Rob Millard's blog Adventure of Strategy takes a second look at recessionary pressures against law firms in 2008. He links to a new Client Advisory from Hildebrandt and CitiBank that is a depressing read.

According to the Advisory, 2007 started out with high expectations and ended in uncertainty. Litigation doesn't look as good since some companies appear to be settling out of potentially protracted litigation. Merck was used as the example with their recent announcement that they were settling their Vioxx claims. (Of course, news yesterday that Merck is back on the defensive may dampen that bleakness and provide hope for trial attorneys on both ends of the aisle.)

The Advisory warned of the "perfect storm" in which finance, transactional, and litigation work have all trended downward at the same time, with no offsetting surge in work related to the economic downturn itself.(p 2)

Breaking down the reasons for their bearish outlook:

• The cost of leverage. The Advisory compares the economic downturn of today and 2001 and notes that the relatively high level of equity partners in 2001 in firms allowed for the use of leverage to increase profits. De-equitizing partners and increasing the barriers to equity partnership have left firms with little wiggle room to work in this economic downturn. This may be true for large firms, but it certainly isn't the case for mid-size firms who are still very much top-heavy according to the 2007 Law Firm Economic Survey from LexisNexis. If leverage was a method of bailout for large firms in the economic trough in 2001, then mid-size firms stand to profit from utilizing it in 2008. This pre-supposes firms have the will to make the admittedly difficult decisions in the more personal environment of the mid-size firm. It stands to reason that a struggling business that wants to survive will make the hard decisions to prevail in hard times. Interestingly, the Advisory argues the negative impact of increasing leverage in the firm that may necessitate a revisit to this subject. In our surveys, increased leverage has been correlative to increased income. Is the Advisory making the argument that you can be over leveraged? Is utilization of associates not the only factor?
• Realization Rates. Realization rates are lower now than in 2001, placing additional pressure on increasing rate. Which leads to the next point -
• Client push back. Clients, in spite of firm predictions of increasing rates, are placing price pressures on firms that place a premium on firms who are efficient at providing legal services. That, combined with lower realization rates, hurts profits.
• The Challenge of Laterals. There are more lateral hires now than in 2001. According to the Advisory, laterals are the first to leave the firm when hard times hit. Perhaps for similar reasons, perhaps not, respondents to the LexisNexis 2007 Survey confirmed that they have more success with new hires than with laterals.

• Lack of Offsetting Practices. It's the "perfect storm" of no transactional, litigation or finance work (although I personally think that may be a bit overstated).

Is this a pre-warning? Click here to read the Advisory in its entirety.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

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I read a post from Kevin O'Keefe last year lamenting the lack of live blogging (other than from Monica Bay) at LegalTech 2007. He writes:

[P]eople on the leading edges of technology are sharing their observations and insight in real time. The result is a live discourse between not only attendees, but also by bloggers around the country. Such conferences feature bloggers and look for the excitement and discussion they create.

Live blogging is self-defining: It merely means that thoughts and ideas are posted to a blog as they happen. Bob Ambrogi, however, explains that live blogging isn't so easy at an event like LegalTech:

…I often find that I have little time for attending many of the panels and presentations — ostensibly the main reason for being there. Simply making one's way around the exhibit hall and speaking to the many vendors and the many people you encounter along the way easily consumes a full day. Then there are the side meetings and the networking and, yes, the cocktails and dinners.

O'Keefe counters that other conferences of similar size have many live bloggers: "The fact that legal tech professionals are not following the trend is further evidence that we're lagging in adopting innovative technology."

I will be attending LegalTech next week. However, I will be spending the greater part of it in a booth. That said, I will take time to visit other vendors and see what they have going on as well as attend a session or three.

I have never attended LegalTech before and it is certainly possible I will get side tracked (especially in the LexisNexis booth I will share), but it can’t be that hard. After all, blogging in many ways is just conversation via an online medium (famous last words I'm sure).

