May 6, 2008

Partner Cost and Client Profitability (Part II)

12:00 am

This is the second in a series on and client written by Ron Paquette, consultant with Redwood Analytics, 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 .  This article is focused on pitfalls of some firms' methodology in allocating costs to partners.

Some firms have chosen to exclude costs all together from worked by partners.  Generally it has been requested for one of two reasons: the firm would like to keep actual out of the model (a closed compensation system), or the firm is thinking about a P&L model where is simply a distribution of firm profits.  While this methodology does accomplish those goals, from a client perspective, it introduces its own set of issues.   

What results is a model where client is maximized by only using partners to perform the .  In the example below, there is a timekeeper with a 66% profit margin and two partners, both with 100% .  Any hour that the Associate performs for a client will in essence drag down that client’s and a matter manager might be tempted to use a Partner where an Associate would suffice in an effort to ‘game’ his clients .  This is contrary to the proper use of and economic theory which would have the partners working on tasks for which lower level timekeepers are not qualified such as originations and the management of matters and attorneys.  For this reason alone, there needs to be some cost associated with each of a Partner’s time, if not for any other purpose than to represent the opportunity cost of them not performing these other tasks.  Besides, every firm that we have encountered expects their partners to perform a certain quantity of for their clients which would imply that some of their compensation should in fact be allocated to the client.

Role

Compensation

Std Rate

Cost Rate

Profit Margin

Rainmaker

$1MM

$250

$0

100%

Dept. Manager

$500M

$200

$0

100%

Associate

$80M

$100

($44)

66%

 

 

 

 

 

 

 

 

 

Another methodology that has been requested in an effort to support a closed compensation is what we call a fixed (or capped) partner cost.  In this scenario, every partner is given the same direct costs.  Aside from the privacy of actual compensation, firms make their case by stating that above a certain point, all is for contributions besides the .   However, since billable rates vary significantly even in the upper echelons of partners, it is hard to justify those hours having the same cost rate.  Regardless, like the methodologies we have already examined, this too creates some unfortunate outcomes. 

The biggest concern with this methodology is the reversed that it creates (similar to having no costs at all).  In the example illustrated below, we see a firm that has chosen $270,000 as the partner direct costs.  Any partner whose compensation exceeds this threshold has their compensation limited and as a result, all have a $150 cost rate for their time.  The result is that the highest rate timekeepers have the highest profit margin, 40% in the case of the Rainmaker, while those with lower compensation, like the Jr. Partner, have minimal (or zero) profit margin for their work.  Certainly, the cost to the firm for these 3 timekeepers is not the same.


The alternate version (and preferable to the former) is to use the dollar amount as a limit to and not a flat amount for every partner.  In the example below, we see the Jr. Partner whose actual compensation is below the $270,000 mark.  In the fixed methodology his profit margin is 0% but if it were capped, his direct costs would be his actual compensation and therefore would have a more favorable profit margin of 44%. This still does not relieve the cost similarity between the Dept. Manager and the Rainmaker but it is a slight improvement over having all partners at one cost rate.  Of course this methodology does not meet the requirements of a closed compensation system (unless the firm is primarily interested in the privacy of Sr. ).

 

Role

Compensation

Std Rate

Fixed Cost

Cost Rate

Profit Margin

Rainmaker

$1MM

$250

$270M

($150)

40%

Dept. Manager

$500M

$200

$270M

($150)

25%

Jr. Partner  (Fixed)

$150M

$150

$270M

($150)

0%

Jr. Partner  (Capped)

$150M

$150

$270M

($83)

44%

 

 

 

 

 

 

 

 

 

 

 

 

The next installment will focus on better ways to calculate partner cost in measuring client .

 

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March 17, 2008

For Long Term Increases To Income, Partners Must Delegate Work

12:00 am

I spoke Friday at the ABA Techshow on and the key drivers of partner income.  At the end, I posed some questions to the audience to facilitate discussion on the findings of the 2007 Law Firm .  One of the questions I asked was "why would firms have low associate utilization?"  A partner in the audience responded, "Partners don't trust them to do the work."

