This past week, The Remsen Group held the Southeast Managing Partner Forum in Atlanta.  Fifty-eight participants attended representing thirty-nine firms in the Southeastern region.  According to 23% the participants, marketing and business development was the most effective way to improve long-term profitability.  This eclipsed raising rates, which was rated as the most effective way to improve long-term profitability by 21% of respondents.

According to the 2007 Law Firm Economic Survey from LexisNexis, marketing and business development was second only to rates as the most effective way to improve profitability.  Yet only 3% linked compensation to marketing and business development activity.  It is apparent that firms consider marketing and business development as important keys to improving profitability.

In our 2008 Survey (currently accepting submissions - please click here if you would like to participate), we dedicate 19 questions on business development.  We hope to be able to flesh out what works for firms and what isn't working to improve profitability.

In a year where the majority of economic news points to an economic downturn, how a firm invests now will determine what opportunities open for it after the economy recovers.  It's worth reviewing some past posts that help firm's manage down cycles and prepare for the eventual upswing:

• RVs, Bananas and Recession-Proofing the Law Firm;
• Planning Helps Law Firms Weather A Bad Economy;
• Information-Driven Business Development For Law Firms;
• Management ABCs: The Hawthorne Effect;
• Marketing Advice for Lawyers During Economic Down Cycles;
• Retained Earnings Prepare Law Firms For Unexpected.

Another interesting statistic that follows earlier surveys is that over 2/3rds of the attendees of the Managing Partner Forum in Atlanta did not follow a firm-wide strategic plan.  John Remsen, along with John Smock and Thomas Grella, Esq., have teamed up to provide a web seminar on Law Firm Strategic Planning.   John Remsen is the owner of The Remsen Group, a marketing consulting firm that is focused on the law firm market.  John Smock is a management consultant and partner with Smock Sterling strategic management consultants.  Mr .Grella is the Managing Partner of  McGuire Wood & Bissette, PA and co-authored the book The Lawyer's Guide to Strategic Planning published by the American Bar Association.  The webinar is scheduled for  June 10th at noon eastern.  To register, click here.

Related posts

• Survey Targets Business Development In Law Firms
• Law Firm Challenge Number 1: Get a Plan!
• Top 25% of Law Firms Earn Margins Above 40%
• The End of Generally Accepted Accounting Principles?
• The Case Against Income Partners

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

ALM Research recently released the 2008 Law Firm Business Development Practices Survey, which targets two "tiers" of law firms:  those listed in the AmLaw 200, The Global 100, and the NLJ 250 (Tier 1) and those not listed (Tier 2).   Though the survey is mostly focused on large firms, the average number of attorneys for Tier 2 firms was 85, within the higher range of the mid-market. 

Business development is difficult to assess in mid-size firms simply because many don't track it.  However, firms do see the importance.  In the 2007 Law Firm Economic Survey by LexisNexis, 25% of respondents claimed business development was the best strategy to improving profitability, second only to increasing rates.  Likewise business development is one of the 5 highest rated factors for financial growth in the ALM survey.  The extent to which these activities are tracked and measured will determine the extent to which firms can gauge the effectiveness of their methods.

Some other key findings:

• More firms are dedicating resources to business development that are separated from a marketing role;
• Budgets for business development have increased over the past year;
• Around 50% of respondents employ client interviews and surveys (the highest rated business development activity among respondents);
• Just under 50% employ "client service teams" focused on clients who generate the most revenue;
• Over 50% receive some sort of sales training;
• Nearly a third of Tier 2 firms reported that they were "not sure" if revenues increased, decreased or remained flat in the past year.

The last finding listed is surprising.  If your firm is not tracking revenues, there is no way of knowing whether your firm is in trouble financially or not.  Further, you can't accurately forecast if you don't benchmark.   The importance of measuring performance can't be emphasized enough. 

The above is just part of the findings of the survey.  To purchase the survey, visit the ALM Research site by clicking here.

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• The Case Against Income Partners
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• The End of Generally Accepted Accounting Principles?
• Managing Partner Forum Attendees: Business Development Most Effective Way To Improve Profitability

One of the observations in the 2007 Law Firm Economic Survey by LexisNexis and a focus of the 2008 Survey (in progress) relates to cash flow.  According to the 2007 Survey, all firms had a slow billing cycle.  On average it took firms 170 days from providing a service to collecting payment on it.  In non-service industries that would be a recipe for bankruptcy.   Law firms enjoy high margins, so once the firm initially weathers the 80 or so days before the cash starts coming in, it can survive the slow cycle.  Unless the cycle stops.

How will you know when clients stop paying?  How long do you have until your cash flow reduces to a trickle?  Measuring your billing cycle times is critical in answering these questions. 

