"Is the billable hour dead, as many like to proclaim (whether wistfully or presciently?)" So starts the Executive Summary for the 2007 ALM Billing Rates & Practices Survey. The relentless assault against the hapless billable hour continues. Here is yet another blog post arguing against hourly billing. Yet if you look at billing rates, they continue to increase. The 2007 ALM Billing Rates & Practices confirms this, but also drills down into respondent's use of alternative fee arrangements.

According to the ALM survey, the average billing rate nationally is $240. This is in line with the 2007 Law Firm Economic Survey from LexisNexis, where nationally, attorney rates were at $249 (broken down: equity partner rates were at $263 and non-equity partners billed at $235 on average). In the ALM survey, "[a]ll but a small percentage were the leader, managing partner, shareholder or owner of their firm", so I didn't include the firm effective rate that includes associate and paralegal rates in calculating the $249 (for those of you thumbing through the LexisNexis survey). Only 8% of the ALM respondents were associates, so it may very well be that average rates were lowered to $240 in the ALM survey by the associates (who in the LexisNexis survey billed at $175 per hour).

The survey is heavily weighted to small firms, with about a third of respondents being solo practitioners and 58% from "small firms" defined as between 2 and 39 attorneys. Why ALM decided to include mid-sized firms (Juris defines mid-size to include firms with attorneys with over 10 attorneys) in the small firm category, I don't know, but it might be due to a small amount of respondents in that 11-39 range.

As further comparison, the average national billing rate for equity and non-equity partners in the 2007 Altman Weil survey was $315. The National Law Journal Billing Survey partner average was $427. Both the Altman Weil and NLJ surveys target larger firms.

One of the observations of the survey was that size of the law firm matters and the above figures certainly indicate this. However, in the LexisNexis survey, the observation was different: it isn't the size that matters, but "that law firms that outperform with regard to per-partner income do so because they excel in performance on the key law firm profit drivers." The ALM Billing survey doesn't profile the firms for per-partner income and thus only looks at part of the picture.

In the chart above, each quartile was ranked for the following key profit drivers: productivity (billable hours), leverage, billing realization, effective rate, and operating margin. The highest performing firms ranked the lowest in all of the indicators.

Size, on the other hand, didn't make as much of a difference. For example, the per partner income of the top performing firms with 25 or more attorneys in the LexisNexis survey was $609,548. Income per partner for firms with 11 to 24 in the top quartile was $548,557 and with 10 or fewer attorneys, $512,896. However, the difference between quartile 1 and 2 across all sizes is substantial: $325,986, $322,876, and $294,871 respectively. While there is less than $100,000 that separates the smallest surveyed firms from the largest ones, there is nearly $300,000 difference between quartile 1 and 2 across firms of all sizes.

Which brings us back to the ALM Billing & Practices Survey. 88% of respondents to the 2007 ALM Billing Rates & Practices Survey reported that they offer "alternatives" to the billable hour and it made up an average of 37% of their revenues. That is a pretty substantial number. Given that the survey is made up of smaller firms, you may be tempted to conclude that smaller firms are moving away from the billable hour in order to compete better with larger firms.

That may well be the case, but it is just as likely that some small firms that continue to not operate like a business could be getting caught up in a trend that in the long run will drop their profits even lower while the solo practitioners next door is making half a million. If you don't measure performance, you won't know.

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

• Survey Targets Business Development In Law Firms
• Midsized Firms Have Available Capacity and a Pricing Advantage
• The Case Against Income Partners
• Law Firm PEPP "Bubble" To Burst?
• The End of Generally Accepted Accounting Principles?

Related posts

• Law Firm Marketing: Individual Attorney Planning Form
• Getting a Handle on Billing Attorney Write Downs
• Measurement Improves Law Firm Performance
• Five Key Differences between Midsized Firms and BigLaw
• What to do When Clients Don't Pay?

One of the business rules I have lived by is the motto “Fix it before it breaks”.

It is an understanding that all things have a life cycle. If it exists, it is aging. It is wearing out. It is becoming obsolete. It is breaking.  Change is constant.  We either change up or natural forces change us down.

This past week, Bruce MacEwen posted an item on his blog Adam Smith, ESQ dealing with partner retirement, Mandatory Retirement” Idiocy or Atrocity? Also this week, The Wall Street Journal Online commented on a forthcoming study by two economists, James Rebitzer and Lowell Taylor, which delves into the predatory behavior behind the current “up or out” model of larger law firms.

To understand what is going on, one only has to understand the Life Cycle.  The life of a law firm without a succession plan resembles the classic bell shaped curve. 