This will be an experiment for this blog and for me. If we get a good response, I may live blog again at the ABA TechShow in March.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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Over the next several weeks, we will be completing our migration of More Partner Income to a new host. We have been on the same site since its inception and have finally outgrown it. We've also heard from several readers about performance and interruptions in service. The new site will incorporate many new features designed for better navigation, aesthetics, and interaction. Some of the new features we are implementing include:

• A new "Most Viewed Posts" section that will show the top most viewed posts and display them at the front of the page. This will eventually be a great help for new readers as well as regular readers who may have missed an interesting article that is getting the attention of others. At this point the feature doesn't include the heavy reading of articles written by Tom Collins in the past so it will be likely show the most recent posts initially.
• A per-post "popularity" percentage that is used as one of the criteria for the above feature.
• A "related posts" section below each article that will show you up to 5 related articles.
• An archives section that displays all the post titles for the current month and easy access to drill down to other months and years, using a collapsing/ expanding feature (click on the arrows).
• New graphical header that corresponds with the new look and feel of the updated Managing Partner Advocate newsletter.
• Comment editor will be expanded by default for the latest post, encouraging readers to interact and comment on the articles.
• New Polling feature that will show random polls every visit (or refresh of your page) that allow you to interact and help provide more content (I will periodically close a poll when there is no activity and if noteworthy will write a blog article based on the results).
• More Partner Income will be mobile device enabled, meaning you can go to www.morepartnerincome.com on your treo, blackberry or other mobile device and read articles without being at your computer.
• The page size should fit better with most displays. Sometimes the old site stretched so far you had to scroll to see the entire page.

Both sites have been running in parallel (posting on both, what a pain that has been - especially having to link internal posts twice) for several weeks. Now that we are close to moving the site, it is time to announce it and let people take a look. Please visit the temporary location at http://www.morepartnerincome.net and tell me what you think. If we have any issues, now is a better time to address them than after I shut down the old site.

We are tentatively set to "flip the switch" this Friday the 1st of February. Expect several weeks when old articles may not show images well or internal links won't work - that is because we have to re-set all of them and some may have not been linked properly. We hope to have that completed by the end of February. The text of the posts should be fine, however (other than some formatting irregularities, which too will be corrected). That said, please feel free to email me at brian@morepartnerincome.net if you encounter any issues or have a question regarding the site.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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• The Law Firm Elevator Speech
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Alan Reynolds of the Cato institute claims that misinformation from the media related to the subprime mortgage market has been propagated in part by the Center for Responsible Lending (CRL). Further, it is alleged that a crafty investor is channeling funds to the CRL and is profiting from the alarmism through the shorting of mortgage-backed securities. Such are the implications in an entry by Chris Edwards on the Cato @ Liberty blog:

Alan notes that there is a lot of misinformation out in the media about mortgages, much of it coming from the Center for Responsible Lending which, in turn, received a lot of cash from John Paulson who just made $3-4 billion by shorting mortgage-backed securities during the panic and hype about “subprime.”

Nothing like good conspiracies.

A quick look at the Center for Responsible Lending's website confirms at least the alarmism. The headline Sunday night read The Subprime Disaster Gets Even Worse. There is a call for Congressional action to "stop foreclosures and prevent more reckless lending". They predict millions will be losing their homes due to the real estate market crash. There is little question that this interest group is at the very least positioning itself to take advantage of the perceived crisis.

So what are the facts? Reynolds notes the following:

• Most foreclosures are prime, not subprime.
• Half of subprime mortgages are fixed, not ARMs.
• The vast majority of recent subprime loans were for refinancing, not buying. As house appraisals went up, some just borrowed all the phantom equity and spent it.
• About 96% of all mortgages are paid on time. Most of the rest are late, but not in default.
• The main reason for default is that home prices fell in some areas, leaving more owed on the mortgage than the house is worth.
• Serious delinquency (2-3 months late in payments) is much more common than foreclosure, partly because deals are being renegotiated. The media often confuse numbers of late payers with numbers of actual defaults.
• Most foreclosures of ARMs happened before the rate adjusted, not after. Often within one year. This was often due to borrower fraud — lying about income and assets. When the house or condo could not be quickly flipped at a profit, those with zero down just stopped paying.
• Very few subprime borrowers qualified for the lowest teaser rates — most paid about 7% or so from the start, so far as [he] can tell.
• The adjustments on ARMs are limited, and with rates now falling some adjustment will be down rather than up.

