June 30, 2008

Managing Partner Advocate Summer Issue In The Mail

4:30 pm

The summer issue of the Managing Partner Advocate is now in the mail.  This issue is focused on ways to combat the effects of a contracting economy.  Highlights include retaining talent, managing associates, planning for the unexpected, measuring marketing activity and measuring timekeeper .  There is also a guide to minimizing facilities costs written by guest author Luke Raimondo, an attorney and commercial real estate broker, and a guide on how much debt a law firm should carry.

The summer issue provides excellent guidance for to help improve even as the GDP struggles to grow.  If you are a subscriber to the site, you may download the summer issue by clicking here.  You may also have the advocate mailed to you at no cost by clicking here and requesting a subscription.

It is with great regret that I am leaving and will no longer be associated with the Managing Partner Advocate and More Partner Income.  I took over the from Tom Collins in January of this year, a mere 6 months ago.  In that time I have moved the site to a new host, completely re-built the and have enjoyed record numbers of readers, building on the solid foundation Tom Collins built over the past 3 years.  I sincerely appreciate all of you who have read this and utilized it as a resource to help your firm.

This is my last post as editor of this .  I have enjoyed my brief time hosting More Partner Income and hope that you have found value in the posts I have written. 

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June 27, 2008

Valuing Your Firm's Inventory

10:16 am

Most understand intuitively that the value of inventory (both WIP and A/R) degrades over time, but by how much and how quickly? The ability to understand and answer these two questions is the first step in preparing a realistic, forward looking valuation model; one that can identify opportunities and drive action, rather than simply report on past performance.

To begin to answer the question of the future value of current inventory, it is important to realize there are two different forces diminishing a firm’s return on work performed, and both have the same basis: time. In essence the old adage “Time is Money” is true; as time passes, your inventory becomes less valuable.
The first and most basic of the two forces is widely known and easily calculated. For our purposes, we will call it the Time Value of Money effect, or TVM. A dollar today is worth more than a dollar tomorrow.  Anyone who has ever used a credit card, carried a mortgage, or borrowed or lent money in any fashion, understands this concept. However, many simply disregard this as a cost against their inventory, or use such a low discount rate, as to make it negligible. When considering a firm’s discount rate, too often factors such as reasonable market expectations of returns and inflation are swept aside. In the model below we use a simple method (with two different Discount Rates) to determine the cost of time on a firm’s inventory:   Amount X Daily Discount Rate X Open Days; where the Daily Discount Rate = Yearly Discount Rate/365 days. 
 
The second, and in most cases much larger charge to your inventory, is what we will call the risk of default (this refers to both defaulting on receivables and not billing work in progress). This is the risk that a firm will not realize a portion, or the entirety, of the value of work performed. In most cases it is instinctively understood that receivables a year old are far less likely to be realized than those just billed. The same can be said for WIP. But how do we measure this concept? One possible way (and there are many) is to use available historical billing and payment patterns to develop a forward expectation curve. We can then apply this curve to our current inventory to determine the amount that is realistically likely to bill or collect. This method can be made more complex or simple depending on various assumptions and the level at which the expectation curve is developed to (i.e. practice group, type of work, client, etc) but the concept remains the same — past performance is an indication of future performance.
In the example below, such a curve is constructed for a client based on a set period of time and then applied to four matters with outstanding A/R (a similar model can be built for the WIP side). A total of $200,000 has been billed over the life of this client, with $175,000 eventually being realized (or 87.5% seen at day 0). As might be expected, the majority of the collections (> 50%) have historically taken place within the first 90 days. The Fwd A/R Expectation Curve helps quantify the expectation of collection (or non-collection) as current A/R ages based on prior practices (i.e. at 240 days, $50,000 has been available to collect, but only $25,000 has been collected, giving us a historical expectation of 50%; therefore, if current A/R now ages to 240 days, we would expect to realize 50% and lose 50%). Of course, like any forecast, our model will not be 100% correct at each level of granularity, but it does provide a logical, and historically proven, method to value inventory, particularly at the firm level.
 
While simplified, the models above allow us a better understanding of a) how much of the work we have currently performed we expect to realize and b) the actual value of that work once we do realize it. Any questions, concerns, or comments on the above can be directed to Dschutz@redwoodanalytics.com.

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June 18, 2008

Associate Attrition Skyrockets By Year 5

12:00 am

The Association For Legal Career Professionals recently released an Update On Associate Attrition covering the 2007 calendar year.  The numbers are striking:

  • Overall percentage of associate attrition was 18% for 2007;
  • 24% of these associates had been on the job for two years or less;
  • 74% of 2007 departing associates left the firm within 5 or fewer years of their arrival.

The most cited reason for entry-level associate attrition was "pursuit of specific practice interests".  