It is created by the original partners.  The firm then continues—prospering for a period of time. Eventually, as the productivity of the partners begins to decline, performance of the law firm turns downward. Finally the law firm goes out of existence with the retirement, disability, or death of the partners. 

Law firms that succeed in taking on a life of their own have found a way to transition from one generation to the next.  To understand such a law firm, visualize a series of life cycles as illustrated below:

The life of a continuing law firm is measured by its successful movement across the multiple life cycles of productive practicing partners and leaders. The point is that the continuing life of a firm depends on the hand off from one generation to the next.  It is not surprising that Altman Weil’s survey disclosed that the majority of larger firms have a mandatory retirement age policy.  While Bruce MacEwen correctly sees a tragic waste of accumulated wisdom in mandatory retirement policies, the naked-in and naked-out tradition of large firms coupled with their mandatory retirement age is an effective way to institutionalize law firm survival—placing it beyond the reach of politics and power.

From the standpoint that survival depends on the hand off from generation to generation, law firms are not unique. While mega law firms have found an answer through mandatory retirement, the corporate world’s answer has been independent ownership—i.e., shareholders.  Shareholder interest supersedes “management’s interest” and that places shareholder interest and business survival as the primary objective of the business.  On the other hand, a family-owned business does not have an independent ownership and faces the same problem as midsized law firm. Survival depends on having someone to hand the business off to and it depends on the existing owner/management wanting to hand the business off to that someone.  

Of the two necessary ingredients, the available talent to accept the handoff and the current owner/management motivated to make the handoff , it is the latter that is most often missing in midsized firms. The old guys and girls need something to motivate their hand off of power and income other than just a philanthropic desire to help the newcomers. The person handing off something of value should receive something of value—they should be paid for the value of what they are turning over or “selling” to the newcomer.   Unfortunately, law firms haven’t been able to figure out that part of the equation.  Without any consistency, law firms apply a variety of approaches that involve continuing compensation to retiring partners for some limited period of time—origination credit being a favorite.  Often, the burden of those unfunded liabilities has had the opposite effect from their intended purpose.  The incoming generation would rather dissolve the firm and move across the hall than share their income with the retired partners.

What is missing among law firms that is present within the commercial world is a concept of ownership and transfer of the going-concern value of the business. The new generation should have to buy its way in and exiting partners should be able to sell their ownership shares back to remaining partners.  For a “how to do it” approach, see the prior post “Law Firm Value, Partner compensation and Continuity”.

The alternative strategies for long term survival can be summed up as:

• Mandatory retirement usually coupled with a naked-in/naked-out tradition—the prevailing U.S. mega firm model among law firms

• Ownership independent of management and workers—the corporate model to which the UK appears to be moving

• Partner buy-in and buy-out agreements—the closely-held business model prevalent in the commercial business world

The alternative is either a law firm that fades away or one that survives for at least one more generation through an ugly or quiet revolution. We old guys leave one way or another.  It needs to be by a win/win arrangement.

This overview should bring home to the existing generation of baby boomer partners the importance of continuity planning.  The new guys and girls can go across the street to another firm or break away and start their own. The needs of the law firm’s clients will be met, no matter what happens to you or your law firm.  There are always alternative law firms ready to serve.  Continuity planning is most important to the entrenched partners.  Without planning for the handoff to the next generation, it is the entrenched partners and their heirs who will lose the value of the legal service business they built (or improved) during their tenure.  

            Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Related posts

• Law Firm Merger Success Depends on People
• Recession Resistant Law Firms
• Law Firms Should Avoid the Tyranny of the OR
• Law Firms and Capitalism
• Impact on Associate Hours Due to Law Firm Compensation Plans

Average reported realization in the Juris Law Firm Economic Survey of midsized law firms, was 91.6 percent.

Invisible expenses, a phrase coined by William F. Breman at Altman Weil, Inc., accounts for the fact that only 95.4 percent of the time value of work performed for billable clients at rates agreed upon is being billed. Billing attorneys, on average, write off 4.6% before clients ever see their bill. Then only 96 percent of the remaining billed amount is ever collected. When combined, these two components of overall realization represent the 91.6 percent picked up in the Juris survey.

The situation is worse. There is another component of overall realization that, unfortunately, usually goes unmeasured and unreported. It has a name, “Standard Rate Realization”. It is the lost value because of negotiated rates that are below the firm's standard rates.

As we analyzed the Juris survey information, it became apparent that lower performing firms had a higher discrepancy between their reported standard rates and their realized effective rate. Since the average billing realization showed little reported variance regardless of quartiles of performance measured in terms of per-partner income, the culprit has to be the firm's standard rate realization. Lower performing firms are billing clients at rates well below their standard rates. They are doing deals. They are increasing standard rates but not adjusting rates of existing clients. Their billing systems and procedures are out of synch with firm intentions.