The sentiment that all is not as bad as it seems is shared by Stefan Swanepoel, Chairman and CEO of RealtyU Group, Inc. He wrote an article on his site Retrends.com titled Mortgage Market Mayhem, sharing Reynolds view that the media is overstating the effects of the subprime market on the economy. Swanepoel believes most of the mortgage businesses that went bust shouldn't have been in the business in the first place (I recall similar reaction to the tech bust in 2000). He notes that there were several pre-warnings that the market was due for a correction and that the poorly run businesses failed to account for a shifting market. Though the real estate market was due for a correction, Swanepoel writes, "the market creates numerous opportunities to grow a business and gain market share. As with any trend or change, knowledge is the key and being pre-warned is also strategically smart." This applies not only to real estate markets but to legal markets as well.

I am of the opinion that it is too early to accurately predict the effects of the subprime market "correction". Volatility in markets make for bad prognosticating. Whether or not millions will be losing their homes this year is yet to be seen, but we should expect that there will be effects on the real estate market and home values in many areas. Whether we are in for several tough financial years or just a bump in the road, take the time to research and learn of emerging trends and warnings (from several sources, not just the main stream media) in industries that your firm services. Position your firm as ready to serve the needs of clients during changes in the political and economic landscape.

Not to the extent alleged of Paulson, of course.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above. Today the focus is on realization.

Realization is a word with many meanings. Depending on what you want to see, it could mean the percentage of what was billed from what was worked (billing realization), the percentage of what was collected from what was billed (collection realization), or the percentage of what was collected from what was worked at standard rates. Further, you can look at realization on the basis of standard rate or negotiated rate (standard rate realization). This article will take a look at billing, collection, and overall realization from a performance measurement perspective. For some previous posts on realization, please read What Is Realization?, Measuring Law Firm Collection Realization, Collection Realization In The Law Firm, Law Firm Standard Rate Realization, and Role of Realization in the Law Practice Business Model.

Why is it important to track realization? The answer is efficiency. How efficient are you in converting work to cash? Each percentage point lost represents money out of the pocket of the firm. Firms that don't track realization will only find success by accident. Tracking realization at every step in the process will help your firm become more efficient and thus more profitable.

Sometimes referred to as "accrual" realization, billing realization looks at what work you performed at your standard rate and compares it to what you bill. Your standard rate is the rate you would charge a new client before any negotiated discounts. Some only want to look at negotiated or actual rate that you are charging to a client and that is fine, but you should also look at what percentage you are billing based on your standard or, as I call it, your "aspirational" rate. That way you can measure the difference between what you should be receiving based on what you believe you are worth and what you are actually getting.

Let's say your standard rate is $250 per hour. For client ABC, Inc. you and your associate perform 5 hours of quality, best in-industry work on the DEF matter. Because ABC gives you 200 matters per year as part of the guaranteed 20% of their workload for your region, you have provided them a nice 30% discount on the rate. $175 x 5 hours gives you $875 of billable work. However, once you see the pre-bill, you notice that 2.5 hours was spent by your associate "reviewing draft of status letter". You aren't going to make your client pay 2.5 hours for this, so you write it down to .5, reducing the bill by $350. Your bill the client for $525.

What is your billing realization? Based on your standard rate, you would have charged $1,250. This is your standard value for the work performed. There is a $725 loss from the negotiated rate and write down. Your billing realization is determined by dividing your billed amount, $525, by the standard value, $1,250. Your billing realization based on standard rates is therefore 42%. If you based it on your negotiated rate, your realization is $525 divided by $875, or 60%. Either way it's money lost due to inefficiency.

Ok, so you have billed $525. The invoice reaches your client, they notice a charge for .2 hours with a narrative "Telephone call with Ed regarding his paternity test - advised he should start saving for child support." Since the matter for client ABC, Inc. was related to a breach of contract claim, they requested that the time related to the erroneous entry be taken off the bill. You adjust the bill $35 and $495 is promptly paid. Your collection realization is 94%, another hit on your profits due to a lack of attention to reviewing the bill; ie, inefficiency.

Overall realization based on standard rate would be $495 divided by $1,250, or 40%. Overall realization using your negotiated rate is $495 divided by $875 or 57%. You won't make a living with these numbers. However, does any of the above (except maybe the reason for the post-bill adjustment) look that out of the ordinary? The only difference is that I am looking at realization at a per invoice level rather than a global level.

