Olmstead & Associates Law Practice Management Blog

Two Attorney Compensaton System

Question:

Our firm has been getting by for 18 months since start-up.  We are starting to get some repeat business and I think we on our way.  However, my partner looked at the numbers for 2008 and realized that she made about a third more money last year, both in terms of actual dollars for her work and in terms of origination. Our actual hours were roughly even, but there might have been some slighter disparity.  Now were are having that first talk about changing from the straight 50-50 split to the perhaps the other extreme of "each woman for herself" (after jointly paying basic expenses).  What are your suggestions?

Response:

I have reviewed your comments. In small firms the best systems are those that are simple, easy to understand, and easy to implement. Often two partners start out on a 50%-50% arrangement and the arrangement eventually has to be changed when and if their situations change that has a major impact upon their overall contributions to the firm. (Notice I used the word contributions - not necessarily - fees collected).

However, until level of contributions change - I have often seen 50% arrangements work well in small firms that are looking to build a Firm - rather than simply their own practice and earn as much money as they can for themselves. When level of contributions change - in a healthy partner culture - the partners will be able to talk to each other and sit down and discuss an alternative arrangement that makes sense for them.

 

I encourage firms to look beyond single year timeframes - typically 3-5 year cycles. Sometimes in healthy firm cultures one partner may need to carry the other partner for awhile. For example, an attorney with a PI plaintiff practice may have wide swings and may need to be carried in lean times - but when the big fee comes in both share in the benefits. In other situations billing cycles mandated by clients, etc. can impact timing of collections. In your firm - it may be a little early yet to have a true picture concerning contribution. Sounds like you are both putting in about the same time investment in the firm and commitment even though one's numbers are higher. Is one of you managing the firm or doing other activities that still benefits the firm?

 

You must ask yourselves what kind of firm you want to be - team-based firm or group of space sharers or partnership of individual firms. Eat-what-you kill compensation systems are not appropriate for law firms that want to build a firm and create a team-based practice since such compensation systems typically reinforce "lone ranger" behavior resulting in a "me first vs firm first" orientation. It is hard to build a team-based firm with such an orientation. However, some firms do not want to practice as team-based firms - they want to practice as groups of individuals. For these firms such a system may be appropriate.

The challenge will be to nail down a method of allocation revenue and overhead that is fair and equitable to both of you. Compensation systems should do more than simply allocate the pie - they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm. Eat-what-you-kill systems discourage these behaviors.

 

In the long term the highly successful law firms will be those that are team based that where the partners look beyond their own self interests and have a "firm first" attitude.

 

I think you need to have an open exchange about what kind of firm you want to build and the commitments each of you are willing to make to achieve that. You need to decide what you consider to be contribution and value to the firm - fees generated, fees originated, primary attorney fees, marketing, firm management, etc. If those commitments are in general alignment - they maybe you should stay on the 50-50 split for awhile longer. Another option would be to stay on the same split - but create a special bonus pool - say 25% of income that could be allocated on a discretionary basic for unusual accomplishments, etc. Of course you would have to agree on who gets how much. Another option would be to have a base draw and then either a formula or discretionary bonus pool for distribution of the excess.

 

The general trend in compensation systems in larger firms is toward more subjective based system rather than formula. However, many smaller firms do still use objective or formula based systems.

 

I hope this helps.

 

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

New Firm Start-up Where Should I Begin

Question: I am an attorney that has been in practice for 10 years with a large firm (200+) in the mid-west. I represented fortune 500 clients in the area of business and commercial transactions. I was a non-equity partner in the firm. Recently I was let go due to the economy and I have no idea when or whether I will ever be called back to work. For three months I have been applying for positions with no success. I am considering starting my own solo practice. Where and how should I start?

Response:

Being an attorney in solo practice will be a much different experience than what you are used to. You will have to handle more of the nuts and bolts of running and operating a practice. You will not have people to do everything for you like you did in your last firm. You will need to learn how to be an entrepreneur and think like a businessman.

First, I suggest that you give some thought as to whether you have what it takes to operate your own firm and plan out your business. The best way to go about this is with a business plan. Click here for an article on the subject.

After your have developed your plan begin developing your business identity, firm name, tag line, website domain name, and related graphic package. For ideas download a copy of our Best Practices Guide.

Consider legal structure for the firm. Register with appropriate governmental and tax authorities.

Determine where you will practice, how you will staff your practice, and techology needs. Keep as much of your overhead as possible. Consider virtual employees. At first do as much work yourself as you can. Add staffing resources as your firm grows. Don't skimp on technology.

Implement a first class website on day one.

Good luck.

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

Surviving in the Present Economy

Question: We are a 12 attorney firm located in the mid-west. We are concerned about the impact that the economy is having on our practice and the current business environment. Our business is down and we are unsure what we should be doing financially to evaluate and improve performance - and survive.

