Question:
Our firm has been struggling for the past couple years. We have lost three key institutional clients, had partner defections to other law firm, and have suffered financially. We were a 40 attorney firm- six years later we are ten. We simply must improve profitability. What areas of our overhead should we attack first?
Response:
Many law firms waste considerable time trying to find ways to cut a pie that is too small up differently by implementation of new compensation systems or increasing the size of the pie by decreasing costs. While unnecessary expenses should be reduced – once they are reduced a repeated effort to slash costs proves fruitless as a strategy to increase the firm pie. The vast majority of law firm expenses are fixed or production-related. The percentage of costs that are discretionary is low, typically in the 20-30 percent range, and the number of dollars available for savings is small. The available dollars available for reduction disappear after a year or two of cost-cutting, leaving the firm with dealing with the effects of further cuts on production capacity. For example:
§ Should a firm eliminate staff positions if the result is additional administrative burden on lawyers and paralegals thereby reducing the revenue capacity of the firm.
§ Should the firm cut lawyers continuing legal education if improving an attorney's level of expertise is important to increasing revenue production.
§ Should a firm cut the marketing budget?
Once a firm has eliminated wasteful spending and made appropriate adjustments to the budget, further cost reductions often results in the firm reducing the possibility of turning the firm around, improving financial performance, and increasing the pie.
Increasing revenue, while maintaining the same expense structure, is the most powerful approach to improving firm profitability. Additional revenue goes directly to the bottom line and makes a significant impact on partner profits. If the firm is able to increase revenue by10% while maintaining the same cost structure, 100 percent of the additional revenue dollars will go to the partners.
So think revenue – not costs!
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John W. Olmstead, MBA, Ph.D, CMC
Phase III – Partnership – Internal/Other Firm
Eventually the question of partnership arises – weather sooner based upon the need or desire to transition an associate into a partnership or to add a practice area by acquiring a lateral partner with his/her book of business. Maybe you are thinking about merging with another firm. Or maybe you have been solo or a sole owner for your entire career and are now contemplating retirement and are looking for a succession/exit strategy and now must either bring in a partner, merge with another firm, or sell your practice. Partnership with another attorney creates another set of interpersonal dynamics and another set of skills that will need to be developed at this stage of your practice.
Phase III Survival Tips
1. Partnership is like a marriage. You must marry the right person. Most partnerships that fail do so as a result of partnering up with the wrong partners. Compatibility is critical. Consider:
a. Long term goals of both parties
b. Work ethic computability
c. Common interests
d. Money and compensation
2. Thinking of merging? Research indicates that 1/3 to 1/2 of all mergers fail to meet expectations due to cultural misalignment and personnel problems. Don't try to use a merger or acquisition as a life raft, for the wrong reasons and as your sole strategy. Successful mergers are based upon a sound integrated business strategy that creates synergy and a combined firm that produces greater client value than either firm can produced alone. Right reasons for merging might include:
a. Improve the firm's competitive position. .Increase specialization – obtain additional expertise.
b. Expand into other geographic regions.
c. Add new practice areas.
d. Increase or decrease client base.
e. Improve and/or solidify client relationships.
3. I would start by thinking about your reasons for wanting to merge and your objectives. Ask yourself the following questions?
a. Do you want to practice in a large firm? If not, what is the largest firm that you would want to practice in?
b. What is driving the desire to merge?
c. If the desire to merge is being driven by a desire to retreat from internal problems – what have you done to address these issues internally?
d. Is your name being part of the firm name important to you?
e. What are your expectations and objectives for a merger?
f. What are you looking from a merger partner?
g. Make sure that you look for a complimentary fit. If you are weak in firm leadership, management and administration – look for a partner that is strong in these areas. Strong leadership, management, and administration may be hard to find in a firm under 25 attorneys.
Are you ready for the challenge?
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John W. Olmstead, MBA, Ph.D, CMC
Response:
Create a plan before even starting the practice even if it is a one page plan. This will serve as a roadmap for your practice. See Helen Gunnarsson’s article in November 2011 Illinois Bar Journal.
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John W. Olmstead, MBA, Ph.D, CMC