According to the 2007 Law Firm Economic Survey from LexisNexis, billing realization has a relationship to increased partner income while collection realization doesn't. Though overall realization is preferred, tracking billing realization appears to have the most impact on revenue. The charts below illustrate this:

The first graph represents cash basis, or collection realization. It is split up by quartile, the first quartile representing the best performing firms in terms of per partner income and the 4th quartile representing firms with the lowest per partner income. Note that there is no link between cash basis realization and per partner income. In fact, those in the 3rd quartile had the best collection realization, while the best performing firms in the 1st quartile were over 3 percentage points less. In the second graph, which represents billing or accrual realization, there is a clear correlation between the realization percentages and per partner income, regardless of whether you compare based on standard rates or negotiated rates.

Ultimately, the best practice would be to track overall realization based on your standard rate. However, the above provides some insight into where most of the money is being lost. It appears that if you can get control over pre-bill adjustments, your revenue will increase as will per partner income.

Ways to increase realization:

• Don't negotiate your standard rate away without volume guarantees.
• Pay attention to mark downs. If they must happen, make attorneys note a reason. If it is correctable, correct it so you can decrease mark downs.
• Bill. WIP is inventory and loses value every day it sits on the shelves (your desk).
• Don't wait months for a client to call and try to negotiate down their bill. Stay on top of receivables.
• Be efficient in how you work, how to bill and how you collect. Modify your processes to the extent you already have them. Develop a process to the extent you don't. Measure your performance and prepare to adjust if your process isn't yielding the results you desire.

Along with other key profit drivers, realization is something you should track regularly. Utilizing technology will help you achieve your goals. Tools such as Juris® Active Information can alert users when their realization goes below their desired percentage. Benchmarking tools such as Lexis® Insight can compare your realization numbers to your peers. Measure against your own goals and the performance of your peers to gain insight as you how your firm performs against others in the marketplace.

There's no reason law firms can't earn more even in a rescessionary economic cycle - unless they don't measure performance. Don't leave the financial state of your firm to chance. Measure your performance.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above. Today the focus is on leverage.

Head count leverage is by far the most difficult indicator to change. Hiring new associates involves much risk, plus you not only need to have the workload, you have to have partners who are willing to share that workload. Some previous posts related to leverage are What Is Leverage?, Best Law Firm Practices for Increasing Leverage, Handling Complexities of Law Firm Leverage, Billable Hours vs. Head Count Leverage In Law Firms, and Leverage Can Help and Hurt Law Firms.

The two types of leverage that will be the subject of this article are head count leverage and billable hour leverage. Head count leverage is the ratio of all non-equity partner fee earners to equity partners. Billable hour leverage is the total sum of all non-equity partner fee earner billable hours divided by the total billable hours of equity partners. The goal is to increase leverage if your partners have reached or exceeded the target billable hour threshold per year. What that number is varies from firm to firm, but in the 2007 Law Firm Economic Survey by LexisNexis , we used a baseline of 1,800 billable hours. I consider 2,000 hours (40 hours per week based on a 50 week work year) as the maximum reasonable output that one should expect from a fee earner. Of that, 4 hours per week can be reasonably dedicated to non-billable activities. As so many who argue for alternative fee arrangements, there are only so many hours an individual may work. After reaching this threshold, it is imperative that work is passed to another fee earner if you want to increase income over the long term (ie, firm growth). Increasing the headcount of non-equity fee earners to handle accretive work (as opposed to absorbing work that could be handled by others) is central in making leverage work to increase income.

According to the 2007 LexisNexis survey, partners are still billing more than associates but continue to project that they will pass work on and reduce their own workload. It appears talking about it is easier than doing it.

Head count leverage is obviously risky if you don't have full utilization of your existing fee earners. If you add staff before full utilization, you are merely absorbing someone else's work - a sure way to lower profits. Plans to increase head count leverage are discussed in years, not months. First and foremost there must be a need. Otherwise, it isn't going to benefit the firm. Still, if used correctly, increasing leverage will increase partner income. The best performing firms in the 2007 LexisNexis survey also had the highest head count leverage.