Long billing cycles hide what may be slowly killing your firm - inefficiencies, declining business, etc.  If you aren't measuring your performance in converting work to cash, you may not know that your firm is in a crisis for several months, wasting valuable time to act.

Below is an example chart that shows how you can measure the billing cycle by just tracking your unbilled fees, billed fees, and collected fees. 

 To determine unbilled fees, take your work in process that is currently unbilled and not subject to mark-down (to the extent known) for the prior "rolling" 12 months.  Do the same for fees billed and fees collected.  From that you can determine your average days to bill, days to pay and average AR days fees outstanding.  Lowering any of these numbers will increase cash flow and provide additional liquidity to the firm. 

The above takes a look at the billing cycle from the firm perspective.   You can also do this analysis on a timekeeper or practice area.  Tools such as Juris' Active Information can not only track your billing cycle but can also drill down into the "why", exposing inefficiencies that are hampering your ability to maintain liquidity and giving you an opportunity to act to increase cash flow before it slows.

Click on the graphic above to download a spreadsheet to use with your firm's numbers.  You must be a registered user to download content.

Related posts

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• Top 25% of Law Firms Earn Margins Above 40%
• The End of Generally Accepted Accounting Principles?
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In the April, 2008 issue of CFO magazine, the cover story reads:  "Goodbye GAAP:  It's Time To Prepare For the Arrival Of International Accounting Standards".  These international standards, called the International Financial Reporting Standards (IFRS), are being sought to replace generally accepted accounting principles (GAAP), an evolving set of accounting standards in the US since the Securities and Exchange Commission (SEC) was established in the 1930's.

What started as a reconciliation of the two is now seen as "more of a takeover than a merger of equals - many who favor a single global standard hope to wipe out GAAP altogether".

Grant Thornton has a paper outlining the major differences between GAAP and IFRS that can be viewed by clicking here.  James Turley, Chairman and CEO of Ernst & Young, also makes an argument for the move to IFRS that was published by the Wall Street Journal in November of last year.

How does this affect firms who are currently not even using GAAP?  Many small and mid-size firms have historically kept their books on a cash basis.  In the  2007 Law Firm Economic Survey by LexisNexis, the failings of cash basis accounting were exposed - in particular, the lack of reporting on work in process gives firms only half of their financial picture.  And, based on the respondents in the 2007 survey, there is no correlation between per partner income and cash basis accounting.  The fallacy of having to report to the IRS on an accrual basis if you reported internally in this manner were reiterated.

Many of the requirements of GAAP and IFRS apply only to publicly traded companies.  This lack of mandate is tempting to law firms, who are not forced to change their accounting methodology.  However, one of the main management priorities respondents in the 2007 survey reported was better benchmarking.  What are other firms doing?  How do we compare? 

Using tools such as Lexis® Insight helps.  But these tools are meant to be starting points for analysis.  As Stephen Collins noted in the Introduction of the 2007 Survey:

"Without applying the accrual concept, law firms can't reliably forecast cash flows or anticipate funding needs.  The unrealized value of unbilled fees and accounts receivable are clouded.  In fact, cash basis accounting may contribute to the industry-wide experience of very slow cash flow cycle times.  Key financial metrics such as realization cannot be accurately measured by matching the appropriate revenue to the related adjustments.  As a result, many firms are losing significant amounts of fee revenue to adjustments and they don't even know it it."

 For nearly 80 years, the answer was generally accepted accounting principles.  It appears that due to the expansion of free trade agreements and globalization in general, there may be a new standard.  For firms who want to improve profitability and are looking to move from cash basis accounting to accrual to help measure performance, take heed.

Related posts

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• Survey Targets Business Development In Law Firms
• For Long Term Increases To Income, Partners Must Delegate Work
• Reflections on the 2007 ALM Billing Rates & Practices Survey
• Measuring Your Law Firm's Billing Cycle

No matter how much you work, until you convert it to cash it is worthless.  The average days in the law firm cash flow cycle (from worked to collected) is 169 (source:  2007 Law Firm Economic Survey from LexisNexis).  Shortening your cash flow cycle has a positive impact to liquidity and thus your cash flow cycle should be measured.

 

There are two metrics that need to be measured:  days to bill and days to collect.  Determining these numbers on a timekeeper level identifies those timekeepers who are efficient and those who aren't.  The opportunity then is to set a standard and work towards compliance by all timekeepers.

 

What is this standard?  It depends on the area of practice.  Many insurance companies just won't pay under 60 days of accepted electronic invoice and will only accept these invoices quarterly.  In this case, 150 days isn't so bad.  Some areas of law (many domestic relations situations come to mind)  should, by default, be prepaid.  Any work in process should be billed immediately and applied against the prepayments.  In these cases a cash flow cycle of 60 days should be cause for concern.

