December 12, 2005
Best Law Firm Practices to Increase Partner Income
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 such as those available from Altman Weil surveys, http://www.altmanweil.com.
Fix the areas where you fall short. If your collection days are longer than your peers, fix it¾invest 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 underreporting of time, then implement new tools to track and report time as worked, set individual goals, track performance and hold fee earners accountable. After you have taken short-term corrective steps, begin to look for long-term changes in the business that increase 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 model - leverage, 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.
Over the next several days, l will post a number of checklists of steps that you can consider to improve per-partner income—one checklist for each of the items listed below that were identified in David Masister's law firm business model as income drivers:
- Leverage
- Billing Rates
- Utilization
- Realization
- Margin
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Filed under Law Firm Bus Model by Tom Collins