May 16, 2005
Ways to increase Per-Partner Income
Any business graduate knows that the short-term approach to inadequate profits is to increase price and reduce cost. Unfortunately, that is not necessarily the long-term fix. Consider the movie theater’s escalating cost of popcorn. Volume declines, price is increased, volume declines, price is increased, etc. The result is a continued spiraling down of the business. In the case of the law firm, law firm clients have a choice. If rates rise significantly above the market, they will take the option. Second, for all practical purposes, cost in a law firm consists of people and facilities. Reduce facilities below the appropriate level and recruiting and retention of people is affected. Likewise, clients may begin to question the firm's status and position. Reduce people cost and you are engaging in "factory closings" that reduce the capacity of the firm.
The approach to raising per-partner income should be done with long-range considerations. First, determine how the firm stacks up against benchmarks. For example, how does the firm compare to its peers based on published surveys? Fix the areas where you fall short. If your collection days are longer than your peers, fix it - invest in technology and/or change procedures. If work in process measured by billing days is excessive, fix it. Likewise, if utilization is too low, find out why. If you don’t have enough work, then either reduce fee earners and staff or, preferably, get more business. If, however, the problem is under reporting of time, then implement new tools to track and report time as worked, set individual goals, track performance and hold fee earners accountable, etc. After you have taken short-term corrective steps, begin to look for long-term changes in the business that increases income without reducing the long-term value of the business.
The number one item to consider is improved marketing, especially to existing clients. The second item is adjusting leverage to fit the nature of the practice. Third, is to engage in structured planning to identify the main things the firm should concentrate on to improve the business over the long term. Fourth, is to improve management with focus on the law firm business model¾leverage, utilization, rate, realization and margin. That requires a sound business system that provides the business intelligence and tools to keep the firm in line or ahead of its peers at all times.
The list below is a reminder of steps, among others, that you can take to improve per-partner income:
• A. Leverage
– Reduce the number of partners through retirement and attrition
– Improve recruiting to hire more associates and paralegals
– Raise partnership criteria
– Consider classes of partners
– Create or expand layers of permanent leverage— paralegals, staff associate, senior associate, executive associate, non-equity partners, etc.
– Invest in a better business system that provides the business intelligence information that facilitates management of associates and paralegals.
• B. Billing rates
– Increase rates to an appropriately competitive level
– Take a more disciplined approach to annually reviewing and renegotiating rates
– Raise rates in selected areas of specialization and expertise
– Identify new specialty areas, train or acquire expertise, thereby increasing value and potential for increased billing rates
– Market for better clients (usually larger legal consumers) willing and able to pay more
– Develop and enforce case acceptance standards that emphasize the value of matters undertaken
– Improve the quality of service, presentation of work product and responsiveness
– Invest in a better business system for pricing flexibility, easier price changes and improved anniversary date tracking
• C. Utilization
– Provide fee earners with better tools for tracking and reporting billable time as worked
– Measurement improves performance¾set individual targets and/or goals, then track against actual at the fee earner level
– Negotiate billing in minimal time increments
– Generate more business to support increased number of fee earners
– Intensify training of young lawyers to shorten learning curves and improve productivity earlier in their careers
– Reallocate workloads, to “even out” utilization and to avoid client hoarding at the partner level
– Employ professional administrative staff to reduce opportunity costs (lost billable hours) of partners involved in management
• D. Realization
– Shorten the billing cycle to speed up collections and reduce bad debts and adjustments
– Improve collection tools and procedures
– Implement and enforce case acceptance standards
– Invoke controls over discounting of fees at billing
– Centralize follow-up on accounts receivable
– Improve training to reduce write-offs
– Invest in better business systems to manage the collection function and to track adjustments and write-offs by those responsible
• E. Margin
– Conduct a cost reduction campaign and work with administrative staff to improve on-going cost controls
– Improve marketing, especially to existing clients to increase fee revenue
– Substitute capital for labor to improve productivity both at support staff and professional level
– Distribute workstation access to information to the professional side of the organization
– Reduce support staffing ratios through use of technology
– Plan office space to enhance work flow
– Establish systems and controls to maximize reimbursement of client expenses
– Budget and compare to actual for improved performance
– Engage in structured strategic planning to reduce the cost and impact of off-track or poorly planned activities
– Invest in better business systems that eliminate duplicate work and increase performance and efficiency of the accounting and administrative staff
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Filed under Law Firm Bus Model, Management, Planning by Tom Collins