Response:

According to Thomson West PeerMonitor Index the first quarter of 2008 marked the lowest point in nine quarters. Demand for legal services is shrinking, the billable hours growth rate has been declining since the second quarter of 2007, and productivity has been shrinking since late 2006. Trends are casting 2008 to be a challenging year for law firms.

Management of cash flow is critical. Here are our suggestions of how to examine where you are based upon receipts and your pipeline of future collections:

1.  Monthly Billings
   
   Are you budgeting your fee billings? Are your billing and collections on track? Are your individual attorneys and other producers meeting their revenue goals? Why not?
   
   
2. Collections and Receipts
   
   Are your collections in alignment with your cash requirements for firm expenses, client advances, loan repayments, and attorney draws. Remember - the total expenses listed on the income statement does not represent all of your cash requirements. Balance sheet accounts such as partner draws, client advances, purchase of assets (equipment), and payments on loans, also involve uses of cash and must be taken into consideration. Typically, there is a lag of three months between the time of when you incur expenses and do work for a client and receive payment. Be aware of potential cash deficits.
   
   
3. Costs
   
   How are your actual expenses/costs tracking against your budget? Are you within your budget? If not - why? Investigate reasons. If over budget should you cut costs or is there a way to increase revenue? Sometimes you have to spend money in order to make money. What costs should be cut - and which should not? Be careful cutting marketing/client development investments.
   
   
4. Accounts Receivable
   
   Are they increasing or decreasing? What percent are they of your annual billings? Fifteen percent is high - five percent is within the range of acceptability. Uncollected accounts can sink the firm - stay on top of them with an effective management system. Deal with collection problems early - formulate a client acceptance/credit policy - get retainers up front - reject problem clients from the onset.
   
   
5. Work in Progress
   
   Is your work in progress increasing or decreasing? Why? Investigate reasons.This represents future receivables and future receipts. Are you on target? Bill immediately anytime during the month if work is completed - don't wait until the end of the month? Bill monthly and cut-off bills by the 25th of the month so they are in the client's hands by the 28th or 29th of the month.
   
   
6. Unbilled Client Advances
   
   Get money from clients up front to cover these expenses or bill them immediately upon disbusement (if total client advance balance reached $100.00) regardless of the billing cycle established for the client's fee billing. One exception may be contingency cases.
   
   
7. Realization Rate
   
   The realization rate is the percentage of fees collected from the billable work of the firm's timekeepers. Low realization rates indicates that attorneys are not effectively utilizing firm resources. Realization rates should be no lower than appropriately 90 to 95 percent.
   
   
8. Lawyer - Client - Area of Law - Metrics
   
   Examine collections, accounts receivable, work in progress, unbilled client advances, unearned retainers, by lawyer, client, and area of law. Spot problems and deal with issues immediately.
   
   
9. Producers Time Reports
   
   All producers (lawyers, paralegals, and staff) should keep time on billable and non-billable time and should enter into the computer system daily. Weekly time reports should be produced weekly and reviewed by firm management to insure that goals are being met for billable and non-billable time. Each producer should be provided with a copy of their own report weekly as well. Firm management should spot problem areas and identify reasons - i.e. - not putting in the time, lack of resources to delegate work, poor time managment or time keeping habits and practices.
   
   
10. Trust Account Balances
    
    Review this report weekly. If funds can be applied to work performed - transfer funds over to the firm's operating bank account. Notify clients that need to replentish their retainers.
    
    John W. Olmstead, MBA, Ph.D, CMC

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Succession: Obtaining Maximum Value for Your Practice

Question: I am the sole owner of a 12 attorney practice. I am 55 years old and am beginning to think about retirement. The other attorneys are associates in the firm. What do I need to be thinking about in order that I can transition out of my practice and have money for retirement. While I have put some money in a 401k, I am not yet financially secure enough to retire.

Response:

You are not alone. As the baby boom generation ages - more and more attorneys are asking this question. Unless you have an appropriate Exit Planning Strategy and put in place a sound Exit Plan, it is doubtful that you will be able to cash in on the full value of the goodwill that you have created. To exit successfully you need:

• A plan - a roadmap - that outlines the process and helps you decide on where you want to go and how you will get there.
• Timeline - a disciplined implementation timetable keyed to your Exit Plan.
• Start Early - Getting ready for exit takes time. Start early 5 - 8 years before your are ready to retire or exit.
• Decide - When do you want to leave the practice.
• Decide - How much cash you need when you exit.
• Decide - To whom do you want to transfer the practice.