The best performing firms also had the highest billable hour leverage. This is where firms can make immediate changes and get results measured in months. The key is measuring fee earner productivity. In mid-size firms, partners typically outwork the associates. In order to benefit from leverage (whether it be head count or billable hour leverage), associated must be fully utilized. Before I go any further, let me clarify what I mean by "fully utilized". It doesn't mean "work the suckers until they keel over". It means determining what the maximum amount of billable hours should be (governed by firm culture and reasonable expectations) and don't hire a single person until associates reach that threshold consistently. The whining about associates being overworked may be true in biglaw, but it doesn't appear to exist in mid-sized firms. In mid-size firms, partners are the overworked ones and most don't complain. Finding young associates who have proper work ethic is more the concern (as one managing partner told me recently, "we can't find associates that want to work!") but that is a topic for another article.

What are some ways to increase billable hour leverage?

• Increase paralegal hours or don't retain them. Paralegals are chronically underutilized. If you don't intend on using them, don't hire them. If you only have 600 hours of billable work for a paralegal and your associates are billing 1,300 hours, the paralegal is lowering both productivity and effective rate.
• Introduce partner caps on billable hours. This is one I expect will be well-received by work hoarders. The idea is to set a maximum annual billable hour requirement - once reached, all further work must go to client development and all billable work must be shifted to available resources. This is a drastic measure and should be instituted only to initiate change when other attempts at shifting workload have failed. It is not feasible over the long term and in firms that have a lockstep compensation system it isn't a good idea period. However, excessive workload is an important requirement to increasing leverage. Client development is key to bringing in more work and partners are in the best position to do rainmaking activities. Whatever it takes to get partners to act like owners of a company (not a confederation of sole proprietors) is worth trying.
• Mentoring activities. Mentoring is a nonbillable but crucial activity. Encouraging mentoring will force partners to do things besides bill time - things that will ultimately make the firm more competitive and profitable. Mentoring is an art not used enough and associates who are properly mentored are in a better position to succeed and develop into good future partners. The work that would have been done by the partner will then get shifted to the associate. Partners should focus on doing work that demands the highest rate so that there isn't as much of a profit hit when implementing mentorship programs.
• Change the criteria for achieving partnership status. Do away with lockstep compensation and similar paths to partnership. In its place create compensation plans based not only on billable work but firm citizenship. Introduce non-equity partnership programs that provide a place for excellent associates who may not be good owners (ie, don't have the drive or talent for client development and management - ie, grinders).
• Change your compensation plan to reward not only billable activities, but non-billable activities. Make shifting workload with mentoring a measurable performance indicator for compensation purposes.

It takes planning to make leverage work to improve profits. Determine where you want to be in terms of fee earner headcount. Look at where you are today in terms of client development. Look at where you are in utilizing your non-equity fee earners. Make your objectives clear and measurable. Track them - and hold everyone accountable for the success of the plan.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Related posts

• Law Firm Business Model: Margin
• Law Firm Business Model - Realization
• Law Firm Business Model - Measuring Rate
• Billable Hours vs. Head Count Leverage in Law Firms
• Best Law Firm Practices for Increasing Utilization

The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above. Today the focus is on margin.

Margin is partners' profits divided by firm revenues. It is the percentage of revenue left after all operating expenses have been paid (not including partner salaries and distributions). For previous posts on margin, look here, here, here, here, and here.

There's no secret to increasing margin. Do a good job, be fair to clients, focus on client development, bill what you are worth, never devalue your time, and make sure costs rise proportionately to revenue. You don't increase margin over the long term by cutting costs. Reducing expenses is either done to correct a past mistake in investment or to replace lost revenues. Neither are positive causes. If you want to grow, you have to spend.

The point is made in the 2007 Law Firm Economic Survey from LexisNexis as well. The firms who had the highest per partner income spent the most. The firms with the highest margins spent the most.

The firms with the highest per partner income are represented in the Q1 column. The operating margin is at nearly 51% and their expenses per head are nearly $100,000. Compare that to the lowest performing firms. In the Q4 column, margin is a paltry 29% but they saved money - only $84,000 per head cost. You can't grow with a constrictive operating budget. Note that both the best performing and worst performing firms also spent a nearly identical percentage of their budgets on technology. This could mean that technology isn't being utilized properly in the poor performing firms (due no doubt to a lack of services if experience tells me anything) or that poor performing firms are attempting to utilize technology to manage their practice. I am encouraged to think the latter and am curious as to whether those firms are improving their practice as a result. There are so many variables to successful implementation of a process, but looking at these firms in 5 years might be a good follow up.

