The summer issue of the Managing Partner Advocate is now in the mail.  This issue is focused on ways to combat the effects of a contracting economy.  Highlights include retaining talent, managing associates, planning for the unexpected, measuring marketing activity and measuring timekeeper profitability.  There is also a guide to minimizing facilities costs written by guest author Luke Raimondo, an attorney and commercial real estate broker, and a guide on how much debt a law firm should carry.

The summer issue provides excellent guidance for law firms to help improve profitability even as the GDP struggles to grow.  If you are a subscriber to the site, you may download the summer issue by clicking here.  You may also have the advocate mailed to you at no cost by clicking here and requesting a subscription.

It is with great regret that I am leaving LexisNexis and will no longer be associated with the Managing Partner Advocate and More Partner Income.  I took over the blog from Tom Collins in January of this year, a mere 6 months ago.  In that time I have moved the site to a new host, completely re-built the blog and have enjoyed record numbers of readers, building on the solid foundation Tom Collins built over the past 3 years.  I sincerely appreciate all of you who have read this blog and utilized it as a resource to help your firm.

This is my last post as editor of this blog.  I have enjoyed my brief time hosting More Partner Income and hope that you have found value in the posts I have written. 

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• Free Subscription

Most law firms understand intuitively that the value of inventory (both WIP and A/R) degrades over time, but by how much and how quickly? The ability to understand and answer these two questions is the first step in preparing a realistic, forward looking valuation model; one that can identify opportunities and drive action, rather than simply report on past performance.

 

 

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The Association For Legal Career Professionals recently released an Update On Associate Attrition covering the 2007 calendar year.  The numbers are striking:

• Overall percentage of associate attrition was 18% for 2007;
• 24% of these associates had been on the job for two years or less;
• 74% of 2007 departing associates left the firm within 5 or fewer years of their arrival.

The most cited reason for entry-level associate attrition was "pursuit of specific practice interests".  

The reason for entry-level associate attrition leads me to believe that the survey is large-firm heavy.  Large firms provide entry-level attorneys with high salaries and intense work schedules.  Within 3 to 5 years, prudent associates should have their law school loans paid off and can now seek to practice in their own desirable area of law.  In fact, the median size of the firms in this survey was 220 attorneys.  Only a fifth of respondents were firms with 100 or less attorneys.

Looking at just the 100 and less category, the percentage of associate attrition was at 17%, 15% had left the firm within 2 years of being hired and 69% left the firm within 5 years of hiring year. It is too bad the survey did not track the reasons for attrition based on firm size, because I suspect that the main reason for attrition for smaller firms wasn't to pursue specific practice interests, but may be closer to the main reason cited by departing laterals:  "unmet work quality standards".

There is little doubt that associate attrition is prevalent in law firms of all sizes.  It is possible that the high attrition rates are reflective of the common culture.  Where once a ball player would stay with the same team for their entire career, free agency now reins.  Where someone would work at the same company for the greater portion of their life, now employee loyalty is considered a thing of the past.  Neither sports nor businesses in general have made employee attrition a pressing issue to be resolved.  When it comes to business realities (i.e., pensions) some businesses specifically don't want employees to retire with them.  Why should it be a concern to law firms?

Whether or not associate attrition is important to your firm may depend on the area of law practiced.  For example, a defense litigation firm that is well organized and has developed processes that manage their recurring tasks may not be too bothered by attrition, particularly if they have a mechanism for quickly training new associates.  On the other hand, an estate practice that relies on many years of expertise can't afford high associate attrition.

Firms would do well to track associate attrition and determine the reasons for their departures.  Although it may be in the interest of some firms to encourage attrition, in the long run firm sustenance is reliant upon the retention of quality talent.

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Now that it is finally the turn of More Partner Income to host Blawg Review, it is tempting to stray from our mission.  For those who may expect this, I'd like you to join me for a moment of digression, as I whisk you away to a remote vineyard in southern France, placing you at a hilltop overlooking hectares of ripe grapes as a cool breeze gently flows through your hair.  It is dusk, and the reddish glow of the horizon creates in you a moment of reflection, something you haven't done in years.  A sommelier suddenly appears:  a vinucator who will ruin the moment by lamenting the perils of the homogenization of wine. 

Ok, that should sufficiently shatter the tranquility of the moment, so let's move on to the theme of this entry:  Law firm survival in economic hard times.

You know that when the price of a gallon of gas increases, it is because of evil oil companies.  That is a given, right?  Well, sure, if you don't know what goes into the price of oil.   Similarly, without knowing the costs associated with performing a service, law firms might be tempted to not increase their own rates, considering the implications it may give to clients (gasp! we are affected by economic conditions, just like you!). 