The reason for entry-level associate attrition leads me to believe that the survey is large-firm heavy.  Large firms provide entry-level attorneys with high salaries and intense work schedules.  Within 3 to 5 years, prudent associates should have their law school loans paid off and can now seek to practice in their own desirable area of law.  In fact, the median size of the firms in this survey was 220 attorneys.  Only a fifth of were firms with 100 or less attorneys.

Looking at just the 100 and less category, the percentage of associate attrition was at 17%, 15% had left the firm within 2 years of being hired and 69% left the firm within 5 years of hiring year. It is too bad the survey did not track the reasons for attrition based on firm size, because I suspect that the main reason for attrition for smaller firms wasn't to pursue specific practice interests, but may be closer to the main reason cited by departing laterals:  "unmet work quality standards".

There is little doubt that associate attrition is prevalent in of all sizes.  It is possible that the high attrition rates are reflective of the common culture.  Where once a ball player would stay with the same team for their entire career, free agency now reins.  Where someone would work at the same company for the greater portion of their life, now employee loyalty is considered a thing of the past.  Neither sports nor businesses in general have made employee attrition a pressing issue to be resolved.  When it comes to business realities (i.e., pensions) some businesses specifically don't want employees to retire with them.  Why should it be a concern to ?

Whether or not associate attrition is important to your firm may depend on the area of law practiced.  For example, a defense litigation firm that is well organized and has developed processes that manage their recurring tasks may not be too bothered by attrition, particularly if they have a mechanism for quickly training new associates.  On the other hand, an estate practice that relies on many years of expertise can't afford high associate attrition.

Firms would do well to track associate attrition and determine the reasons for their departures.  Although it may be in the interest of some firms to encourage attrition, in the long run firm sustenance is reliant upon the retention of quality talent.

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June 12, 2008

Forecasting Collections and Inventory Management

12:00 am

 In today’s unstable environment, driven by outside economic forces, higher associate salaries, and increased competition, law firm leaders are faced with the tough job of forecasting cash collections. Many existing forecast methodologies focus on production and collection . However, these models often fall short because they ignore the other drivers of collections, and do not provide any information about collections beyond the forecast period. A better model:

1)      Forecasts bills and collections as they relate to inventory levels thus allowing analysis into the impact of the next period’s collection funnel,
2)      Drives the forecast according to the speed of the billing and collection cycle,
3)      Isolates the quality of inventory separate from collection timing by analyzing realizations at the time of collection.
A key aspect to understanding collections is to think of the process as an inventory funnel. Each month production is added to the funnel, increasing inventory available to bill and collect. At the same time, bills and collections, as well as write downs and write offs drain the funnel, thus reducing inventory levels available next period. By analyzing this inventory turnover, modelers can focus on the drivers of collections: beginning inventory, production, inventory turnover, and realizations. Consider the following example:
 
Last Year
 
Forecast
 
Beginning Inventory
$50,000
 
$60,000
 
Production
$150,000
 
$170,000
 
Total Available for Collection
$200,000
 
$230,000
 
Written down/off
$10,000
 
$11,000
 
Cash Collected
$130,000
 
$150,000
(3)
Inventory Turnover
$140,000
 
$161,000
(4)
Ending Inventory
$60,000
 
$69,000
 
 
 
 
 
 
Inventory Turnover %
70%
(1)
 
 
93%
(2)
 
 
1)      Inventory Turnover/Total Available for Collection
2)      Cash Collected/Inventory Turnover
3)      Total Available for Collection * Last Year’s Inventory Turnover %
4)      Inventory Turnover * Last Year’s %
In this model, the total available for collection is beginning inventory plus production. By comparing the amount available for collection and the ending inventory, the modeler may derive the inventory turnover. Also, by looking at the type of turnover, collected vs. written down or off, the modeler can calculate . Applying Inventory Turnover % and % to future inventory, produces a cash collected forecast based on all of the cash drivers mentioned above and provides a starting point for the next period.
Redwood has helped forecast collections using this and other methodologies since its inception. Our Business of Law Consultants are prepared to help law firm leaders take their forecasting to the next level by sharing best practices forecasting techniques, separating inventory turnover for billing and collection cycles, and capturing the seasonality of collections. In addition, our business intelligence solution is uniquely positioned to help not only improve their forecast, but also their actual results.

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June 9, 2008

Blawg Review # 163

12:00 am

Now that it is finally the turn of More Partner Income to host Blawg Review, it is tempting to stray from our mission.  For those who may expect this, I'd like you to join me for a moment of digression, as I whisk you away to a remote vineyard in southern France, placing you at a hilltop overlooking hectares of ripe grapes as a cool breeze gently flows through your hair.  It is dusk, and the reddish glow of the horizon creates in you a moment of reflection, something you haven't done in years.  A sommelier suddenly appears:  a vinucator who will ruin the moment by lamenting the perils of the homogenization of wine. 