The way to improve margins may be different for each firm depending on where they start, but there are still two constants: cutting costs do not equate to long-term increases in per partner income and measurement improves results. With any action geared to improve the financial performance of your firm, you must measure it and adjust when you get off track.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Related posts

• Law Firm Business Model - Leverage
• Law Firm Business Model - Measuring Rate
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• Measurement Improves Law Firm Performance
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The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above. Today the focus is on Productivity.

Productivity is the degree of value generated by fee earners. It is most commonly determined via billable hours, but you can track productivity in terms of fee generation whether via hourly billing or other fee arrangement. The concept is the same either way: attaining maximum productivity means getting the most output from your fee earners. In alternative fee arrangements, you can determine the productivity by breaking down each task by the time it takes to perform the task. Then productivity becomes how many tasks you can complete in a given time frame. One way or the other, you can only work so many hours in a day regardless of how you bill. Since most firms still primarily judge productivity in terms of the billable hour, this article will gauge productivity by billable hours. For some prior posts on productivity/ utilization, please look here, here, here, here, and here.

According to the 2007 Law Firm Economic Survey from LexisNexis, partners billed more hours than associates. Based on a 1,800 billable hour per year standard, top performing firms had associates with productivity numbers that were closer to their partners.

In the above charts, it is clear that partners are more productive than the associates. Considering that partners dictate what associates do, this is a disturbing indicator of a lack of workload sharing by partners of mid-sized firms. Further, for those who do utilize their associates, profits increase. Across the board, partners were within 10% of the 1,800 standard. However, the best performing firms (those in the 1st quartile), had both partner and associate productivity within 8% of each other. In the 2nd quartile, the disparity was a whopping 17% For the 3rd quartile, it was even worse: a 25% difference between the utilization of partners versus associates. For those in the worst performing quartile, the disparity was a little less at 18%, but partners were only as productive as the associates in the 1st quartile.

It is worse for paralegals, though you may argue that paralegals shouldn't be held to the same billable hour standard as associates. Even so, the higher performing firms still utilized their paralegals more than those with lower per partner income. It is clear that utilization is a path to higher profits.

Don't read too much into the above sentence. Again, there are only so many hours in a day and thus only so much productivity you can expect from fee earners. You still need to measure performance based on proper leverage, rate, etc. But you can improve short term profitability by increasing utilization alone.

Assuming the work is there, the best way to increase productivity is through incent. Provide incentives to partners to share work with associates. Provide incentives to associates to reach their billable goals. Provide incentives to utilize paralegals. Try many things and measure against production. If it works, keep doing it. If not, adjust.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

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The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above. Today the focus is on rate.

For a primer, look at some prior posts related to rate here, here, here, here, and here. The importance of tracking rate shouldn't surprise anyone. However, I run into firm after firm who either don't increase rates annually or don't track effective rate. How can you improve performance if you don't measure it?

Source: Timothy McMahon (http://www.inflationdata.com)

The above chart shows the trend in inflation since 1990. Failure to increase rates annually at the rate of inflation during the 1990's wouldn't have as much of an effect on profits considering the economic boom the US experienced along with low inflation. That changed in 2002 and there has been a steady increase in inflation for the past 6 years. In fact, as of December, 2007, the consumer price index (which includes the price for food and oil) was at 4%. If you are not increasing your rate at least by the percentage of inflation, you are working for less money every year. It isn't known where inflation will be at the end of this year, and some are forecasting that this year will see some lower inflation, but the point isn't to predict lower profits when inflation is higher or higher profits when inflation is lower - it is to keep up with the rate of inflation and be certain your rate increases take it into consideration so that you are immune to the index altogether.

Inflation is a starting point - other factors such as relative expertise in a given area of law can also factor into rate. In your retention agreements, you can provide cost predictability to your clients by treating it like one would a long-term lease. You factor price increases into the agreement so that they know the percentage increase each year. In volatile times (such as the last few years), it may be better to treat it more like a mortage, setting a range of increase that won't go beyond a certain ceiling. Then annual increases can meet margin goals as well as inflation.

