January 25, 2008

Law Firm Business Model - Realization

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 .

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 ), the percentage of what was collected from what was billed (collection ), or the percentage of what was collected from what was worked at standard rates. Further, you can look at on the basis of standard rate or negotiated rate (standard rate ). This article will take a look at billing, collection, and overall from a performance perspective. For some previous posts on , 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 ? The answer is . How efficient are you in converting work to cash? Each percentage point lost represents out of the pocket of the firm. Firms that don't track will only find success by accident. Tracking at every step in the process will help your firm become more efficient and thus more profitable.

Sometimes referred to as "accrual" , billing 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 ? 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 is determined by dividing your billed amount, $525, by the standard value, $1,250. Your billing based on standard rates is therefore 42%. If you based it on your negotiated rate, your is $525 divided by $875, or 60%. Either way it's 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 is 94%, another hit on your due to a lack of attention to reviewing the bill; ie, inefficiency.

Overall based on standard rate would be $495 divided by $1,250, or 40%. Overall 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 at a per invoice level rather than a global level.

According to the 2007 Law Firm Economic Survey from LexisNexis, billing has a relationship to increased partner income while collection doesn't. Though overall is preferred, tracking billing appears to have the most impact on revenue. The charts below illustrate this:

cbrealization_1.JPGabrealization_1.JPG

The first graph represents cash basis, or collection . 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 and per partner income. In fact, those in the 3rd quartile had the best collection , while the best performing firms in the 1st quartile were over 3 percentage points less. In the second graph, which represents billing or accrual , there is a clear correlation between the 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 based on your standard rate. However, the above provides some insight into where most of the 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 :

  • Don't negotiate your standard rate away without volume guarantees.
  • Pay attention to mark downs. If they must happen, make 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, 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 goes below their desired percentage. Benchmarking tools such as Lexis® Insight can compare your 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 can't earn more even in a rescessionary economic cycle - unless they don't . 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 and partner income contact Juris National Sales Center:

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

Related posts

Permalink Print Add Comment

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

Leave a Comment

Subscribe without commenting

January 15, 2008

Reward Attorneys for the Commoditization of Reproducible Work

12:04 am

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 . 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 .

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 . That doesn't mean that I am against alternative fee arrangements when the use of them will improve the of the firm and thus increase . 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 . Not only will have a value based on their , 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, 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 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 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 who have a talent for researching and integrating current law into forms as work product creators and 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 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 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 and adjustment.

Related posts

Permalink Print 1 Comment

Filed under Alternative Billing, Management, Policies/ Procedures by Brian J. Ritchey

March 21, 2007

Law Firm Scheduling, Is Continuity Good or Bad?

10:54 am

In responding to a question, David Maister wrote the following:

 

“Ultimately, clients care about quality, and service - continuity is just a short-hand rule-of-thumb to try to get to these things. If you can be more thoughtful about how you achieve these things, they will give you more leeway in pursuing your other goals and won't insist on always seeing the same faces. And, with more thoughtful staffing, you'll be able to improve , , learning and morale.”

 

The work one gets determines the future of the individual attorney.  Give them limited exposure, the same old stuff or the same clients year after year, and you will neglect the full opportunity to enhance the value and potential of the attorney. You are likely to lose them to someone who they think is more concerned about their professional development.  It is over the professional development issue that most associates switch firms.

 

The problem appears to be a general lack of centralized schedule management in midrange .  Someone other than each individual partner needs to manage firm-wide scheduling. An alternative is needed to the frequently seen model where work is doled out by partners to “their associates” or “their favorite associates.” There has to be a counterweight to the easy and expedient “continuity” method that leaves associates stuck working with the same partner, same client, and/or on the same style matter.

 

For an enterprise whose factory floor is composed of talented people rather than machines, it is surprising that more technology is not available and used for managing the maintenance (professional development) and scheduling of the firm’s production resources (its professional talent).  This is one of the areas of future product development that the Juris team has been considering. Technology is one thing; having a culture that makes scheduling a strategic issue must come first.  How do you have the best people and the best future leaders without making their development a priority?  How can you do that if scheduling is not a key tactic in that pursuit? 