That is a common answer I hear from partners.   However, without fully utilized associates, firms can't affects the growth of the firm and there was a strong correlation between and income by  of the 2007 Survey.  The challenge for small to mid-size is finding ways to increase associate utilization so that the firm positions itself to .  If trust is an issue, then confront it.  Mentor associates so that you can trust them to do the work as you would.

An article written by Allison Wolf in her Lawyer Coach Blog titled The Fine Art Of Delegating was the basis of a post by Tom Collins in August, 2007 called Spinning Increases Law Firm Income.   Both Wolf and Collins stress that partners who aren't "spinning" work to associates need to face the reasons that prevent them from delegating - don't let the reasons be an obstacle. 

Wolf writes:

Delegation is one of the lawyer behaviors that need to be rewarded by compensation committees. For a law firm to be most profitable partners are required to spin work down to juniors. Savvy compensation committees look at the combination of and spin earnings when allocating partner income.

Collins adds:

[A] firm’s is often the reason Why Partners Hoard Work. That, in turn, leads to poor , underutilization of associates and high turnover.

On the issue of trust, Wolf writes:

Successful people surround themselves with talent. Your challenge is to help develop the juniors so that they do the work as well if not better than you do.

Formal mentoring programs are still rare in small and mid-size firms, yet the need is apparent based on the findings of the 2007 Survey and from what I hear from partners.  In a year where inflation may very well end up over 4%  (over 1% higher than the annual average the past 10 years), firms can't rely on rate increases alone to maintain income.  Develop programs to help associates manage more caseload.  Give partners an incentive to delegate and mentor.  Those who do will create the circumstances necessary to and grow the firm, ultimately leading to sustainable increases to income.

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Filed under 2008 Tech Shows, ABA Techshow, Leverage, productivity by Brian J. Ritchey

January 24, 2008

Law Firm Business Model - Leverage

12:00 am

The 5 all should measure are:

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

Head count 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 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 that will be the subject of this article are head count and . Head count is the ratio of all non-equity partner to . is the total sum of all non-equity partner fee earner divided by the total of . The goal is to increase if your partners have reached or exceeded the 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 . 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 to handle accretive work (as opposed to absorbing work that could be handled by others) is central in making work to increase income.

 

According to the 2007 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 is obviously risky if you don't have full utilization of your existing . 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 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 will increase partner income. The best performing firms in the 2007 survey also had the highest head count .

 

ptleverage.JPGbillablehrleverage.JPG

 

The best performing firms also had the highest . This is where firms can make immediate changes and get results measured in months. The key is measuring fee earner . In mid-size firms, partners typically outwork the associates. In order to benefit from (whether it be head count or ), 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 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 ?

  • 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 and effective rate.
  • Introduce partner caps on . This is one I expect will be well-received by work hoarders. The idea is to set a maximum annual 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 . 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 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 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 . Make your objectives clear and measurable. Track them - and hold everyone accountable for the success of the plan.

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

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

 

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Filed under Blog, Law Firm Bus Model, Leverage by Brian J. Ritchey

March 20, 2007

Billable Hours vs. Head Count Leverage in Law Firms

10:02 am

The question of is becoming more complicated given the increasing use of part-time and those working flexible schedules. Likewise, a pure head count approach where a firm underutilizes non-partner produces a misleading result.

 

William Johnston and Kristin Stark of Hildebrandt International address the and underutilization issue in their paper titled Are We Approaching a Profitability Plateau?

 

While partner/associate is widely regarded as one of the drivers of economic performance (much like , , etc.), of is more important and should be given greater attention than based on body count.  is often stated as the ratio of non-equity to ; economic focuses on the total each group works.  A surprising number of firms, including some of the largest firms in the country, have solid based on body count, but only mediocre when based on .  These firms should reevaluate their use of . is only positive when you can keep the timekeepers busy. After all, having a high associate-to-partner ratio is fairly meaningless if the associates are underutilized. Firms where 'body count' far exceeds typically have a large number of who neither work very hard as a working attorney nor generate significant business for the firm.  Successful firms have the courage to take action when under perform, including counseling out of the firm.”    