Ok, that should sufficiently shatter the tranquility of the moment, so let's move on to the theme of this entry:  Law firm survival in economic hard times.

You know that when the price of a gallon of gas increases, it is because of evil oil companies.  That is a given, right?  Well, sure, if you don't know what goes into the price of oil.   Similarly, without knowing the costs associated with performing a service, might be tempted to not increase their own rates, considering the implications it may give to clients (gasp! we are affected by economic conditions, just like you!). 

Reid Trautz argues in his Reid My Blog! that firms should increase rates now, mid-year, based on perceptions of our economy.   If firms haven't already increased rates this year, now is about the time they should consider it.  Inflation isn't waiting for you.  Though some argue that law firms can be recession-proof, Ed Poll argues that law is subject to economics just as any other business.

Judge Posner in the Becker-Posner blog writes of the cost of the deterioration of infrastructure.  More money will be needed to finance upgrades.  From where will it come?  Tax increases?  Tax cuts?  How about taxing wheels?

The Estrin Report discusses more layoffs for associates and staff - regardless of whether the economy improves or not.  Even partners aren't immune.  Jim Cotterman of Altman Weil suggests that the likelihood of becoming partner is being affected by the economy:

Generally are best situated if they promote to ownership only those who can maintain, refresh and expand the business opportunities of the firm.  Without this one attribute, no firm can remain competitive or viable for very long.

What can a law firm do?  For one, it can avoid being stupid, as Jordan Furlong of Law21 writes.  What does he mean by stupid?

  • Partnerships that don't enforce rules against uncooperative or alienating partners who happen to bring in a lot of revenue;
  • Senior lawyers who consistently hoard the best work and the most client contact, to the detriment of junior lawyers;
  • Firms that allow women lawyers to leave because of partnership tracks that are tailored for men;
  • Firms that prioritize short-term profits over long-term interests.

Speaking of women, Matt Homann in his the [non]billable hour writes of the five things you need to know about women and word of mouth.  One of the things appears to be costly: Instead of offering a 15% discount for referrals, offer a 15% discount to everyone a woman refers!  Considering this 's disdain for discounting fees, I would prefer that "kirtsy" discount be placed on a timer.

I'm more inclined to attract women [clients] who misbehave.

Another thing firms can do is communicate better with clients.  Status reports are often an underutilized medium of communication that can mean the difference between a happy client and a lost client.

Tom Kane's Legal Marketing Blog discusses 6 steps to improving client service:

  1. Agree upon and commit to a defined set of client service standards.
  2. Turn fluffy, high-level strategic statements into real, definable, measurable action steps.
  3. Provide training and ongoing reminders focused on what it takes to meet and exceed a client's expectations.
  4. Include client service as a significant factor in compensation.
  5. Give leaders the power to enforce standards (carrot and stick).
  6. Provide role models, teach the skills, give opportunities to practice and supply meaningful feedback. One great rehearsal hall is within your own firm, where lawyers can deliver exceptional service to each other.

Being a role model is a tall order in today's firm, where partners appear to work twice as much as associates.  However, in a great post from the Harvard Business Review "Editor's Blog" titled  A Boss Who Changed My Life, Steve Prokesch writes of the means that his boss employed that helped "turn us individually and collectively into winners":

  • Set the bar high and then push your team to raise it higher;
  • Make excelling a team activity;
  • Promote your team in the organization;
  • Remember that management is personal;
  • Champion your people.

The above is a lesson that can be learned by all in business. 

There are other blogs that were emailed to me which are also worthy of mention:

Jesse Hines (a guest author on Write to Done) argues that a single-idea post often works better than list posts.  Though I didn't follow that particular advice in writing this entry, I look to that as a source of writing guidance.

Thanks to all who emailed suggestions this past week.  Blawg Review has information about next week's host, cearta.ie, and instructions how to get your blawg posts reviewed in upcoming issues.

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June 6, 2008

RainToday Report: 76% of Law Firms Discount Fees

12:00 am

Pricing has been a frequent topic at More Partner Income.  Some past topics include the science behind pricing, the ill effects of inflation on pricing, pricing management, and discounting.

RainToday has recently released the Fees & Pricing Benchmark Report:  Law Firm & Legal Services Industry 2008.  David Maister wrote a blog post on a similar report released by RainToday focused on the consulting industry on April 28th.  There were some striking similarities between the two reports:

  • 65% of consulting firms reported they discounted fees.  76% of reported discounting fees;
  • Average discount of responding consulting firms was 11.7%.  Average discount of responding was 9.9%.

Of the two pre-bill adjustments (mark downs and discounts), discounting is the most difficult to change.  Both show weakness in the firm, but discounting creates a feeling of entitlement from clients.  How?