 

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

Related posts

Permalink Print Add Comment

Filed under HR by Tom Collins

November 30, 2006

Measurement Improves Law Firm Performance

10:53 am

People, not numbers, determine the success or failure of a law firm.  Performance is created by empowered people or limited by the effectiveness of the firm’s strategies and tactics (formal or informal) and the of the firm’s practices.

 

That being said, make no mistake, successful law firm leaders pay attention to the numbers.  Intuitively, successful leaders understand that improves performance.  They plan, set goals, , and hold people accountable.  Partners in the firms that do those things earn, on average, two to seven times the income of those who don’t.

 

Numbers allow to express the firm’s targeted performance.  Numbers enable the partners to compare the firm’s performance to its own targets or to the performance of other similar .  Financial metrics (numbers) are the outcome of the firm’s people—the degree by which they are “doing the right things in pursuit of the firm’s goals and doing those things in the  right way.”  Put into a simplified model, numbers help answer “what if” questions by letting the firm’s partners test the impact of various scenarios:

  • How will an addition in the number of associates alter the ?

  • How will an increase in the firm’s fees affect distributable partner income?

  • How will an increase in effect partner distributions? 

 

Listed below are seven metrics that influence law :

    1. or Utilization

    2. Effective (Blended) Rate

    4. Margin

    6. Days of unbilled fees (work in process)

    7. Days of billed fees outstanding (accounts receivable)

 

Each of the seven metrics should be religiously measured and reported.  Current performance should be compared to prior periods to determine if the firm's is improving, holding its own, or declining.  The numbers should be compared to the firm’s targets to determine if it is achieving its objectives.  They should be compared to of similar firms.  Doing so will most likely indicate areas that deserve attention and that represent lost opportunities.

 

While alone will improve performance, combine with goals and plans to achieve those objectives and the whole ball game will change.  Planning, goal setting, measuring, and accountability go hand in hand with increased management and teamwork.  The resulting culture in such sets those firms and their performance completely apart from who are not similarly engaged.  

 

If you need help computing any of the seven basic metrics, refer to the previous posts linked below:

 

What Is Utilization?

What Is Blended Rate?

What Is Realization?

Measuring Law Firm Collection Realization

Measuring Law Firm Margin

What Is Leverage?

Measuring Law Firm Work-in-Process Days

Measuring Law Firm Accounts Receivable Days Outstanding

 

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

Related posts

Permalink Print

Filed under Law Firm Bus Model by Tom Collins

May 16, 2006

Law Firm Financial Management-Getting it Right!

10:34 am
This post contains content viewable to subscribers only. Registration is free and gives you access to exclusive articles not found anywhere else, including interviews with managing partners and practice-specific articles written by attorneys specializing in the industry. Subscribe now to gain access to this content.

Related posts

Permalink Print

Filed under Law Firm Bus Model, Subscriber Content by Tom Collins

March 29, 2006

U.K. Law Firms Prepare For Change

11:32 am

I was paging through LegalIT’s February 2006 supplemental issue on yesterday. The U.K. perspective is a fresh view of the law firm as a business. Our neighbors across the pond are preparing for a significant change in their business environment.

U.S. with a global eye are already aware of the U.K. government’s intention to radically reform legal services, including allowing outside investors to buy a share in or even purchase them outright. The consolidation of into banks, accounting firms, and other organizations is soon to follow. The change will rip away the protection of the partnership form of ownership and expose to commercial competition. However, I was struck by a familiar refrain. One article read as follows:

“The findings reflect the reality of highly profitable institutions that have previously lacked an incentive to truly maximize their . Indeed, in an industry where much work is still billed by the hour, it can be argued that reducing the time taken to complete a given task, accordingly reduces the amount of fees that can be charged”

Like U.S. , those in the U.K. are cash-generating machines with very favorable business attributes for the owners. There is a growing , however, that the consumer of legal services is paying for inefficiency. So while the are happy with their own financial results, the winds of change are building. In the end, that become the most efficient will win.

If you are interested in tracking events in the U.K. including their efforts and progress toward becoming more efficient check out LegalIT’s web site.

