Since 2000, law firm PEPP (profits per equity partner) have increased on average 11% for Amlaw 100 firms and 8% for Amlaw 200 firms.  Some observers fear that, like other markets that have sustained growth periods at or near double digits in the past 10 years, the law firm partner profit "bubble" may soon burst as well.

Looking at Amlaw 200 data, PEPP increased by 2% in 2001.  In 2002, the increase was 7%.  2003 saw an increase of 11%, 8% in 2004 and 2005, and 10% in 2006.

This increase doesn't only apply to Amlaw 200 firms.  Looking at the differences from 2005 and 2006 for the top respondent firms in the Law Firm Economic Survey  by Juris Inc. and LexisNexis, respectively (the only two years available), firm PEPP increased 11%.  It is likely that most firms in the mid-market and small market increased incomes by respectable if not similar percentages over the same period.

What can you do to prepare for a stunt in the growth (or decline) of PEPP?  Bruce MacEwen posted an article May 5th  on his blog Adam Smith Esq., titled A "Bubble" in PPP? that looks at some short term ideas to help "mitigate the downward trend" and predicts a change in the las firm business model over the long term:

Short term ideas:

• Redeploy lawyers in troubled practice areas to healthier ones;
• Use the opportunity of "shared pain" with your key clients to get closer to them;
• Adroitly stand by while the normal waves of attrition take their toll;
• Build or at least safeguard capacity in selected practice areas that you anticipate will emerge strongly from the downturn;
• And always, always, keep a sharp eye on costs–although, truth be told, you don't have much material flexibility here. You're not moving your offices to Brooklyn and you're not paying less than market for partners and associates.

Long term predictions:

• the billable hour, lamented by many but eliminated by few, will eventually replaced with a more "value-based" model, though MacEwen stresses that he is not "holding [his] breath" on this;
• the traditional associate/partner model changes to include more non-equity partners and more contract attorneys;
• at least fundamentally, "the core processes by which law firms manage cases and deals must and will change" (ie, more project management, more team philosophy centered around practice groups to become more efficient).

Ultimately, MacEwen believes that due to increased demand (at least for Amlaw 100 firms), finding work won't be the problem.  However, he sees the traditional model as being unsustainable based on the limits placed on things such as productivity (>2,400 hours?), rates (>$1,000 per hour?)and realization (>100%?).  Because of this, if PEPP does suffer a downturn for an extended period of time, the long predicted changes to law firm dynamics may happen.

If this occurs in large law firms, it is incumbent on smaller firms to adapt quickly.  The predictions above are all point towards efficiency that allow firm profits to increase through efficiency rather than increased rates and worked hours.  Much has bee written about the "unmanageability of law firms".  Despite this, firms have continued to make exceptional profits - due in no small part to their enviable margins.  With good management, law firms can see profits that far exceed anything that firms receive currently.   And if partner profits start decreasing, your firm will be in crisis -  just as it is not a good idea to go to the grocery store on an empty stomach, it isn't a good time to contemplate an overhaul in processes during a crisis.

Much of the allure of smaller firms is quality service at a lower price.  Some large firm partners charge rates in excess of $1,000 per hour.  If large firms realize they can offer similar services at lower prices and still increase profits, smaller firms can be squeezed out of the marketplace.

Think Walmart.  As Walmart entered the scene, small businesses were unable to compete based on their lack of purchase power.  Walmart could offer more product selection at a lower price.  Home Depot and Lowes did the same to small hardware stores.  The small shops that survived did so by using their secret weapon - customer service and personal engagement.  Still, you won't find many of these shops who don't struggle on a monthly basis and have to watch as their clients often come to them for advice, then go to Home Depot to buy the big-ticket items.

For small and mid-size firms to compete in this changed environment, they will have to embrace workflow efficiencies that meet or exceed that of the larger firms - and use their "secret weapons" of personal engagement with clients and responsiveness.  However, without the fundamentals of an efficient business in place, your firm will suffer under the weight of your processes.  

There will always be individual clients available, but more dependable sources of income often come from business clients and their leaders.  These clients are already demanding more cost certainty.  If larger firms are able to provide this value to business clients first at a price that isn't so different than yours, your firm may be in trouble.

The time to act is now.

