In the February, 2008 Managing Partner Magazine, a case study was published regarding the international firm Herbert Smith, who recently implemented a financial management system that focused on measuring performance.  The case study mimics everything we promote on More Partner Income and thus deserves highlight.

The study begins with a quote from William Thomson (Lord Kelvin), who said "if you cannot measure it, you cannot improve it".  They may have done well to also quote "don't reinvent the wheel", since most of the sweat put forward in devising their system is already developed by software vendors such as LexisNexis.  It is the process, though, that bears note.

The firm adopted a "phased approach" to implementation that focused on basic needs first, then expanded to add functionality as the basic needs were met and a comfort level established by the users.  The firm initially only gave access to the system to the partners and used three phases:

1. Easy access to key financial reports
2. Financial planning and reporting
3. Time recording and "universe" design

The first phase entailed providing easy access to the important financial reports that had previously been distributed on paper.  This not only provided the partners with the information they needed, it helped them become accustomed to viewing this information electronically.

Phase two was focused on budgeting and management accounts.  They also placed some forward-looking indicators of performance and trend analysis.  This helped the firm make future projections through modeling.

Phase three provided real-time information for fee earners, including alerts when time entries were late or incomplete.

In my opinion, phase three should have been phase 1, phase 1 should have been phase 2, and phase 2 should have been phase 3.  However, whatever works is the right solution.  The important thing is that the firm set up their implementation with the highest probability of success by not cramming an entire new method of consuming information to all fee earners at once.  Instead, they focused on getting partners on board first, then eased them into the solution by first getting the most important information (read:  what they had already been getting) to them first.  Then incrementally adding new value to the system until it became an indispensable tool for managing the firm.

When your firm is looking to invest in a software solution: 

• If considering to develop it internally, which will require specialized staff to maintain, make sure you research to see if software vendors have already developed the solution you need;
• When you implement the solution, make sure you do it in phases to ensure adoption by all those who will benefit from it.

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.

Related posts

• Why Are Law Firms Slow to Bill Their Clients?
• Law Firm Managing Partner Wish List
• Working with the Law Firm Business Model to increase income
• What is leverage?
• Ways to increase Per-Partner Income

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

To understand how the economics of your particular law firm are changing as related to staff leverage, compute and track more than one leverage number:

• Snapshot leverage: The snapshot metric consistently measures the ratio of associates to partners at the same time of year to determine the direction of movement in leverage, i.e., calendar quarter, end of year. For this purpose, the only adjustment should be to convert “part-time” associates to full-time equivalents.
• Performance leverage: The performance metric converts all counts from the end of period numbers to full-time equivalents for the period. For example, a new associate hired at mid-year and in training for three months would be .25 percent of a full-time associate for the year, whereas under the snapshot measure, the associate would count in full.
• Hours leverage: Hours leverage, like the snapshot metric, is a period computation. In this case, the ratio being computed is the ratio of associate hours to partner hours. This computation is self-adjusting for part-time and recently hired fee earners and also is impacted by utilization. Underutilization lowers the ratio and improved utilization increases leverage without any increase in operating cost.

Why is leverage an important management tool? Without leverage, partner income is limited to the income-producing “work” capacity of the partners. Leverage increases partner income by shifting a portion of the income-producing capacity from the work done by the partner to the work that the partner can achieve through “delegation and supervision” of others.

Morepartnerincome.com is sponsored by Juris, Inc. 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.

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The answer to increased performance is to step back from the daily wars of the law practice and ask, “How can we do this smarter?  How can we tie our revenue and fortunes to something more than just the partner’s billable time?”  Leverage in terms of fee earners, technology, knowledge management, relationships and, yes, pricing strategies is an important part of the right answer.  As for fee earner leverage, its impact on per-partner earnings is well known and understood.  So, it is surprising that 75 percent of midrange law firms are not successfully implementing the strategy.

The chart shown below is one of many included in the 55-page Juris, Inc. Law Firm Economic Survey published last year. The survey reflected the financial performance of midrange-sized U.S. law firms for the year 2005. Survey results confirmed the important role that leverage plays in determining law firm partner earnings. The first quartile, the top performing 25 percent of law firms, earned more than twice the per-partner income of the next highest group.

The same survey indicated that associates in half of the surveyed firms worked less than 1400 hours. Even among the top performing 50% of firms, the average billed hours for associates ranged from 1550 to 1600. The majority of midrange law firms are both under leveraged and underutilizing the associates that they do have. The only way out of that income-limiting box is invest in improved scheduling and delegation with respect to existing non-partner resources. Partners need to give up some short term income shifting their individual effort from “billable work” to business development, recruiting, mentoring and professional development.

