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.

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PEP as a measure of law firm financial performance has come under fire lately.  See the Adam Smith, Esq. post Is PEP the Proper Measure of Success?.  Profit per Partner is a perfectly legitimate measure of financial return to the owners of a law firm.  There are, however, those shortsighted firm leaders who would maximize PEP at the expense of long-term law firm success just as in the corporate world you can find some less-than-stellar CEOs who focus on earnings per share while damaging the long-term value of the business.

How should performance of a law firm be judged?  What attributes should management use as its steering points for long-term success?  For the answer, you don’t have to look far. Peter Drucker spelled out the eight areas in which organizations create value in the eyes of those to whom it is accountable.  The eight key result areas are:

1. Customer Satisfaction

2. Productivity

3. Innovation

4. Resources

5. Management Development and Performance

6. Employee Attitude and Performance

7. Public Responsibility

8. Profitability

The point is no single metric tells the whole story. The successful organization must address each of the eight areas through its objectives and control systems. It must set goals, measure performance, and hold people accountable in all eight areas.  Profit per Partner is just one measure.  It isn’t an inappropriate one. Like any other single metric, it can be inappropriately pursued.

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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IOMA, the Institute of Management & Administration, publishes a yearly edition of its Guide to Best Management Practices for Law Firm Leaders.  

I was scanning through the collections of white papers comprising the 2006 guide and found particularly interesting a paper titled “Bank Guidelines to Boost Your Firm’s Credit Rating”.  If banking relationships are important to you, this six-page paper reporting on the views of Citibank’s Jeffrey Grossman and Joseph Mendola may justify the $439 cost of the Guide.  Another source you might consider is Ed Poll’s $29.00 paperback titled The Successful Lawyer—Banker Relationship.

Citibank Private Bank Law Firm Group is an important player in the legal market, and thus, their views are important.  It was their views on the effect of culture and management that I thought added something new to the issue of law firm credit worthiness.

According to the IOMA publication, Joseph Mendola believes that partner departures have little to do with dissatisfaction with compensation. “The main reason [for their departure] is that they felt their firm has no appropriate plan, mission statement, or goals for the business”. 

Considering the large number of firms served by Citibank, Mendola’s insight carries a lot of credibility.  We know the importance of culture and planning on the financial performance of a law firm. Now Mendola has made the connection to the cohesiveness of the firm.  Where does culture come from? In morepartnerincome’s view, a culture grows out of partner conscientious and becomes stronger through constant communication, measurement, and accountability. The partners must first agree on three things:

            What they want to be—their vision          

            Their core set of beliefs that guide conduct

            The main things success depends on—strategies

Another interesting bit of insight is that, from this banker’s perspective, an autocratic management is more decisive—decisions are made more quickly.  As you might expect, they consider management stability a plus.

Their implied preference for the autocratic leader points out the fact that democratic styles tend to run counter to the emergence of the law firm as a business where all of its resources are aligned as a team in pursuit of common objectives.  Banks can understand that.  They can’t put their arms around an organization where all of its pieces are operating largely independently, each chasing its own star.

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 December 2006 issue of Law Office Management & Administration report by IOMA listed nine things law firms need to do before year-end.  The list is taken from Ed Poll’s new book Secrets of the Business of Law: Ways to be More Effective, Efficient and Profitable. What are they?  I’ve taken the liberty of paraphrasing Ed somewhat and prepared the following list based on his nine steps:

1. Update your business plan

2. Set goals for each member of the firm

3. Assess and update your marketing plan

4. Prepare an operating budget based on your plans

5. Critically review the desirability of your existing clients

6. Raise your fees incrementally

7. Restructure your fees based on the market and your objectives

8. Improve your billing practices

9. Concentrate your energy on revenue, not expense reduction

 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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Recently Legalweek.com, among other news sources, disclosed that Clifford Chance was opening a service center in India to move 300 accounting and IT support jobs to India. The move is just the latest in Clifford Chance’s ongoing outsourcing initiative. When you look at the financial statements for law firms of any size, salaries constitute the majority of operating cost. Accordingly, when an organization turns to cost cutting for improved financial performance, it is salaries that are in the gun site. Outsourcing can save big dollars, but it doesn’t come without risks.

Off shore moves aren’t automatically good or bad. Some may improve capability and service quality. However, I was impressed by a quotation attributed to Russell Lewin, former managing partner of Baker & McKenzie, which included the remark, “…you cannot underestimate the way hidden cultures impact upon your operation.” The person on the other end of the phone may be smart and eager to help, but it can be difficult to communicate effectively across cultures even when both parties are speaking a common language.

