Strategies for Minimizing Your Risk
Many personal injury plaintiff firms are facing challenging times. In the last few years may firms have had to deal with the impact of tort reform, increase competition from other law firms doing extensive advertising, and weathering the last recession. From a profitability standpoint – some are holding their own – others are struggling.
General Survival Strategies
The majority of our PI law firm clients are advising that they are having to work much harder at getting clients and investing more heavily in marketing – both time and money. PI firms were feeling the most of these challenges before the recession. However, the recession accelerated the pace with which many PI firms reevaluated existing processes and many are implementing new business models. PI firms may want to begin by:
1. Develop a firm strategic plan and individual attorney marketing plans which include aggressive network/contact plans for past clients, attorney referral sources (non PI attorneys), attorney referral sources (other PI attorneys), and other referral sources.
2. Evaluate the feasibility of adding an additional practice segment to reduce the level of risk in the case portfolio and reduce cash flow variability.
3. Reduce case portfolio risk and improve case profitability by implementing a case intake system whereby all new cases over a specified level of projected case value are reviewed and approved by the partnership (or a client intake committee) in order for the case to be accepted by the firm. In other words – don’t let one attorney expose the entire firm to either excessive levels of case risk or case investment (time and client cost advances) without other partners having a say on the matter.
4. Analyze the profitability and return on each case and ascertain what can be done differently on future cases. Metrics might include effective rate, return on LOADSTAR, and dollar case profit after allocation of all appropriate firm overhead, etc.
5. Review and measure present marketing investments (time and money) and determine what is working and what is not. Reallocate resources if appropriate.
6. Insure that they are using an appropriate mix of marketing tools in their programs.
7. Consider increasing marketing investments (time and money). Suggest a marketing budget be developed in the range of 8-12 percent of fee revenue. Also suggest that non case production (non-billable) time be budgeted for business development and marketing activities as well.
Contingency Fee Profitability
The CEO of a large law firm when interviewed about the law firm’s recent dissolution, advised that deferred profits from contingency fee work led to the firm’s demise. The recent demise of several large law firms are illustrations of what can happen when the risks of contingency fee work is not considered or managed. Contingency-fee work can pose major risks for law firms, as they earn no fees if they lose those cases and sometimes have profits deferred in protracted litigation. In addition, cases can be lost with no fee whatsoever received. Whether your firm is considering “big deal” litigation or bread and butter run of the mill personal injury litigation you may want to consider the following:
In essence the fundamentals of risk and return is at work and should be considered when accepting contingency fee work. You are betting that you can beat your hourly rate that you receive (or would receive) on hourly work. Contingency fee work often involves the risk of no fee at all, financing the case, long time periods before the case is concluded and fees are received, client advance investments, etc. For these risks the firm should be able to expect a premium. In other words – the effective rate on contingency fee cases should (on average) be greater than that for hourly work.
Many law firms are not receiving a “risk premium” at all and are often, on average, obtaining an effective rate close to their bill rate. So, do consider the risk involved and evaluate methods of mitigating the risk as much as possible. In general – don’t dabble – but work to a portfolio of cases large enough to diversify your risks.
Herbert Kritzer has done extensive academic research over the years on contingency fees which can be found in his book – Risks, Reputations, and Rewards: Contingency Fee Legal Practice in the United States. The book can be ordered from Amazon.com.
While I have outlined a cautious approach here I want to also clarify that I have many clients that are doing very well and making a lot of money doing contingency fee work. It is the firms that did not grow up doing contingency fee work that “dabble” where I see the problems.
So proceed with caution – but go for it if it makes strategic sense for your firm.
Managing the Pipeline – A Key Financial Metric and Indicator
Pipeline management is a term used in the management consulting profession to refer to the process by which you continually evaluate your active opportunities (prospective clients to booked clients) for their balance of QUALITY and QUANTITY. The goal is to continually stay on top of the overall health which is a full pipeline. Pipeline management allows client relationship managers to more accurately forecast fee revenues, better staff and manage client engagements, and close more client business.
I often also refer to Pipeline management in law firms in the context of using financial dashboards by which the individual charged with financial management responsibilities is continuously aware of significant changes in the firm’s Pipeline (from prospects to cash):
By comparing these dashboard statistics to a prior month, quarter, or year – you are able to avoid financial surprises down the road.
If Expenses Are Out of Control Implement an Expense Control Program
The first step in an expense control program is to identify those areas where potential savings exist. Review your profit and loss statement. Resist the temptation to arbitrarily cutting costs which could cut the muscle with the fat and result in revenue loss as well. You have to spend money to make money – so if cost cutting is the appropriate strategy – cut the right costs. Think strategically about cost reduction.
After you have identified areas where savings can be made prioritize and develop specific strategies and implement action plans to achieve the savings.
Here are a few ideas:
STRATEGY #1: Reduce Headcount
This is the largest area for potential savings. Downsizing is a strategy that has been used by many firms this past year. However, it can have long term negative consequences for revenue and talent management. Consider all levels – non-productive partners, associates, paralegals, and staff. Be prudent and sensitive in implementation.
STRATEGY #2: Reduce Compensation
Obviously one way is to cut salaries – a strategy to be used as a last resort. A better approach is to reduce fixed salary (paying people for showing up) and add a variable pay component which will allow employees to earn additional compensation in the form of bonus for results achieved. Another approach is to freeze salary increases.
STRATEGY #3: Benefits
A major area for cost savings – especially health insurance. Determine which programs are most important to employees. Do your best to protect those and reduce or eliminate programs that are less important. Consider offering more than one health insurance plan. Pay the premium for the lowest cost plan and provide options for employees to “opt up” to the better plans by paying the additional premiums. Consider increasing deductibles and requiring employees to pay a portion of the base premiums.
STRATEGY #4: Outsource
Examine potential for outsourcing – from copy services – IT management – to your legal team.
STRATEGY #5: Occupancy
Review your lease invoices and question increases and escalators for which you have been charged. Consider renegotiating your lease and ask for a lower rate. Reduce excess space either through a renegotiated lease or through sub-leasing.
STRATEGY #6: Telephone Service
Scrutinize your bills and examine rate tariffs as well as items that have been tagged to your bill by third parties. Negotiate and ask refunds for any discrepancies or abuse found. We have seen firms receive thousands of dollars in refunds.
STRATEGY #7: Virtual Office
Do you need an office at all? Many solos are working out of virtual and home offices or a combination of same. Some larger firms are reducing the size of their primary expensive downtown offices by having some attorneys work from home offices or other locations.
STRATEGY #8: Marketing
Many firms actually need to spend more money on marketing. However, this does not mean that it should be wasted on sacred cows. Review marketing investments, eliminate feel good items, and insure that they are producing results. Reallocate funds.
STRATEGY #9: Supplies and Other Purchases
Eliminate waste and unnecessary expenses. Consolidate with fewer vendors and solicit discounts for exclusive relationships.
STRATEGY #10: Develop a Budget and Financial Plan
If you don’t have one – develop a budget and financial plan and work the plan.
John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.
Dr. Olmstead’s assignments have covered the spectrum of management issues. However, in recent years most of his time is focused on engagements helping firms with:
Dr. Olmstead is the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson West. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a member of the Legal Marketing Association (LMA) Research Committee. Dr. Olmstead may be contacted via e-mail at firstname.lastname@example.org. Additional articles and information is available at the firm’s web site:
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