The message here is do not leave standard rate realization unmeasured. How do you do that? Most full-featured time and billing systems will measure and track the time value of work performed by both standard rate and negotiated rate values. You need to set goals and measure and hold people accountable at both the origination and billing attorney levels for the difference between negotiated rates and the firm’s standard rates. In addition, for the drill-down information needed to investigate and correct problem areas, you need to have measured the difference at the client, matter, and working attorney levels. Measuring and comparing both values at the practice class level is important for firm planning purposes. If your time and billing system does not track both standard and negotiated time values, replacing it with one that does should pay back the added investment many times over and for years to come.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
 

Related posts

• What Margin Should Your Law Firm Generate?
• Midsized Firms Have Available Capacity and a Pricing Advantage
• Top 25% of Law Firms Earn Margins Above 40%
• The Lever to Pull to Increase Existing Law Firm Profits
• Reflections on the 2007 ALM Billing Rates & Practices Survey

Recently I participated with a number of managing partners in a roundtable discussion of issues they are dealing with. An issue shared by most attendees dealt with write downs of billable time by the billing attorney before the bill even gets out the door of the law firm. The national consulting firm Altman Weil, Inc. referred to such write downs as “Invisible Expenses” because, in many firms, they go unaccounted for.

One attendee indicated that last year his firm initiated a policy that the managing partner had to approve any write down above a certain amount. As the attending partner explained, “There is always an explanation—since I’m not the responsible attorney, how can I second guess that billing attorney?”

Approval mechanisms seldom work. But there is something that will. Require any write down to have a Reason Code and then track and report those reasons and the amount of the write down. Don’t create many codes—just a few. For example:

We blew it

Associate took too long

Planned associate development activity

Exceeded client expectation

Relationship building

Measurement always improves performance. By tracking and reporting write offs, reason patterns are disclosed. Why does one billing attorney write down bills for “exceeding client expectations” at a significantly higher rate than other attorneys? Why do we make adjustments repeatedly for the same clients? Why are multiple billing attorneys writing down the hours of the same associate because that associate took too long?

You can’t second-guess individual decisions by responsible attorneys, but you can identify patterns, and that will lead to an improvement in billing realization.

PS: You can always add a code or two to center in on problem areas. For example, if you have a high volume of “associate took too long” write offs, you might temporarily expand that code into several that better explain why they took too long. Once the area is in control, remove the excess codes. Too many codes can hide the trees in the forest.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
 

Related posts

• Women and Men Rainmakers in Law Firms
• What to do When Clients Don't Pay?
• The Lever to Pull to Increase Existing Law Firm Profits
• Practice Interest; the other major reason for lateral moves of attorneys
• Measurement Improves Law Firm Performance

Altman Weil has been conducting an annual Survey of Law Firm Economics since 1972. Its survey for 2005 contains information from 285 law firms. The survey indicates associate income gains outpaced increases in partner compensation. Given the associate compensation bump occurring in the current year, 2006 is likely to show more of the same. Altman Weil slices and dices their annual survey in many ways, and it has been one of the more popular sources for benchmarking one’s own performance against others. You can read more about the survey in their August news release or purchase the survey by going to the Altman Weil Publications, Inc. product page.

When you compare survey results, there is always a little “apples and oranges” problem because different surveys slice things differently. Nevertheless, I thought it would be interesting to compare some of the Altman Weil news release numbers to those in the Juris® Law Firm Economic Survey. The Juris survey for 2005 combined information from 274 firms compared to the 285 in Altman Weil’s, so the sample sizes are the same for all practical purposes. The Juris survey does differ through its emphasis on midsized law firms; whereas, Altman Weil's survey includes firms with 150+ attorneys. The billing rate and billing hours reported in the news release for partners was for equity partners with 21+ years of experience and for associates with 4-5 years of experience.

Partner compensation from the Juris survey is the average of all firms surveyed. The top quartile in the Juris survey earned more than twice the average. What is striking is that midsized firm partners are on a par with firms in the Altman Weil survey as far as compensation is concerned, but midsized firms appear to be significantly more competitive in terms of billing rates. It follows that they must have a materially lower cost structure given comparable partner compensation numbers. The implication is that midsized firms have competitive pricing for competing with large firms and may very well have more pricing increase room.

Partners are working harder in midsized firms surveyed by Juris, Inc., and they are less skilled at fully utilizing associates. Improvements in scheduling and delegation would fall directly to the bottom line, partner compensation, for midsized firms.

Considering the lower billing rates and the lower associate billable hours, in the Juris survey compared to the Altman Weil news release numbers, one must conclude that midsized firms have both available capacity and the opportunity to improve pricing. Improving either or both would materially increase partner income.