Marking down time tells your client one of several things (the below is not exhaustive):

  • I spent more time than I can reasonably charge you for the service provided:  ie, I am not efficiently working the matter;
  • My associates spent more time that I can reasonably charge you for the service provided:  ie, my firm has less competent attorneys working on your case or I have inefficient staff working on your case;
  • Even though I spent an adequate amount of time on this, it "seems" too high to me:  ie, I am unclear on the value of my service.

All of the above are correctable.  They are entry-specific adjustments that can be seen as temporary.

On the other hand, discounts are typically applied to the entire bill.  This gives rise to expectations of entitilement.  They can tell your clients one very negative thing:  I am overcharging you up front and adjusting it on the back-end. 

Just as discussed on this site in the post Discounting At Law Firms, the RainToday report suggests that there may be valid reasons to discount, but only when the discount is intentional, strategic, and, ultimately, mutually beneficial to you and your client.

Some reasons to discount given in the report include well-funded start-up clients (in expectation of long-term payoffs) and absorbing the cost of training new associates.  It is also something to consider when trying to win RFPs, in exchange for quick payment of invoices or in return for a threshold amount of work that the client will provide to the firm.

The important part of discounting is that it is mutually beneficial to you and your client - there needs to be consideration for the discount.  It needs to be binding so that if the client does not perform on their end, the discount doesn't get applied.  If there isn't quid pro quo, you are giving a clear message to your client that you overcharge up front - and that your rates are open to negotiation.  

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June 5, 2008

Hosting Blawg Review # 163 Next Week

12:25 pm

More Partner Income will be the guest "blawg" on BlawgReview next week.  If you would like to submit a to be reviewed, please refer to the submission guidelines that can be found here.

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June 3, 2008

Partner Cost and Client Profitability (Part VI)

12:00 am

This is the last in a 6-part series on and client written by Ron Paquette, consultant with Redwood , now part of .  The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client .  The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners.  The third article, titled  Partner Cost And Client Profitability, (Part III), is focused on basing a partner's direct cost on a "minimum margin percentage".  The fourth article, titled Partner Cost and Client Profitability (Part IV), is focused on basing a partner's direct cost on a "minimum margin dollar amount".  The fifth article, titled Partner Cost and Client Profitability (Part V), is focused on allocating a partner's direct cost using a variation of both the "minimum margin percentage" and "minimum margin dollar amount" based on different partner "ranks" using a sliding scale.  This final article compares the different methodologies to help a firm decide which one to utilize in their environment.

Over the past several weeks, I have explored a number of methodologies for determining the appropriate amount of to consider direct cost and allocate to clients for purposes of evaluating client and matter . Since a partner is compensated for a multitude of contributions to the firm (billable hours, originations, matter & client management, attorney management & development, and for firm ownership), the issue is complex. Through my last five postings, I have evaluated half a dozen methodologies, all of which are used by at least one firm Redwood has worked with, but not all are recommended. 

The first step Redwood took as we set out to answer this question was to determine what we were trying to accomplish with an allocation methodology. From there, we developed a list of five criteria to evaluate each methodology against. As I wrote about in the prior entries, the advantages and weaknesses are all based on this list:
  • Simplicity. If the methodology is not easy to understand with a minimal number of decisions, it will prove difficult to build partner buy-in.
  • Positive margin. There is value associated with every hour of partner time at standard rates. While discounting may be a planned strategy to acquire a client or matter, at full rates, every hour should have some margin.
  • Rate based. Compensation can be affected by a large number of factors including discretionary bonuses and overall firm performance in a year (cash received from a litigation case). As a result, it is possible for compensation to decrease from one year to the next.   Since we are trying to assign costs to the client for the billable time only, it is important to ignore these effects. Instead, direct costs should be based on partner’s standard rate,
  • Leverage. While not the only measure, leverage is extremely to increasing firm . Any methodology should (through the resulting margins) encourage the use of lower cost timekeepers over higher cost (and highly compensated) partners.
  • Closed Compensation system. If this is a concern for your firm, it can generally be accomplished by using a rate-based methodology and leaving out any actual compensation figures.
In our journey through this process, we gathered various approaches from our clients and from industry experts. The list of criteria above is a solid place to begin evaluation to determine if the resulting model is providing the desired outcome.  In the figure below, you will see the six methodologies that we evaluated and the degree to which they meet the criteria above (solid circle indicating criteria met, half circle indication partial, and blank indicating criteria not met). As you can see, the three methodologies that we recommend to our clients, Minimum Margin %, Minimum Margin $ and Sliding Scale, meet almost all six of the criteria we have laid out here.
If you use or know of another methodology, we would be interested to hear about it and may be able to provide some guidance on its performance against the list of criteria. Please send an email to rpaquette@redwoodanalytics.com with any suggestions, questions, or additional methodologies that we have not yet seen.

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