 

Tools such as Juris from LexisNexis' Active Information can help you track this key performance indicator so that you can improve your liquidity. 

 

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

 

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An article in the Tampa Tribune (hat tip:  Estrin Report) reports that foreclosures are so high in some areas that firms are hiring as many as 200 additional staff to handle the workload.  Foreclosures in Hillsborough County, Florida in February more than doubled the amount from February 2007 and is more than 5 times the foreclosures from February 2006.  This reportedly is putting a strain on the "assembly line" approach firms here use to push these cases through the system. 

This is an extremely worrying sign.  Granted, the investment houses purchased in Florida may not be the primary residences of the owners.  However, their investments were lost and many lost their savings in the process. 

This is more evidence that the 2008 Client Advisory published by Hildebrandt and CitiBank is off the mark.  There does appear to be offsetting legal work to be found.  This is reassuring news to law firms, especially those who have expanded practice areas, that they may not suffer what the Client Advisory termed "the perfect storm" where all areas of practice trend downward with no offsetting surge of work.

However, it is likely that Congress will act to slow foreclosure activity on primary homes sometime this year.  Though good news on the surface, Congress isn't very effective in softening the effect of a market correction.  

Our economy is volatile.  Opportunities for work will be everywhere but not necessarily in areas traditionally served by your firm.  Firms need to prepare to be innovative in their business development approaches this year to take advantage of the continued fall out from the several market corrections that have happened and will happen in the coming months.

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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When some talk of strategic planning, they are talking about retreats and consultants, about mission statements and long term goal setting.  Strategic planning can be all of this - however, it doesn't necessarily have to be a complex document that takes weeks or months to develop.

In a more simpler form, strategic planning consists of reviewing the current environment, setting goals to improve it, and implementing them, measuring performance along the way.  How you get from "review" to "do" is the focus of several posts this week.

 There are several different "models" of strategic plans.  Some listed on The Free Management Library include:

• "Basic" Strategic Plan - this is the plan typically implemented in firms that invest in developing a strategic plan;
• Goal-Based Model - this model is more focused on goal setting and performance metrics relating to meeting the goals;
• Alignment Model - this model is targeted to driving the organization to align itself with the firm's mission;
• Scenario Model - this model uses scenarios to help identify strategic issues and goals;
• "Organic" Model - this model focuses on embracing the shared values and evolving the plan through the continual dialogue that will hopefully eventually increase the values that are shared. 

74% of the respondents to the 2007 Law Firm Economic Survey from LexisNexis stated they did not have a written strategic plan.  However, 89% of those who did plan said that there was a correlation between their plan and income.  What is your firm's plan?

For a look at reasons why strategic planning has been a problem for law firms to implement, look at an earlier post on the subject:  Law Firms With Strategic Plans More Profitable.

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The Spring 2008 Managing Partner Advocate is in the mail.  Highlights include an interview with a managing partner from a Louisiana firm and an article from a tax attorney on the tax implications of a withdrawing member of the firm.  Like our past issues, the Spring '08 Advocate is full of articles focused on increasing income as well.

The Managing Partner Advocate is a complimentary publication for Juris (and soon PCLaw) clients, but is available for free to anyone requesting a subscription.  To be placed on our mailing list, please click here to send an email request.

Registered users to this blog may also download the Advocate from this site.  To download, please visit the downloads page by clicking here.  If you haven't already registered, it is free and gives you access to downloadable files and now the Managing Partner Advocate. 

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here. 

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In the coming weeks, there will be some new contributors added to the blog.  I met with several members of the Redwood Analytics team in Virginia today and am happy to announce that their expertise will be added to More Partner Income.

Redwood Analytics is a new acquisition to LexisNexis.  They focus on benchmarking and business intelligence tools for law firms.  They also have a staff of consultants who work with law firms to measure performance as well as provide granular analysis on both matter and attorney metrics.

The addition of Redwood's expertise to the blog will provide unique insight gained from experience in working with law firms in the large law segment that demand high levels of analysis related to the business aspects of their practice. 

Redwood also hosts a Think Tank, made up of law firm leaders.  From Redwood's website: 

[Redwood's Think Tank] is comprised of forward thinking industry leaders assembled to study and formulate cogent solutions to significant law firm management issues. Individuals are invited to join the Think Tank based on their demonstrated ability both to think strategically and to take action to promote change.

For more information on Redwood Analytics and the products and services they provide, please visit www.redwoodanalytics.com.

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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• Business Development Opportunities For Law Firms In 2008