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

Related posts

Permalink Print

Filed under Operations by Tom Collins

February 2, 2006

Out of Synch Law Firm Compensation Plans

9:53 am

I spent the last three days (LegalTech NY) talking to a lot of and their consultants. Times are pretty good, but many have hit a ceiling in per-partner income that they can’t seem to break through.

Here is the reality. If you depend on your own , fee revenues in most locations will max out in the range of $300,000 to $400,000. What you take home as personal income will be about half of that.

So how do mid-sized push per-partner income into the half million plus range? The great thing about the law is that the answer to that question is pretty well known. You have to make fee revenues depend on something other that the partner’s own physical effort.

  • Contingency billing arrangements shift financial success to accomplishments verses physical effort.
  • Flat fee arrangements let you off of your including technology and process.
  • lets you eat what others have killed rather than depending on your efforts alone.

Most mid-size firms have some revenues derived from contingency and flat fee work, but the majority of their revenue is still dependent on the . is the prevailing strategy for making per-partner income less dependent on the physical effort of the partners.

Unfortunately, plans tend to be out of synch with this reality. Too many place major emphasis on each partner’s individual production rather than on the care and feeding of associates. If is the key strategy for driving per-partner income, then rain making, recruiting, supervision and mentoring of associates, project management and firm management have greater importance than maximizing individual partner’s production. Partner must be at a hygienic level rather than an exhausting level. Individual partner productive levels must leave time for the important team work aspects of the partner’s role in the modern law practice. Compensation plans should support the strategy, not fight it.
 

Related posts

Permalink Print

Filed under Compensation by Tom Collins

January 26, 2006

Lawyers Hiding from Phone Calls and E-mail

11:44 am

A few weeks ago I was having lunch with several including one of the partners of a firm trying to establish itself in a major city. That firm was the afterlife of an earlier acquisition. Its founding partners had been the up and coming of a good size firm that was purchased by one of the mega . After a few months of life in the mega firm environment, they bailed and started their own firm.

 

The were talking about handling e-mail and phone calls. The partner from the young firm bragged that he made a practice of always responding to e-mail the next day. His practice was not to read e-mail until the morning after and then to respond to it. He explained that it avoided interruptions to his work schedule during the day. It was clear that he considered a next-day treatment to be “very responsive” to his clients. The partner had given me his direct office phone number. Since our lunch, I have had the occasion to call the same attorney on several occasions. I always get his voice message system. He has never actually answered his direct number. As with e-mail, he consistently returns my calls the following day.

 

The tragedy is that he believes he is being responsive. What do you think? Do you believe that law firm clients are happy to have their e-mail and phone calls returned the following day? Do you think clients are happy to deal with someone hiding behind their phone system? Would they be happy dealing with someone who places a greater priority on their own than yours?

 

Over and over again, clients criticize first for failing to be responsive—for not returning their phone calls or responding to e-mail on a timely basis. Law firm clients have already moved to instant messaging and to push-to-talk while many are still hiding behind their phone system and from their e-mails.

 

are in the service business. They just happen to be in the lawyering service business.

 

Related posts

Permalink Print

Filed under Blog by Tom Collins

December 23, 2005

Good Time for Law Firms

11:17 am

Two days ago I noted that the BTI Consulting Group is predicting double-digit 2006 growth in spending for the fast growing areas of class action defense, product liability, general litigation, regulatory, IP litigation and securities. Now the National Law Journal has weighed in with another good indication that it is a good time for and their partners.

Firms are increasing hourly rate according to the Journal’s survey—most at both the partner and associate level. The Journal’s December 12, 2005, article reporting flies in the face of general media stories reporting pricing pressures. MorePartnerIncome.com’s observation is that pricing pressures from insurance and major corporations are real related to commodity services. Those pressures may play a role in the size of the general rise in rates that are applied to more value-oriented services.

Taken as a whole, that are paying attention to and are doing well.

 

Related posts

Permalink Print

Filed under Blog by Tom Collins

December 15, 2005

Best Law Firm Practices for Increasing Realization

11:45 am

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

 

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

 

Steps for Increasing the Firm’s

 

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

Related posts

Permalink Print

Filed under Law Firm Bus Model by Tom Collins

Page 1 of 212»