Law Practice Management Asked and Answered Blog

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July 2013

Jul 30, 2013

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Impact Of Law Firm Growth Upon Management and Organizational Structure

Question:

Our firm is a five attorney firm in Peoria, Illinois – three partners and two associates with four staff members. One of our legal assistants wears two hats – she serves as our office manager and also performs legal assistant duties for clients. Three years ago we had two attorneys and two staff members. We are feeling the consequences of our growth – our caseload has increased by 200%, our overhead is much higher and even though we have greater revenues – our take home earnings is less. We are overwhelmed. I would appreciate your thoughts?

Response:

It sounds like your firm has outgrown your management (organizational) structure. A firm with nine people is a different firm than a firm with four people. You are at a difficult size – large enough to feel the pains and challenges of being larger than two attorneys and two staff members but not large enough to reap the organizational benefits of a larger firm such as a full-time firm administrator, accounting manager, HR manager, etc. (I believe that as a law firm grows – management gets harder until a firm gets to around 12 attorneys – then as the firm begins to put in place a management team – it gets easier.)

In the meantime you might want to consider the following:

• Create an organization chart and map out your management structure for the two management sides of your firm – client services and business services.
• Define roles, responsibilities, expectations, and accountabilities for each management function and specify in job or position descriptions. (Example: Partnership, Managing Partner or Management Committee, Office Manager, IT, Accounting, HR, etc.)
• Assign your people to the positions – some may do double duty – for example an office manager may perform duties of office services manager, accounting manager, and human resources manager.
• Determine if your office manager is best suited for legal assistant work or office management. Determine where her interests lie. The firm may have outgrown her management abilities and she may not be able to function well in both roles forever. An effective office manager should have good accounting, interpersonal, and human resource skills. The firm may need to begin to use her in one role.
• Consider a full-time office manager position that handles accounting, HR, IT as well as other functions as needed. (This could be the existing office manager or some recruited for the position.)
• Begin to formalize the firm a little more – conduct annual performance reviews with goal setting for all attorneys and staff – document procedures and policies in an office procedure manual and employee handbook.
• Get a handle on the financial management function – not just the bookkeeping – but proactive financial management that sets goals for operations and production and uses key metrics and dashboard reports to insure that the firm is performing as it should in real time.  Don't wait until the end of the year to find out that the firm has fallen way short financially – then it is to late to take corrective action.

 Click here for our blog on financial management topics

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

 

 

 

Jul 20, 2013

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Law Firm Succession Strategy for An Owner That Wants to Keeping Working

Question:

I am the founder and solo owner of a small firm in Memphis. Besides myself there is one non-equity partner and four associates. We handle the transactional and litigation work for small and large business concerns in the Memphis area. I am 60 now and would like to begin slowing down over the next five years – but I want to continue working – I don't want to retire completely. Over the past few years I have focused more on client development as opposed to serving clients and have turned over much of the client service work over to other attorneys in the firm. While I would like to receive some compensation from my sweat equity – I also do not want to place an unreasonable financial burden (large cash buy-in/buy-out) on others in the firm. Legacy of the firm is important as is a place to continue to work and contribute – so I really would like to transition the firm internally to deserving attorneys employed by the firm. What are your suggestions concerning how I might accomplish this?

Response:

I often ask attorneys – are you more a lawyer that wants to lawyer or a business person that enjoys and wants to focus on the business of law. It sounds like you, as you approach retirement, would like to spend more of your time "finding" rather than "minding" or "grinding". You might want to consider the following:

1. Get a feel for the value of your firm. If you have been taking home say $400,000 per year – using that as a starting point for your rough value figure if you were to sell your practice to outsiders. Would you be willing to discount to transition the members of your current team? If so, maybe that figure might be $200,000 – $300,000.
2. Establish a date when you want to start to wind down.
3. Decide on your future role, institutionalize the role and write a job description for it. You might want to consider a role such as Business Development Director or Manager. Establish specific goals and expected outcomes for the role. 
4. Then plan a gradual wind down with gradual draw reduction but at a level that in essence is greater than the ratio of time reduced providing you with say – $200,000 over a five year period of time.
5. Put in place a commission arrangement where you would receive a commission on fees (say 20%) from new clients that you bring into the firm after the date that a program is put in place. I would suggest a 5 year sunset provision whereby after five years the commission decreases to zero – requiring you to continue to develop new relationship and bring new clients into the firm.