You will need to consider whether you should consider merger, sale of the practice to an outside buyer, or sale of the firm to the other lawyers in the firm. You need to find ways to institutionize the firm so that in additional to professional goodwill (your personal reputation and goodwill) you develop practice goodwill (goodwill of the firm that will remain after you have left the firm). Develop your lawyers and create a desire and motivation for them to want to be owners/partners in the firm. Develop your staff and practice systems. Diversify and stabilize your client base.

If you decide to sell to attorneys in the firm - begin the process early so that most of the buy-in is completed before your actually leave the firm. The longer the planning horizon - the easier they buy-in burden will be for others

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

Change

Question: I am a legal administrator with a midsized firm in the southwest. Our firm has recently lost two major clients and we have not acquired any new major clients for many years. Other problems regarding failure to innovate also exist. I am concerned that if the partners do not change their ways that we may not still be in business in the next few years. The firm need to change. Where do we start? How can I teach old dogs new tricks?

Response: This is a common problem being reported to us by several of our clients. Institutional clients are now shopping for legal services. They are looking for innovative solutions to their problems. They are looking for law firms that they can partner with and that becomes in essence a part of their team. The old ways of conducting business is no longer working with institutional clients. Law firms need to rethink their business and perhaps reinvent their practices. This will not be an easy task for many law firms. Change does not come easy and it cannot happen unless the firm sincerely desires to change and do things differently. In many cases law firms cultures will need to be changed to a client orientated model. This will take time and patience. Legal administrators will play an instrumental part in this process. The firm may want to start by getting out of the day-to day management rut and begin a process of long term strategic planning. Only then will the roadmap to change be able to be formulated. John W. Olmstead, Jr., MBA, Ph.D, CMC

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Management Ideas for 2008

As you begin 2008 here for getting started.

• Take a serious look at the firm's present position in the marketplace. Review financials, compare against financial ratios, compare with both firm past history and against law firm benchmarks. Examine how well the firm is competing. Is the firm too dependent on a narrow base of clients? Is the practice at risk? Conduct a client survey and obtain client feedback both on firm performance as well as possible unmet needs and opportunities. Consider a comprehensive management review.
• Formulate business goals and develop a strategic business plan as a roadmap for the future.
• Design and simplify business reports designed to measure the goals identified in the strategic business plan. Strive for a one page summary as the primary report.
• Require all timekeepers in the firm to submit personal one page business plans which in addition to outlining goals for the year provided fee revenue goals with an element of stretch. The goals should have a stretch component but yet be realistic and attainable. These plans should be approved by the Executive Committee, Managing Partner or the Partnership.
• In all of our client engagements we typically discover that the root cause of most problems is poor internal and external communications. Poor client service, staff competency and morale, interoffice conflict, and client defections typically can be traced back to poor communications. Work on improving internal communications with firm personnel and external communications with clients and prospective clients. Yes, you have to have meetings now and then. Devise systems to improve communications and implement properly. If a meeting is required - conduct it properly, use agendas and take minutes. Use your email systems. Match the richness of the communication method with the nature and depth of the message to be communicated.
• Improve relationships with your clients. Studies show that each year 'lack of responsiveness' has been the number one reason for client dissatisfaction.
• Find ways to focus the firm and foster accountability from all.
• Undertake a few projects at a time that can be realistically accomplished. Delegate tasks across the firm. All firm personnel should have marketing responsibilities - from the receptionist to the senior partners and everyone else in between. Databases must be maintained, newsletters and articles written, presentations given, clients to be wined and dined, etc. There is work for everyone.
• Law firms must adopt management structures that enables the firm to act decisively and quickly. Structures that do not support such a culture must be replaced.

Strategies For Surviving In The Present Economy

As law firms begin to plan for the new year we suggest the following key strategies:

• Develop an ongoing brainstorming program to facilitate the process of identifying new business opportunities. Incorporate client surveys into the process. Consider small client advisory boards and focus groups.
• Get that business/marketing plan that you have been talking about for years done for 2008.
• Focus – Focus – Focus your firm

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.

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.

We suggest the following:

• Recognize that unless your firm is a large firm - full-service may not be an appropriate strategy. Small firms should identify fewer areas of practice and specialize and aggressively market these areas.
• Limit your practice
• Consider industry niches
• Identify three to five key goals and strategies for the year
• Be selective in client acceptance
• Use your business/marketing plan as a tool to keep you on track
• Create an environment in your firm for effectively getting decisions implemented
• Increase your marketing investments. Research over several decades shows that businesses that continued to invest in marketing during a recession had greater growth and profitability than their competitors who decreased marketing investments during the down periods.
• Evaluate your image and your firm identity plan. Consider upgrading your marketing materials.
• Consider ancillary business opportunities.