That is apparently a hard call for the majority of midrange firms to make.  I’m reminded of a cartoon I saw years ago.  A Gatling gun salesman was standing at the entrance to a medieval tent as the guard, complete with armor and spear, was saying, “I’m sorry, but the general says he is too busy fighting the war to meet with you.”

Work on this year’s annual Economic Survey is currently underway. Click here to participate and to automatically receive the results and analysis without charge.

Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-374,  e-mail info@juris.com or go to www.Juris.com.

Related posts

• Top 25% of Law Firms Earn Margins Above 40%
• Survey Discloses Factors That Influence Law Firm Partner Earnings
• Partner Income Related to Law Firms Fees
• Leverage Rules When It Comes to Partner Earnings
• What Will Determine Your Law Firm's Future?

Related posts

• Increasing a Law Firm's Effective Rate
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• Measuring Law Firm Utilization (Billable Hours) and Blended Rate
• Law Firm Business Model - Measuring Rate
• High Performing Law Firms Spend More

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For regular blog readers who saw yesterday's blog about Tom's surgery, it was a success!  You'll probably hear more about it from him later.  Until he's back at the computer, his pre-written blogs will be posted daily, starting with the following:

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According to a recent survey by Thomson Elite, 50 percent of law firms are planning to increase technology spending in 2007.   A large majority of reporting firms, 80 percent, say they will spend more on software than on hardware. Likewise, the survey indicates that firms do not plan on increasing technology staff levels.  The emphasis is on software and infrastructure investments to improve competitiveness and partner income.

Thomson’s finding parallels the emphasis on software indicated by law firms responding to an earlier Law Firm Economic Survey conducted by Juris, Inc.  In addition to financial information, the Juris survey polled participating firms about their financial and practice management priorities.  It turned out to be a wish list for better tools to guide the firm. Here are their top wishes:

• Real-time information for fee earners

• Improved reporting systems for better business intelligence

• Budgeting & forecasting tools

• Benchmarking tools to improve competitive information

The top two desires, real-time information and business intelligence, signals that traditional reports are no longer adequate. Managing partners want actionable information that is instantly digestible and in time to do something about it.  The new dashboard technology arriving on the scene is delivering on this need for constant situational awareness. Partners want timelier information in smaller doses. Rather than dig for information, they want to be alerted when their attention or action is needed. They want to control the flow of information according to what is important to them at the time. Delivering all of that is a big deal for software vendors. But the leading business system vendors are in business to address buyer preferences, so some exciting new breakthrough products are hitting the market—for example, the new Active Information from Juris, Inc. and Elite 3E® from Thomson Elite. 

Benchmarking's move into the top wish list reflects the growing awareness by law firm leaders that their firms can ill afford to continue flying blind. They need competitive intelligence.  They want to know key financial information from their peer and competitive groups. Surveys that are 12 to 18 months behind the curve aren’t satisfying that need.  Thus, we see the rise of new continuous benchmarking and monitoring services from the likes of Thomson, Redwood Analytics, and Juris.

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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Over the last several weeks, I have had the opportunity to discuss the results of the Juris Law Firm Economic Survey with managing partners from across the country.  Today I will be doing the same in Orlando at a breakfast for managing partners organized by the Central Florida chapter of the ALA.

In addition to financial information, the survey polled participating firms about their financial management priorities.  This is a managing partner wish list for better tools to guide the firm. Here are their top wishes:

1. Real-time information for fee earners

2. Report writing systems

3. Budgeting & forecasting

4. Firm management education

5. Benchmarking tools

The top desire for real-time information signals that traditional reports are no longer adequate in today’s high-speed world.  Managing partners want actionable information that is instantly digestable and in time to do something about it.  The new dashboard technology arriving on the scene is delivering on this need for constant situational awareness.

Likewise, the second wish on their list for better and easier-to-use layperson report writing tools arises from frustration over the value of traditional reports.  Partners want timelier information in smaller doses and, preferably, only when their attention or action is needed. They want to control the flow of information according to what is important to them at the time. Delivering all of that is a big deal for software vendors. But the leading business system vendors are in business to address buyer preferences, so some exciting new breakthrough products are hitting the market—for example, the new Active Information from Juris, Inc.

Benchmarking has moved up to the top five wish list, reflecting the growing awareness of managing partners that their firms can ill afford to continue flying blind. They need competitive intelligence.  They want to know key financial information from their peer and competitive groups. Surveys that are 12 to 18 months behind the curve aren’t satisfying that need.  Thus, we see the rise of new continuous benchmarking services from the likes of Thomson, Redwood Analytics, and Juris.