Measure the effective blended rate consistently so that you know if the rate is going up and down throughout the year. Why is this important? Assuming that your firm has established rate goals for the year, the blended rate (the combined average of all fee earners' rates) should be known. If the rate is decreasing, then something is wrong. The most likely culprit is pre-bill or post-bill adjustments. If your attorneys are devaluing their work, there needs to be a reason - otherwise, you will be sending a signal to the client that you are over charging them and adjusting to make it more fair. This is not the way to make it easier to raise rates in the future. Further, if you are trying to meet a financial objective, write downs and mark offs go directly to the bottom line and put you behind in reaching your financial goals.

The effective rate is calculated after the invoice is paid. It gives you the actual value of your services. In the report below, productivity, realization, and rate are tracked. The image below it is a blow up of the rate section of the report. In it you can see the value of the hours worked at your standard rate, your actual or negotiated rate, the billed rate after mark down but before invoice discounts, the billed rate after discounts, and the collected rate after post-bill adjustments. It is broken down both by both worked hours and billed hours.

In the above, you can instantly see that the time keeper is writing up his negotiated rate at pre-bill edit to conform with his desired standard rate. One way you achieve this (ethically) is by the use of firm-wide standards for the cost of a task. You must determine the time it takes generally to do the task and then price it accordingly. If you have efficient attorneys that can do the task in less time than the standard, he/she may write up the bill to conform (likewise, if it takes longer, you must write it down). This way an efficient attorney may mark up his time and thus increase his effective rate. For those who advocate value billing, here it is at work. The better value goes to either the efficient attorney or the client of the inefficient attorney. Tracking effective blended rate regularly will allow you to determine whether your attorneys are being efficient in their processes and if they are on track to reach the financial goals or not. If they are not, you can act on it well before it becomes an uncorrectable problem.

At the same time, the above time keeper may be increasing his rate unethically, which may lead to undesirable consequences (firm reputation as well as ethical violations may be the result). Without regular reporting on the above, you won't have the information to know which is occurring.

Price increase is one factor to consider in increasing effective blended rate. It isn't the only factor. Many firms, especially those who work in corporate defense litigation, have traded high rates for volume. In practice areas where there is not a lot of price flexibility and the rate is usually heavily discounted to get the business, the key is to have an efficient workflow process and be very wary of mark downs. In some firms, the rate can absorb an inefficient operation. In corporate defense, you may not have that luxury. On top of that, more and more corporate clients are levying restrictive billing guidelines that can seriously affect effective rate. Not only can non-compliance with client billing guidelines delay payment, it can lead to nonpayment of certain tasks altogether.

Improving workflow efficiency is the easiest way to increase effective rate. However, expectation of reciprocity from a client who expects you to provide quality service at a reduced rate wouldn't hurt. Why is it that a client can expect you to lower rate for their volume when you are not guaranteed any volume from them? In my opinion, not only would I work to increase rate, I would tie the frequency and level of the increase on the volume the client provides. If the client is willing to guarantee a certain percentage of their work for a given year, I would be more willing to hold rates steady or only increase them by the annual rate of inflation. Don't be afraid to treat your corporate clients like a corporation. They are treating you like a business. Although restrictive, billing guidelines provide a measure of cost certainty by the tracking of costs associated with a task. They know what it costs for you to do your work. You better know it too - and make sure you are making a profit from the work you do.

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It seems every year there are those who get in front of the press and claim that there is a looming recession that is about to envelop the country and if there is no action, the depths of it will surpass our worst fears.

• Housing starts are down 24% from a year ago. The median sales price of existing single-family homes has been falling all year, according to the National Association of Realtors. A person's home is the largest single asset and the source of a sense of prosperity for most Americans.
• The value of the dollar is near an all-time low [ ]. The dollar is worth the same as the Canadian Loonie currency.
• The price of oil spiked at $100 per barrel on January 2 and has settled at an exorbitant $92 per barrel.
• The US trade deficit widened sharply by 9.3% in November to a larger-than-expected $63.1 billion. The trade deficit has widened to its highest level in more than a year.
• The "credit crunch" means that investment capital is difficult to obtain. Banks and investors become wary of lending funds to corporations, thereby driving up the price of debt products for borrowers. Citigroup, the nation's biggest bank, announced a stunning $10 billion fourth-quarter loss. The Kuwait Investment Authority — a foreign country — is expected to bail out Merrill Lynch with a $4 billion investment.
• The cost of the war in Iraq over the past five years is now approaching a cumulative $500 billion, or about $100 billion per year on average.

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