Related posts

• Survey Targets Business Development In Law Firms
• Reflections on the 2007 ALM Billing Rates & Practices Survey
• Law Firms with Non-Lawyer Management Achieve Higher Per-Partner Incomes
• Law Firm Survey Shows Link between Leverage and Partner Income
• Law Firm Business Model: Margin

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.

Related posts

• Law Firm Business Model - Measuring Rate
• Law Firm Business Model: Margin
• Law Firm Business Model - Leverage
• Law Firm Financial Management-Getting it Right!
• RULES: Another Path to Law Firm Success

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
• Law Firm Business Model - Realization
• Measurement Improves Law Firm Performance
• What Margin Should Your Law Firm Generate?

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.

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 - Leverage
• RULES: Another Path to Law Firm Success
• Law Firm Growth Prospects - 2005 Survey Results

A friend of mine practices in firm that specializes primarily in transactional work. Much of the work is billed flat fee but they still track their time so the firm can determine profitability. Recorded time is set against an attorney's budgeted hours for the year so that they are credited for their flat fee work. My friend lamented associates padding their worked hours for flat fee work so they make their budget numbers. In this case, padding hours doesn't affect clients since the fee is pre-set but it does affect reporting of profitability.

Aric Press, Editor-In-Chief of The American Lawyer, wrote in the December, 2007, In-House article that 2008 may well be the year when clients start to demand alternative fee arrangements:

One of the unintended consequences of electronic billing is that clients can now easily compute and compare the cost of tasks. Soon there may be other technological threats based on knowledge management that can convert once complex acts of lawyering into rather commoditized routines.

I have been pretty adamant in my defense of the billable hour. That doesn't mean that I am against alternative fee arrangements when the use of them will improve the efficiency of the firm and thus increase profits. Recording time, regardless of fee arrangement, is still a good idea. However, sometimes it just makes more sense to bill using fixed fees for certain tasks.

Why not take advantage of this and place an internal value on the task as well? You can do this by determining the time it takes to perform the task, then mark it up to the market price (perhaps based on the hourly rate times the time it should take to perform it). When a task is routine, standardization gives firms opportunities that can revolutionize a firm's business model. Not only will attorneys have a value based on their billable hour, but certain repetitive and reproducible tasks can be valued as well. Your firm will diversify its product offerings to clients, giving them more options for services and giving you more options to strengthen the client relationship. You could ostensibly set a price list for legal products - in effect competing with the emerging online forms market.

In the example of my friend's firm, creating a standard task that is reproducible and given a proper value reduces the inaccuracies in reporting due to "padding time" by associates trying to make their numbers. In the example of the firm whose client has already placed billing guidelines on a firm, this has the equal benefit of both providing cost certainty to the client and saving the attorney from repetitive time entry.

There is also the benefit to the general practice firm. The firm can market package transaction services at a set rate, and tack on billable hours beyond the scope of the repetitive (and priced) task. Sound a bit like value-billing?

How would this work? For transactional work, it would be as simple as setting a value upon a routine task, such as creating a will. For a simple will, attorneys will determine what the variables are, determine what it has cost in the past, agree upon an acceptable price based on market acceptance and variables, then price it.

In a litigation matter, it is no different. Many firms are already required to provide budgets based on tasks for the benefit of client cost allocation. Each task that the firm performs can be priced. Litigators can anticipate the course of the suit and determine a cost for the entire matter. There should be a value placed upon every legal task, whether it be writing a status letter, reviewing a file, etc. The price can take into consideration variance in time it takes for different attorneys to perform the task. That is up to the firm to decide.

By standardizing the value of certain tasks, it also opens another opportunity for building firm expertise: giving royalties to attorneys who create reproducible work product. Firms spend years building up forms. Forms are rarely created again - they are typically modified. Yet no one gets credit for creating the forms.

By giving an attorney a royalty for a form, you encourage expertise to be passed on to the rest of the firm. You can position attorneys who have a talent for researching and integrating current law into forms as work product creators and attorneys who are better at managing relationships and matters representing clients. Both have value. Both can be compensated based on the work they perform. Form writers would receive a percentage of the cost of the task as a royalty for a certain time period whenever their form is used. Just as you should place a time limit on origination credit, you should only provide royalties on forms for a certain time.