You can purchase or learn more about the Juris survey by going toJuris® Law Firm Economic Survey.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
 

Related posts

• Reflections on the 2007 ALM Billing Rates & Practices Survey
• Benchmarking Services for Midsized Law Firms
• Survey Discloses Factors That Influence Law Firm Partner Earnings
• Law Firm Standard Rate Realization
• Law Firm Growth Prospects - 2005 Survey Results

Always keep in mind that the approach to raising per-partner income should be done with long-range considerations.  First, determine how the firm stacks up against its peers.  Use survey benchmarks like those available from Altman Weil, http://www.altmanweil.com.  Take corrective steps where you fall short.

The list below is a reminder of steps that you can take, among others, to increase margin and improve per-partner income.

Steps for Increasing the Firm’s Margin

• Consider relocating for a lower cost per-square-foot
• Pursue alternatives for lower communication cost
• Conduct a general cost reduction campaign and work with administrative staff to improve on-going cost controls
• Take advantage of outsourcing for lower or variable cost
• Improve marketing, especially to existing clients to increase fee revenue
• Improve productivity both at support staff and professional level through capital investment—technology, equipment, training, etc.
• Increase professional and front office direct access to systems and information
• Reduce support staffing ratios through use of technology
• Plan office space to enhance workflow
• Establish systems and controls to improve recovery of client expenses and soft costs
• Implement an administrative charge (3%-5%) of fees billed to cover soft costs
• Budget firm expenses 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
• Set goals and hold people accountable
• Invest in better business systems that eliminate duplicate work and increase performance and efficiency of the accounting and administrative staff 

Related posts

• Best Law Firm Practices to Increase Partner Income
• Ways to increase Per-Partner Income
• Best Law Firm Practices for Increasing Realization
• Best Law Firm Practices for Increasing Utilization
• The Likelihood of Full Collection Decreases With Age

The approach to raising per-partner income should be done with long-range considerations. The first set is to determine how the firm stacks up against benchmarks such as those available from Altman Weil surveys, http://www.altmanweil.com. Concentrate on the areas where you fall short.

The list below is a reminder of steps that you can take, among others, to increase realization and improve per-partner income.

Steps for Increasing the Firm’s Realization

• Implement and enforce client intake standards
• Pursue alternative fee arrangements that let the firm benefit from increased efficiency and technology
• Shorten the billing cycle to speed up collections and reduce bad debts and adjustments
• Pre audit bills against engagement standards (rules) to eliminate bill rejection and reduce adjustments by corporate and financial clients
• Establish controls over unilateral write downs during the billing process—so-called invisible expenses average $31,000 per attorney per year
• Improve training to reduce write-offs
• Centralize follow-up on accounts receivable
• Improve collection tools and procedures
• Set goals and hold people accountable
• Invest in better business systems to speed up billing, track adjustments and write-offs by those responsible, automate engagement rule compliance and manage the collection function.

Related posts

• How does your Realization Compare?
• Best Law Firm Practices to Increase Partner Income
• Best Law Firm Practices for Increasing Margin
• Ways to increase Per-Partner Income
• The Likelihood of Full Collection Decreases With Age

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. 

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.

The list below is a reminder of steps that you can take, among others, to increase utilization and productivity of fee earners improving per-partner income.

Steps for Increasing the Firm’s Timekeeper Productivity—Utilization

• Provide fee earners with better tools for tracking and reporting billable time as worked, including use of Blackberrys and other PDAs
• Measurement improves performance - set individual fee earner targets and/or goals, then track actual billable hours against the fee earner’s target
• Negotiate fee agreements providing for billing in minimal time increments
• Generate more business to fully utilize existing fee earners and to support increasing the number of fee earners
• Modify compensation plans to increase rainmaking and handing off work
• Reallocate workloads to “even out” utilization and to avoid client hoarding at the partner level
• Intensify training of young lawyers to shorten learning curves and improve productivity earlier in their careers
• Substitute lateral hiring for law school recruiting
• Add laterals with an established book of business
• Employ professional administrative staff to reduce opportunity costs (lost billable hours) of partners involved in management
   

Related posts

• Law Firm Business Model - Leverage
• Best Law Firm Practices to Increase Partner Income
• Best Law Firm Practices for Increasing Effective Billing Rate
• Ways to increase Per-Partner Income
• Law Practice Business Model

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

Related posts

• Ways to increase Per-Partner Income
• Best Law Firm Practices for Increasing Margin
• Best Law Firm Practices for Increasing Utilization
• Best Law Firm Practices for Increasing Realization
• Women and Men Rainmakers in Law Firms