramid the information is more summarized and more detail is provided as you work you way down the pyramid. For example, do the equity members need to see journal registers, cash receipts registers, etc.?

I suggest you develop a report distribution guide that outlines who gets what and when and have it approved by the executive committee. Here is an example:

The objective of these guidelines are to provide timely, meaningful reports to firm management, equity and non-equity members, associates, and other timekeepers. Therefore, as few reports as possible should be distributed to reduce bulk and information overload. All other reports not listed for equity member distribution should be available to them on a per request basis.

Daily Reports

 Weekly Reports

 A detailed time report will be generated weekly (by Wednesday of each week for the conclusion of the preceding week) and will be distributed as follows:

Monthly Reports

        Monthly reports should be distributed no later than the 5th of each month according to the         following schedule:

        Equity Members             

        Non-Equity Members

        Executive Committee

        Director of Administration

        Associates

        Paralegals

        Staff (Timekeepers Only)

Quarterly Reports

Annual Reports

Annual reports are generated at the end of the year and maintained in a end of year section of the reports binder for the year (or computer system)

        Equity Members

        Same reports as received monthly.

        Managing Member/Executive Committee

         Same reports as received monthly

        Director of Administration

        Same reports as received monthly

        Note: At year end each of the above reports should be printed and saved to a file to the         reports folder that has been setup on the computer network. This should be done prior to         running the year end close.

        Associates

        Same report as received monthly.

        Paralegals

        Same reports as received monthly.

        Staff (Timekeepers Only)

        Same reports as received monthly.

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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

 

Mar 22, 2016

Law Firm Partner Retirement Buyouts – How to Keep from Breaking the Bank

Question:

Our firm is a 14 lawyer firm in the Boston suburbs with 4 founding partners and 10 associates. Two of the partners are in their 50s and two are in their 60s. Several years ago we adopted a retirement buyout plan for the founding partners where each partner upon retirement is paid the balance of his cash-based capital account and a multiple of one times an average of his last three years earnings paid out over a five year period. I am concerned that when partners begin to retire the retirement payouts will place undue stress on operating funds and the firm's ability to continue to be successful. I would appreciate your thoughts.

Response:

If nothing else you should consider a cap that places a limit on how much can be paid out in a single year where aggregate payments to all retired partners in any one year are capped at 10 percent or less of distributable net income. Any obligations that cannot be paid in one year as a result of the cap would be rolled forward to the next year also subject to the same cap.

Unfunded plans can present problems down the road if they become unaffordable for the next generation of attorneys as they have to be funded out of future earnings. You should look into ways to fund your partner's retirements as much as possible through 401k and other retirements plans, life insurance policies (on each of the partners that can fund the buyout in the event of death or where paid up cash values can be used upon retirement to apply toward buyouts, and sinking funds (Rabbi Trusts, etc.) where funds have been set aside out of current earnings.

We all have been witnessing what is happening with governmental unfunded pension programs. The same thing is happening with law firms that have unfunded retirement programs as baby boomers are retiring in record numbers.

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

Dec 22, 2015

Law Firm Financial Management – Protecting the Firm from Employee Embezzlement

Question:

I am a partner in a eight attorney firm in downtown Chicago. Last week you participated in a discussion at an Illinois State Bar Association meeting where you indicated that four out of ten of you law firm clients have had an employee embezzlement at some time or another. I would appreciate any thoughts you may have on how we can protect ourselves.

Response:

Even though a firm trusts their accounting staff segregation of duties is appropriate and should be implemented in firms of all sizes. Here is an overview of such a system that we generally suggest:     

Internal Control is the plan of organization and all of the coordinate methods and measures adopted within a business organization to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies.

The four basic elements considered essential in a satisfactory system of internal control are:

  1. A plan of organization that provides appropriate segregation of functional responsibility and duties.
  2. A system of authorization and record procedures adequate to provide reasonable accounting control over assets, liabilities, revenues, and expenses.
  3. Sound practices to be followed in performance of duties and functions of each of the organizational areas.
  4. A degree of quality of personnel (competency) commensurate with responsibilities.

Here is a link to an article outlining specific steps:

The goal is not to catch an employee that is stealing but to have a system of checks and balances in place so they will not even consider stealing.

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

 

May 06, 2015

Law Firm Contingency Fee Practice – Surviving the Cash Crunch

Question:

Our firm is a six attorney personal injury plaintiff located in Kansas City. We have been in practice for 20 years and the firm has been very successful. However, in the last few years the cases are getting larger, more complex, and really putting a drain on our cash flow. We are always into our credit Line. You thoughts would be appreciated.

Response:

Cash flow has always been a challenge for contingency fee practices. However, times are getting harder. For personal injury plaintiff firms insurance companies are refusing to settle cases, stretching out timelines for settling cases that they do settle, paying less, and becoming even harder to deal with. Other contingency fee practices are also facing similar challenges and everyone is finding it harder to find adequate lines of credit. Many firms that were once 100% contingency fee practices are looking for ways to improve cash flow implementing different fee arrangements or by adding non-contingency fee practice areas.