 

To see what the authors are talking about, compute your firm’s body count and then compute the ratio of non-partner to partner hours.  To illustrate, the related numbers for a composite of all survived firms as determined by the 2006 Juris Law Firm Economic Survey were as follows:

 

            Partners: 12

            Associates: 12

            based on Body Count 1:1

 

            Partner hours:  19,956

            Associate hours: 17,724

            based on hours: 0.89:1

 

While the body count is 1 to 1, associates' hours were 89 percent of those produced by a partner, reaffirming the chronic underutilization of associates in midrange firms.  

 

Morepartnerincome differs with the Hildebrandt team when it comes to corrective steps.  Conditions on the ground may, in some cases, warrant thinning the law firm ranks of under-producing . However,  spotty cases of attorneys who are inclined not to “work very hard” cannot account for across-the-board low body count and even lower hourly among 75 percent of midsized . The blame rests not on lazy , but on law firm partners who hoard work at the expense of delegation and .  Chopping heads is a short-term fix to stop the blood flow. The long-term solution is improved scheduling and delegation coupled with increased partner emphasis on , recruiting, and association development.

 

Back to the issue of measuring , the issue of relying on body count alone raised by the Hildebrandt authors illustrates why sound management requires a balanced approach in using law metrics.  , utilization, price, , and margin must all be considered.  Top performing score highly in all metric categories.  When it comes to measuring , part-time and flex schedule attorneys add an additional complication. One simplifying technique is to use non-equity equivalents in computing traditional body count .  Two half-time associates equal one non-equity equivalent, for example. When using equivalents, the fractional measure should be based on compensation not on the that part-timers generate.  If a flex hour attorney is costing you two-thirds of a comparable associate, they are two-thirds of a non-equity equivalent, even if they are producing at the annual level of 500 or 1500 hours. 

  

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

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March 12, 2007

Law Firm Myopic Compensation Plans

9:49 am

I don’t want to be overly negative.  Midrange are doing well financially, but they leave much on the table and, more importantly, they continually put their future at risk. IOMA, Institute of Management & Administration, Inc., asked to rank 10 items according to their importance when deciding how to distribute profits among the partners.  Here is the myopic list from most important to least important:

 

  1. Collections

  2. Origination

  3. Activities

  4. Firm Management/Leadership

  5. Cross-selling

  6. Practice Group leadership

  7. Seniority

  8. Teamwork

  9. Associate Development

 

You get what you ask for, especially if you measure it.  Ask any “expert” and they will tell you that the principle weakness of as a business is their lack of teamwork and a neglect of talent development.  Turn your compensation system on its head when it comes to firm partners.  Individual production, depending on the responsibility of each partner, should be a job requirement.  It is all the other stuff that makes you a firm.  Otherwise, you are just a group of attorneys sharing an office.

 

How would I like to see the list?  Try this:

 

  1. Firm Management/Leadership

  2. Practice Group Leadership

  3. Teamwork

  4. Associate Development

  5. Client Retention

  6. Cross-selling

  7. Origination

  8. Individual Production Realized (collected)

  9. Individual Production

 

How do you measure the above attributes?

  •  Firm Management/Leadership: Overall against targets
  •  Practice Group Leadership: Practice group performance against targets
  • Teamwork: Performance evaluation and internal surveys
  • Associate Development: Retention percentage plus activity performance against established plans
  • Client Retention: Measure retention and losses plus proactive surveys and client relationship activities against individual attorney plans
  • Cross-selling: Measure against results by partner and measure activity against annual individual attorney plans
  • : Measure individual performance against annual attorney development activity plan
  • Origination: Drop the politics and measure who really closed the deal—if it’s brand, house, or inertia, it should be credited to brand, house or inertia
  • Individual Production Realized: Collections for individual production
  • Individual Production: Hours worked on clients and authorized firm activities

 

I suppose partners could be broken into two groups: those that are simply production talent and those who are expected to lead, manage, generate business, and develop those under them.  But I find it hard to believe that, under any circumstance, teamwork and associate development should be at the bottom of the list.  It is not what a single player can accomplish. It is about the team’s win/loss record.