Tips for Staying Energized and Productive

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

I am often asked to help law firms design and implement strategic business plans. I also coach many solo and small firm attorneys in career as well as personal and professional life balance issues. In both situations the starting point is the same.  Begin by taking inventory of your personal life goals. Only then can you effectively begin planning an effective career strategy or law practice. Unfortunately, may attorneys start with the law practice and take care of business first and fail to take care of their personal lives until it is too late. It is much easier to begin your life and career with balance that it is to try to bring your life back into balance later in life.

Ask yourself the following questions:

1. Do you find yourself spending more and more time on client and firm work-related projects?

2. Do you often feel that you don't have any time for yourself or your family and friends?

3. Does it seem that every minute of every day is always scheduled for something?

4. Do you sometimes feel as though you've lost sight of who you are and why you chose law as a career?

5. Can you remember the last time you were able to find the time to take a day off to do something fun -- something just for yourself?

6. Do you feel stressed out most of the time?

7. Can you remember the last time you used all your allotted vacation and personal days?

8. Does it sometimes feel as though you have never even have a chance to catch your breath before you have to move on to the next client project/crisis?

9. Can you remember the last time you read -- and finished -- a book that you were reading purely for pleasure?

10. Do you wish you had more time for some outside interests and hobbies, but simply don't

11. Do you often feel exhausted -- even early in the week?

12. Can you remember the last time you went to the movies or visited a museum or attended some other cultural event?

13. Do you do what you do because so many people (children, partners, parents) depend on you for support?

14. Have you missed many of your family's important events because of work-related time pressures and responsibilities?

15. Do you almost always bring work home with you?

If you answered with non-positive responses to more than five questions your life is out of balance and you need to take steps to correct the situation.

Here are some ideas:

Keys To Happiness

• You must take responsibility for your personal happiness, set clear goals, develop skills, become sensitive to feedback, know how to concentrate, and get involved.
• You must have an overall context within which to live.

Tips For Staying Energized And Productive

TIP #1: Develop a Personal Life Plan and a Career/Practice Business Plan.

TIP #2: Use and work your plan.

TIP #3: Work smarter not harder. Improve your time management skills.

TIP #4: Create your life balance expectations for you clients and your superiors in the firm. When interviewing for a new job or position let your future employer know your expectations upfront.

TIP #5: Tend to your physical health. Insure that you address prevention and treatment of diseases, weight control, physical fitness and stress management. Schedule and keep annual physicals. Exercise daily.

TIP #6: Begin looking for ways to implement alternative billing. Look for alternatives to billable hours.

TIP #7: Take time for yourself and family. Take vacations.

TIP #8: Define what is important to you and define your personal-professional life balance boundaries.

TIP #9: Enjoy life and get involved in activities other than the practice of law. Pursue hobbies and other interests.

TIP #10: Know your personal and professional goals.

TIP #11: Learn to relax. Take time everyday for meditation, prayer, yoga or some other activity that is focused solely on relaxation.

TIP #12: Schedule time for relationship building and maintenance.

TIP #13: Never eat alone. Use mealtime to network with referral sources, potential clients, and other professionals.

TIP #14: Turn off e-mail notifications, pagers, and cell phones.

TIP #15: Develop a personal and business budget and follow it.

TIP #16: Network, Network, Network both inside and outside of the firm.

TIP #17: Develop your conversational skills.

TIP #18: Eliminate clutter at home and at work. Develop a filing system for your personal papers and business files and documents. Open and review your mail immediately and discard anything that you do not intend to keep.

TIP #19: Use technology to streamline your work.

TIP #20: Delegate work.

It takes 30 days or longer to form new habits. PRACTICE, PRACTICE, PRACTICE. Celebrate your successes, reward yourself, and continually strive for improvement.

Suggested Practice Tips For Today

1. Never eat lunch alone. Have lunch everyday with clients, prospective clients, referral sources or members of your team.
2. Take our time management self test. Begin working on your problem areas one behavior at a time. Time is money.
3. Enter you time daily into you time and billing system - both billable and non-billable - as you work. Don't go home until you have accounted for an entire day. You may be dropping 10-25% potential revenue.
4. Look for ways to brand yourself - dare to be different. With the internet you really can expand your base beyond your local community.
5. Set a few goals and hold yourself and your team accountable.

Business Identity Plans

Question: I have heard you speak about Business Identity Plans. What is a Business Identity Plan?

Response: A business identity plan is a communications design plan that insures  a consistent and professional firm identity and message is being conveyed through all of its collateral marketing materials and vehicles. It begins with identifying the firm’s core values, uniqueness, and essence which frequently is a result of a strategic planning process. Then designers create graphic identity scenarios depicting illustrative letterheads, business cards, web site, etc. Frequently logos and tag lines are developed. Once the firm selects an identity plan it is incorporated in a consistent manner into all marketing materials including:        

Letterhead & Envelopes

Business Cards

Web Site

Powerpoint Presentations

Newsletters 

Announcements

Press Releases