I suggest that you evaluate ways that you might re-balance your case portfolio to say 60% contingency/time-bill mix. You might consider:

  1. Billing and collecting up front for all client costs even if the fee is contingent.
  2. Flat fee paid up front for a certain segment or phase of work – then contingency fees for the rest of the work.
  3. Actively marketing and targeting certain small business firms, establishing relationship, and seeking out defense employment work billed on a time-bill basis.
  4. Adding a different practice area that would not be billed on a contingency fee basis.
  5. Bring in a another attorney with a book of business in a complimentary non-contingency fee practice area.

Review your case pipeline report and your work habits to insure that you are putting the right effort and mix into the cases that you have so that when your time bill matters come up for billing at the end of the month – all can be billed.

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

 

Mar 10, 2015

Law Firm Financial Management – Managing the Money

Question:

I am the managing partner of a 17 attorney firm in San Francisco. We have a firm administrator that we hired four years ago and he manages our financial and HR matters. I haven't a clue as to what goes on financially and this is becoming more of a concern for me and my other partners. You thoughts would be appreciated.

Response:

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

  1. The owner, or an appointed partner(s) in larger firms, obtain a basic level of understanding in basic accounting/bookkeeping and law firm financial management.
  2. The owner, or an appointed partner(s) in larger firms, obtain detailed training on the accounting software system(s) along-side the bookkeeper and administrator when the system is implemented. In addition to general operation of the software, special training should also be obtained on interpretation and use of the management reports.
  3. In your current situation – this may be a good time to consider upgrading your system and at that time obtain training on the new system, review the roles of all parties, and current procedures.
  4. Insure that you have accounting controls in place and appropriate segregation of accounting duties.
  5. Outline your expectations and requirements of the bookkeeper and administrator, meet with them, and communicate appropriately.

Don't allow your administrator to create a fiefdom and hold you and your partners hostage.

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

 

Jan 28, 2015

Law Firm Succession – Succession Plan for the Solo Practitioner

Question:

I came across your firm while researching law partnerships. The short story is as follows: I am a sole practitioner and have been practicing for over 35 years. I have a high volume practice and I employ 7-8 people. Business is good and actually on the rise. I have a great office manager and outstanding loyal staff. The practice is on semi- autopilot for me. I have a young associate lawyer in my office that shares space and is  learning my practice but actually seems to be making his own way in a different practice area. He wants to buy into my practice. We have had some serious talks. He's capable and I think the right person to transition with. I have asked myself why sell/partner/transition when I don't have to? I am not ready to retire. With that said a 3-5 year plan may make sense. Let me know your thoughts.

Response:

The real value for most practitioners is the cash flow from working in the practice. Exit value is secondary and only makes sense when you are ready to quit or retire.

Eventually, however you will retire (retirement, death, etc.) as the clock runs. The biggest problem that I am finding is that practitioners that are ready to exit the practice is finding attorneys willing to buy the practice or buy out partnership shares in the event of a partnership. I am working with practices where is has taken a couple of years to find the right WHO and this often dictates the WHAT – merger, partnership, Of Counsel, sale, etc. The approach that works best is an internal transition via bringing an associate into partnership. So, I would take a serious look at the attorney that you are speaking about, maybe have him become a partner (member in a LLC) with minority interest initially, and incorporate into your agreements how compensation will be handled, him acquiring additional interests down the road, and the arrangement for your retirement payout upon your actual retirement.

Don't wait until you are ready to retire – take some baby steps now.

Good luck with it.

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

Sep 30, 2014

Law Firm Capitalization – What is the Proper Level for Partner Capital Accounts

Question:

I am the chair of the finance committee for our firm – 17 attorney firm in Chicago. We have 6 equity partners in the firm. We are in the process of admitting a new equity partner and are reviewing our capital accounts and trying to determine our capital needs. I would appreciate your ideas and thoughts.

Response:

There are two categories of capital – short-term or working capital which is used to fund daily operations and long term capital which is used to pay for capital assets such as furniture and fixtures, computers and other office equipment. I guess I am old school but I believe that short term working capital should be funded as much as possible with partner capital and long term capital funded with bank borrowing or leases. I have more and more clients that are funding working capital with partner capital and have no bank debt at all. I have other clients that finance all working capital with their bank line of credit – these firms could find themselves in dire straits if bank credit should tighten in the future.

The amount of working capital needed by a firm depends upon your practice, billing and collection cycles, whether you do contingency fee work, and whether the firm is growing and adding attorneys and staff. As a rule of thumb I suggest that a firm have three times one month's expenses excluding draws in working capital. This would need to be increased if the firm has lengthy billing and collection cycles, does contingency fee work, and is in a growth mode.

Partner capital contributions are usually made proportionately based on partner earnings or ownership percentages.

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

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