How can this be advantageous to the firm? Several ways:

• It encourages information sharing within the firm.
• It compensates those who provide value to others in the firm.
• It can further a strategy of increasing leverage by giving credit to partners while reducing their billable hours.
• It transfers the wealth of knowledge gained at the firm's expense back to the firm.
• It can aid the strategy of succession planning by providing a route to semi-retirement while ensuring that the firm maintain its areas of specialization.
• It allows partners to spend more time on what they excel in most: rainmakers focused on marketing efforts and strategic planning and grinders developing work product.
• It gives firms an opportunity to give associates responsibilities that will benefit the firm as well as the associate.

Of course, with any change in policy, there are uncertainties that have to be addressed. For example, what if another attorney within the firm finds a problematic provision in the form and proposes to change a few clauses? What if the attorney proposes an entirely new form? Although in theory it would be a good thing to have several different forms from which to choose, logistically it may make more sense for your firm to settle on a preferred form from which attorneys may receive a royalty. That along with determination of the royalty percentage is sure to provide lively discussion in the partner meeting.

Whatever direction your firm goes when applying new policies, it should conform with a universal requirement of periodic measurement and adjustment.

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• The Missing Alternative Fee Arrangement for Law Firms
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• Realistic View of Law Firm Management
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Juris® Insight, a ground breaking peer group benchmarking services is now open for business. The new web-based service from Juris, Inc. went live the first week of February 2007.

Juris Insight will give participating firms relevant competitive intelligence and other tools to help the firm set and achieve its goals. Measurement improves performance. But setting goals and measuring performance with an internal focus alone is not enough to drive partner income to the optimal level. The most effective measurement systems must include comparisons with peers and competitors to set the right goals that, if met, will ensure the firm performs at the highest level.

Law firms spend hundreds of dollars purchasing outdated surveys each year. They incur even greater cost through invested staff time responding to survey requests and then manipulating and analyzing the survey results against the firm’s own metrics. Juris Insight eliminates that investment in staff time by extracting information automatically from the firm's Juris system and by providing comparative results in a format that is in synch with how the firm tracks its own performance.

Stephen Collins, President and CEO of Juris, Inc., explained: “Athletes always carefully study and measure the performance of competitors so they can adapt their training to win. They know that when you have a target, the odds of winning go up dramatically and goals are more achievable. With Juris Insight service, law firms will know exactly how their firm’s key performance metrics compare to peers.”

Juris Insight benefits include:

• Automated survey preparation and submission

• Relevant and comparable benchmarks designed around the law firm business model

• Peer group selection control for meaningful comparisons

• Customizable views and metrics

• Current information on an ongoing basis

• Goal setting models to increase partner income

• Confidentiality and security

You can learn more about new benchmarking technology by reading the following prior posts:

Law Firm Benchmarking Comes of Age

CitiGroup Private Bank Benchmarking Involvement

Benchmarking Services for Midsized Law Firms

Benchmarking Services by Redwood Analytics

The Importance & Power of Legal Surveys

 

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.

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Successful law firms pay attention to the numbers. Usually, I stress the importance of David Maister’s Law Practice Business Model. It is worth noting that there is an alternative approach for expressing the basic key factors that determine financial performance. It is the RULES model.  

RULES is an acronym that stands for the following:

R-rates/realization

U-utilization

L-leverage

E-expenses

S-speed

While not expressed in the form of a mathematical formula, RULES identifies the basic performance drivers that deserve the constant attention of the managing partner.

Both RULES and Maister’s formula deal with rate, realization, utilization, and leverage. Both imply the need to control expenses. Maister does it by focusing on margin (revenue less expenses) whereas the “E” in RULES implies the direct need to hold expenses to their minimum or appropriate level. The “S” in RULES covers a critical performance factor overlooked in Maister’s model—uncollected fees.

Providing legal services doesn’t put cash in the bank, cover expenses, or put money in partner pockets until those services are billed and collected. Speed—how fast you get bills out the door and how quickly law firm clients pay those bills. Your Speed determines realized revenue and influences adjustments, write-offs, and bad debts.

The two related metrics I encourage firms to track are:

Days of unbilled fees and expenses for work in process

Days of billed but uncollected fees and expenses for accounts receivable

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.

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• Law Practice Business Model