 

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

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November 27, 2006

What Corporate Clients Read Into Law Firm Bills

11:19 am

Rees Morrison wrote a must-read article for the Legal Times that is also available on Law.com. When it comes to practices within your law firm, Rees believes your bills read like an open book. Bills tell clients the whole story—the good, the bad, and the ugly. In his article Do the Math on Outside Law Firms, he points out that he is writing about more than “the kinds of billing abuses that third-party bill auditors should ferret out — block billing, differences in amounts billed for the same event, days of more than 10 hours billed, and long, suspicious patterns of hours.” He notes that, “Bill review should not be just a drudgery to be gotten through. In fact, bills can tell you much more about the performance of your and your own staff than most law departments realize. “

While look at their bills as just a record of the billable work and pass through expenses for the period covered, savvy are reading between the lines. Here is an executive overview of some of the things a savvy corporate client is likely to read into your bills:

Those 0.2 added each month read “Partner Sprinkling” and don’t expect me to pay for drive-by billers.

An associate with more than 1000 to 1500 hours on my matter, all in one year, doesn’t have enough to do and is padding their at my expense.

More than 30 percent partner time means I’m paying partner rates for associate and paralegal level work.

If expenses are more than 10 percent of the bill, my guess is that no one in the law firm is looking out for me. They aren’t getting the best price for expenses passed through to clients.

I can tell it’s not a well-run (managed) law firm because their bills included work and expenses more than 30 days old. Sloppy is as sloppy does!

While there can be a good and legitimate reason for all of the red flags listed above, the client-centered law firm will review its bills from the client’s point-of-view to manage the client’s business efficiently and to proactively communicate with the client when billed items, left unexplained, might indicate otherwise.

Rees W. Morrison, co-head of law-department management consulting for Hildebrandt International, hosts the blog Law Department Management.

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

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September 1, 2006

Attorney Articles Win Clients– How to Guide

10:17 am

By Guest author: John Remsen, Jr.

Articles in a well-respected publication are an effective way to establish your reputation as an expert in a particular area of law. Their value doesn’t end with publication. It starts.

Articles give you a reason to communicate with clients and by sharing reprints with them. They add credibility when posted on your firm’s web site. Articles increase the impact of speaking engagements as hand outs and increase the likelihood you will be asked to serve on the faculty of a legal conference. They make your future articles more attractive to publications when you have established a track record of prior publication. Do not overlook industry trade publications when submitting articles. An article in the publications that are read by your targeted business segments can bring you and your firm to the attention of VITO, that Very Important Top Office.

This post will give you practical ideas to tap this powerful marketing technique as a vehicle to:

  • Enhance your reputation as an expert
  • Increase your visibility among key audiences
  • Build relationships with publications
  • Increase your faculty value to conference planners
  • Build your inventory of marketing materials

Laying the Groundwork

The last thing you want is to divert a significant block of to writing an article no one wants. Before you start on that great idea, there are several important things that you need to do.

Consider Your Purpose

Ultimately, the objective of your article is to generate for you and your firm. However, take the time to think through your primary purpose for this particular article. Is it to build relationships with people at a particular organization, enhance your reputation as an expert in an area of law, or increase overall visibility with a key audience? Once you determine your primary purpose, you can then incorporate some of the ideas presented here into your strategy.

Decide Who You Want to Reach

Identify carefully who you want to reach with your article. Then, select your publications based on what they read. The more widely read and respected the publication, the more difficult it becomes to have your article published in it. For example, it is much more difficult to get your article in The Wall Street Journal than in your local chamber of commerce newsletter. There is a trade-off to consider. As an author, you may have to start with smaller publications and work your way up to larger publications. Look for new online publications competing with the traditional newsprint formats. As newcomers, they are often more aggressively searching for contributing authors. 

Build a Relationship with the Editors

Schedule a meeting (or telephone call) with the editor to find out more about the publication, its editorial calendar, and its guidelines for article submission. Learn the parameters (length, style, deadlines, etc.) for your submission. Find out the topics in which the editor has a particular interest. Ask for a media kit, if available. Discuss reprinting policies and copyright issues.