Click here for our blog on succession

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

 

Jul 16, 2013

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Metrics and Dashboards for a Personal Injury Law Firm

Question:

I am the managing partner of a three attorney personal injury plaintiff firm in Indianapolis. We have a total of 600+ open PI files. What are some of the key financial metrics/indicators that we should be using to manage the practice?

Response:

From your case count it is obvious that you a managing a high volume practice. In addition to selecting the right cases managing you inventory (case portfolio) is crucial as is managing and monitoring the effectiveness of your marketing investments. Here are a few metrics that you might consider incorporating into a one page report with trend line charts. You can design the report in Excel and pull the numbers from detail reports from your case management system:

Plotted by Month

• Fees Collected by Case Type 
• Number of New Client Appointments Made
• Number of New Client Appointments Kept
• Number of New Cases Conditionally Signed
• Number of New Cases Accepted/Opened
• Number of Later Case Dumps
• Ratio of New Cases to Dumps
• Number of Demands
• Number of Files Closed
• Number of Open Cases – by Case Type
• Total Open Cases
• Number of Open Cases Per Lawyer
• Average Age of Open Cases (Turnover)
• Expected Fees – Value of Case Inventory by Case Type (Expected Value)
• Total Expected Fees – Value of Total Case Inventory/Pipeline
• Average Case Fee
• Marketing/Referral Source – No of cases opened each month by referral source.

This will get you started.

Income statements/profit and loss statements are nice history lessons but they don't help you manage the productive operations of the firm.

Click here for our blog on financial management

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

 

Jul 08, 2013

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Law Firm Pipeline – A Key Financial Metric and Indicator

Question:

I am the managing partner for a 16 attorney firm in Miami. I am new in the job and am trying to learn all that I can about law firm financial management. I have recently read several law firm management articles that have referred to "Pipeline Management". What exactly does this mean and what is the implication for law firm management?

Response:

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): 

• Number of new business inquiries for the month 
• Number of pending prospective clients 
• Number of open client matters 
• Dollar value of Unbilled Work in Process/Age 
• Dollar value of Accounts Receivable/Age 
• Dollar value of billings 
• Dollar value of unearned retainers 
• Dollar value of fee receipts/collections

By comparing these dashboard statistics to a prior month, quarter, or year – you are able to avoid financial surprises down the road.

Click here for our blog on financial management

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

Jul 02, 2013

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Law Firm Managing Partner Compensation

Question:

I am one of the founding partners in a 27 attorney law firm in San Antonio, Texas. We have four equity partners, six non-equity partners and seventeen associates working in the firm. We focus totally on litigation. Each of us four equity partners have equal ownership percentages and since day one (20 years) have divided firm profits equally along those lines (25%, 25%, 25%, 25%). We each put in the same amount of effort and work – but since I am managing partner – my fee collections are much lower than those of the other three equity partners and I am concerned that they may feel that I am not carrying my weight since my fee collections are lower. How should this be handled in our compensation system?

Response:

This is a common question that we hear often. It sounds like you are still allocating income in the same manner that you did when the firm first started. Often when a firm grows the partner compensation system needs to be reexamined when and if partner roles or contributions change. As the firm has grown I suspect that your time spent on management activities has grown as well. I, as well as many other legal management consultants, believe that firm management (running the business) is as important as generating client fees and should be so considered in partner compensation systems.

We have numerous law firm clients where at least one or more of the equity partners "run the business" and do not provide billable client services at all.

Management time should not be used as a non-billable time category (excuse) to simply "dump" time. Your partners have a right to expect results that improves the bottom line and the size of the pie for all.

Here are a few suggestions:

• Develop a budget for management time and have it approved by the partnership. 
• Create a job description for the management partner and have it approved by the partnership. 
• Recognize that administrivia (day-to-day office management) and management (higher level concerns) and not the same thing. Hire an office manager or administrator for administrivia – focus your time on the higher level management concerns. 
• Insure that you are using your management time wisely and obtaining results for the partnership.

Click here for our blog on compensation

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

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