I would prefer to have seen strategic planning on the partners’ wish list, but I will settle for budgeting and forecasting.  I am a big proponent of financial modeling. While detail budgeting at the operations level should be standard procedure, forecasting and testing “what if” scenarios requires a simplified approach.  When models become too complex, they can confuse rather than enlighten. 

I would also like to have seen “modified compensation plan” on the wish list.  All firms need to carefully examine the impact of their current compensation plan on the firm’s collective results.  Is your compensation plan a positive influence toward achieving the firm’s goals and objectives, or is it interfering with those goals and objectives?  

Finally, I trust that www.morepartnerincome is a helpful stocking stuffer toward fulfilling their wish for more management education.

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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The most profitable firms don’t have the lowest cost structure. That was one of the findings from a recent Juris, Inc. survey. Top performing firms had higher per-head operating expenses and a higher ratio of non-fee earners to fee earners. Full survey details will become available later this month.

The findings provide more evidence that it pays to focus on revenue rather than cost reduction. That is not to say that profitable firms spend recklessly. While costs per head are higher, the firm’s total cost as a percentage of revenue was lower due to higher revenue per partner and per head.

Cost cutting campaigns will not move a law firm into the category of a top performer. If you want to increase profitability, you need to concentrate on increasing revenue rather than focusing attention on reducing expenses. You should pursue business development as well as opportunities to increase productivity, effective rate, and realization. Eliminating amenities, downgrading facilities, reducing personnel, holding back on salary increases, and reducing administrative staff is likely to cause more harm than gain.

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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It was another item of discussion during the LegalTech conference earlier this week. There is even a new book on the subject titled Solving the Part-Time Puzzle: The Law Firm’s Guide to Balanced Hours.

Yes, law firms can benefit profitably by taking advantage of part-time or "limited availability" resources.  These resources can play a valuable role by rounding out the bench. There is a place for part-time availability in the law firm. There is a place for the dedicated attorney that must place personal priorities above professional requirements.

But will law firms in any significant number ever establish the issue of “a balanced life and work environment” as a primary objective of the law firm?  Not in my life time or yours.  If we are honest, a law firm has only a limited number of slots at the top, i.e., partners.  A law firm has to have reasonable turnover as the bottom moves up.  Likewise, existing partners have to move out and retire to make room for some of the associates who go through the professional maturing process.  It is a profession where the young work long hours. Over time work hours decline as the professional matures and leverages their wisdom and knowledge off of the endurance of more youthful members of the profession.

Don’t get me wrong, the prize doesn’t go to those who work the hardest or longest. The firm’s first string varsity team is comprised of fee earners the firm can count on to get the job done.  If they can do that and still make it to the soccer game or to the day care center, that is what counts. But as a service organization, a “balanced work/life approach can not take precedent over the requirements of the case or matter."  

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I enjoyed reading Andy Peters’ article recently in the Daily Report. He was reviewing the highlights of a session that placed two prominent law firm attorneys as panelists before 100 in-house corporate counsels. Jeffrey Haidet, Chairman of Long & Aldridge, and William Brewster, the managing partner of Kilpatrick Stockton, took their lumps and served with honor handling such questions as:

• Why are outside firms slow to send invoices…..?
• Why don’t outside lawyers understand the business models and corporate culture of their clients?

Regarding the question on invoices, I am always amazed that law firm’s don’t understand that their corporate clients are not happy about being billed for work done over two months ago. It isn’t even unusual for the bill to be three months behind the actual work by the time it gets to the corporate counsel. That causes problems with their records. People tend not to be very appreciative of work done two or three months in arrears. The average law firm has 78 days of work in process and it takes 60 days to collect once the bill has gone out the door or across the Internet. That is money that is not in the partners’ pockets and it is an irritant to the law firm’s client. So, why not solve the problem? It isn’t rocket science. The steps are clear and simple:

• Require fee earners to track and report time extemporaneously as work is performed
• Give them the tools to do so including the ability to do so anywhere, any time preferably using BlackBerries or other PDA devices
• Use tools with spell check and automatic testing against the engagement standards (pricing and billing rules) required by the client
• Require time entries to be correct as submitted by the fee earner or as edited, throughout the month, by the fee earner's secretary or assistant
• Run bills immediately after month end
• Require billing attorneys to return changes within three business days or the bills go out the door “as is”
• Send bills electronically or by e-mail wherever you can
• If clients will accept it, change your service (billing month) to cover the period from the 26th through the 25th. Doing so means you have a bill in the clients hands by the end of their month even though it is a few days out of sync with the calendar. Many clients will prefer it.

As for the second question—why outside lawyers don’t understand the business models and corporate culture of their clients - I will save my comments for a later post.
 

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