Relying on outsourced functions can negatively impact the firm’s legal professionals, lowering their effectiveness and efficiency. If that happens, the move will prove penny-wise and pound-foolish. The biggest risk, however, is that outsourcing administrative and accounting functions will alter the client’s experience in dealing with the law firm. For the client, service quality involves more than just legal competence. For example, the timeliness, accuracy, and quality of billing procedures—including how questions and adjustments are handled—are an important reflection on the law firm.

In spite of service quality risks, the outsourcing trend continues in BigLaw circles and among the vendors and suppliers to those firms. According to one of the popular outsource companies, a leading U.S. provider of enterprise business software for major U.S. law firms is in the process of outsourcing its support center to them.

Consolidations and acquisitions have reduced the number of law firms and vendors serving them. Unfortunately, what usually comes next is higher prices and lower quality as fewer suppliers put their emphasis on cost reductions rather than market share increases for improved performance. Customers get less and pay more.

What does this mean for midsized law firms? While they are milking their cash cow, you have a rising star. Midsized law firms that emphasize service quality and lower cost for the customer can take business away from their larger competitors.

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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Friedrich Blase with Edge International penned an article appearing in the September issue of Law Practice Today titled “Beyond Today's Income – What Constitutes a Firm's Future Earnings Potential?” It is a great question but a difficult read. It is a question that is always on the mind of every partner and every partner candidate in the firm.

Answering that question in an ongoing fashion is a central function of firm leadership. Fail to answer it, and the firm loses the glue that binds the law firm together. Blase puts it this way:

“Eventually, all the potent partners realize that their firm has no positive answers ……..” “Their firm, they have decided, does not have enough future earnings' potential. As one administrator of a demised law firm's estate put it brutally, "Left behind are the old, the fragile and the idealists."

The word vision is often used when discussing the role of law firm leadership. While that vision is not exclusively financial, financial aspects must be a part of it. The leader’s role must include not only the steps to assure sound future financial performance but the steps to build internal confidence in that future.

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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Competitive intelligence and specifically peer group benchmarking has been growing in importance as law firms increasing adopt traditional business practices. This post is one of several summarizing information garnered from the September 2006 Benchmarking Symposium held in Nashville Tennessee.

One might be surprised that a bank is one of the leading players in benchmarking services to law firms. CitiGroup Private Bank has 200 professionals who serve law firms. The bank has relationships with 650 firms. Its venture into benchmarking was initially to assist the bank in risk management. Benchmarking separated high-risk situations from those law firms that represented quality relationships for the bank. That evolved into using benchmark information to help bank customers improve financial performance and eventually became a highly sought after service by larger law firms.

CitiGroups answer the question, “Why should you consider benchmarking?” this way: “It lets the members of the law firm know where they are and if they are making progress toward their goals.”

As the City Group representative pointed out during his presentation at the recent Nashville Benchmarking Symposium the legal industry is consolidating and becoming more competitive. Law firms are run more like a business than ever before. Given these conditions a good fact base gained from benchmarking can help gain consensus about important decisions.

Thomson West has partnered with CitiGroup as the content provided for its new PeerMonitor™ service. The service is targeted toward large law firms. Thomson’s news release explained the new services: “Law firm leaders, often frustrated by the lack of real-time competitive information available to them, now have an answer that will help them to make more informed management decisions.” According to Thomson West, PeerMonitor provides law firms with competitive facts as current as the most recent monthly financial statements. PeerMonitor enables law firm executives to benchmark their business performance to a named group of peer law firms across a range of pricing, profit and expense categories.

Other benchmarking providers speaking at the symposium included, Juris, Inc., PriceWaterhouseCoopers, and CitiGroup Private Bank. Juris Insight service is targeted at midsized U. S. law firms. Redwood, PWC and CitiGroup are primarily targeted at the largest 250-attorney to 300-attorney law firms.

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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What top-level metrics should you track? If you are among the 20 percent of midsized firms who have a formal planning process, what you track depends on that plan and your objectives. But regardless, there are six basic metrics that every firm should track:

Productivity or Utilization

Effective (Blended) Rate

Realization

Margin

Days of unbilled fees (work in process)

Days of billed fees outstanding (accounts receivable)

Current performance should be compared to prior periods to determine if the firm's financial performance is improving, holding its own, or declining. It should be compared to the firm’s targets to determine if it is achieving its objectives. It should be compared to benchmarks of similar firms. Doing so will most likely indicate areas that deserve attention and that represent lost opportunities.

While I have not included it among the basic metrics, leverage is still the primary factor correlating with per-partner income. For example, in a recent survey, the top performing 25 percent of midsized firms had 2.5 associates for every partner, compared with an average of 1.3 associates for all firms. The chart below appears in the Juris Law Firm Economic Survey of midsized firms for 2005. The chart clearly illustrates the dominant influence of leverage on per-partner income.

If you need help computing any of the six 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
• 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 firm performance and partner income, go to www.Juris.com.

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