Editors have a continuing need for timely, well-written articles for their publications and are usually receptive when contacted. Volunteer as a source when the publication is looking for an expert quote on a particular legal issue.

Before you invest your writing time, get a tentative commitment from at least one worthwhile publication that they are likely to include your submission in an upcoming issue. Be clear on the topic, the length of the article, and submission requirements.

Color Within the Lines

You determined your audience, selected your publication(s), and discussed potential topics with an editor or two. Stay within those lines when writing your article.

  • Stick to the Parameters: Be certain to stick to the publication’s parameters. An article that is too long or submitted after the deadline probably isn’t going to make it into the publication. If you run into problems or have any questions, contact your editor as soon as possible.
  • Write for Your Audience: Write to your audience’s level of understanding. Avoid using “legalese” or writing in a style not easily understood by your readers. Two good sources on writing articles and getting them published are The Writer’s Yearbook and Writer’s Digest magazine.
  • Proofread Your Work: Have your final draft proofed for spelling and grammar. Don’t stop there.Have at least two other people (preferably members of your audience or, better yet, a client) read it for clarity and relevance.

SUBMITTING YOUR ARTICLE

Now that your manuscript is complete, you are ready to send it off to the editor who has agreed to publish your article. First, you should call that individual to let him/her know the document is on its way. There may be some other details about submission to discuss. Also, give thought to the copyright issue. Publications usually want to own the copyright of the article, so any reprints or subsequent publication will require its approval. Include with your submission a photograph, a two-sentence biographical profile, and play it safe by including complete business card information: Name, title, firm, address, phone, fax, URL, and e-mail address. Today, most publications will accept your submission electronically. Be clear about required file formats and the required format for the photograph. Check with the publication to make sure your submission was received and the file formats were correct.

After your article appears in the publication, send a thank-you note to the editor for the opportunity to contribute an article. Remind the editor that you are interested in future writing opportunities and always available should the publication be looking for input or a quote regarding your area of expertise. Likewise, take the time to thank all those who helped with your article, including your proofreaders.

Start capitalizing on your investment. Distribute reprints to clients and . Post your articles on your web site. Use them as hand-outs when speaking. Use your articles as promotional material on display in the reception area and as inserts in information packs and press kits about the firm. A well-written article can be an investment that just keeps paying off.

About the Author: John Remsen, Jr. is President of TheRemsenGroup, a marketing consulting firm that works exclusively with to help them attract and retain the clients they want. He is Past President of the Southeastern Chapter of the Legal Marketing Association and is a frequent speaker and author on law firm marketing topics. He can be reach at 404.885.9100 or JRemsen@TheRemsenGroup.com.

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

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June 21, 2006

PDAs Make a Difference for Law Firms

10:35 am

If you haven’t gone mobile with a PDA, you’re behind the curve. With the BlackBerry® patent issue resolved BlackBerrys are the hot item again. We work with using a variety of PDAs, but there is no denying that the BlackBerry is currently the favorite choice in .

The BlackBerry Guy, Andy Bailey, is quick to remind me that studies show BlackBerry users gain 53 minutes per day in productive time–previous downtime that is recovered because of the anytime/anywhere convenience of going mobile with calls, emails, appointments, time tracking, etc.

Fifty three minutes, almost an hour, per day is big . PDAs and mobile services pay for themselves, even if you only pick up an hour per month. And, what if your almost instantaneous response to a large prospective client wins a large book of business? Even casual use of a BlackBerry can increase and improve responsiveness to clients.

When you walk out of your office, your contacts and calendar can be in your pocket or purse. It doubles as your phone, tracks your time, and connects you to your e-mail and the internet. It even functions as a GPS so you can find your way. Why carry a five- to ten-pound computer with you when a few ounces keep you connected 100 percent of the time?

Andy reports that the in your office can go mobile with Blackberry for a one-time cost of about $200.00 per attorney and a monthly service cost of about $40.00. Don’t forget that cost can replace what you’re currently spending for cell phone services. The bottom line is that going mobile means more partner income.

Contact your Time and Billing or Case Management software vendor to find out about their PDA and mobile options. You can find out more about BlackBerry by going to www.blackberryguy.com.

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

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