Reid Trautz argues in his blog Reid My Blog! that firms should increase rates now, mid-year, based on perceptions of our economy.   If firms haven't already increased rates this year, now is about the time they should consider it.  Inflation isn't waiting for you.  Though some argue that law firms can be recession-proof, Ed Poll argues that law is subject to economics just as any other business.

Judge Posner in the Becker-Posner blog writes of the cost of the deterioration of infrastructure.  More money will be needed to finance upgrades.  From where will it come?  Tax increases?  Tax cuts?  How about taxing wheels?

The Estrin Report discusses more layoffs for associates and staff - regardless of whether the economy improves or not.  Even partners aren't immune.  Jim Cotterman of Altman Weil suggests that the likelihood of becoming partner is being affected by the economy:

Generally law firms are best situated if they promote to ownership only those who can maintain, refresh and expand the business opportunities of the firm.  Without this one attribute, no firm can remain competitive or viable for very long.

What can a law firm do?  For one, it can avoid being stupid, as Jordan Furlong of Law21 writes.  What does he mean by stupid?

• Partnerships that don't enforce rules against uncooperative or alienating partners who happen to bring in a lot of revenue;
• Senior lawyers who consistently hoard the best work and the most client contact, to the detriment of junior lawyers;
• Firms that allow women lawyers to leave because of partnership tracks that are tailored for men;
• Firms that prioritize short-term profits over long-term interests.

Speaking of women, Matt Homann in his blog the [non]billable hour writes of the five things you need to know about women and word of mouth.  One of the things appears to be costly: Instead of offering a 15% discount for referrals, offer a 15% discount to everyone a woman refers!  Considering this blog's disdain for discounting fees, I would prefer that "kirtsy" discount be placed on a timer.

I'm more inclined to attract women [clients] who misbehave.

Another thing firms can do is communicate better with clients.  Status reports are often an underutilized medium of communication that can mean the difference between a happy client and a lost client.

Tom Kane's Legal Marketing Blog discusses 6 steps to improving client service:

1. Agree upon and commit to a defined set of client service standards.
2. Turn fluffy, high-level strategic statements into real, definable, measurable action steps.
3. Provide training and ongoing reminders focused on what it takes to meet and exceed a client's expectations.
4. Include client service as a significant factor in compensation.
5. Give leaders the power to enforce standards (carrot and stick).
6. Provide role models, teach the skills, give opportunities to practice and supply meaningful feedback. One great rehearsal hall is within your own firm, where lawyers can deliver exceptional service to each other.

Being a role model is a tall order in today's firm, where partners appear to work twice as much as associates.  However, in a great post from the Harvard Business Review "Editor's Blog" titled  A Boss Who Changed My Life, Steve Prokesch writes of the means that his boss employed that helped "turn us individually and collectively into winners":

• Set the bar high and then push your team to raise it higher;
• Make excelling a team activity;
• Promote your team in the organization;
• Remember that management is personal;
• Champion your people.

The above is a lesson that can be learned by all in business. 

There are other blogs that were emailed to me which are also worthy of mention:

• Mark Herrmann, author of one of my personal favorite books, "The Curmudgeon's Guide To Practicing Law", co-authors a blog called Drug and Device Law.  His June 5th post is titled Users Guide To Defence Amicus Briefs - Wyeth v. Levine.
• Victoria Pynchon, author of the blog Settle It Now Negotiation Blog, wrote a series of moving articles on the familial issues surrounding the last days of her father's life and the possibility of suing her father's physician; the first titled Negotiating Life's End.
• Biker Law Blog host Norman Gregory Fernandez writes of California's new law banning cell phone use (when not using hands free) and whether the law serves its purpose of reducing distractions to drivers.
• Eric Turkewitz of the New York Personal Injury Law Blog writes of a purported obscene filing in a Texas court (which is later shown to be a practical joke played on a partner - who said lawyers had no sense of humor?).
• There must be something in the air in Texas:  The Wall Street Journal Law Blog writes of a Texas Federal Judge in the case Waggoner v. Wal-Mart issuing an Order that was as ridiculous as it was funny (as if the SouthWest Conference was ever in the same category as the SouthEastern Conference!).
• Lowering the Bar has a post discussing a Colorado store owner who was ordered to stop taking shoes from people he catches shoplifting in his store.
• Brett Trout discusses in his blog, BlawgIT, the patent application of Microsoft's device manner's policy.
• Every law student finds an obsession to take their mind off the stress of law school (I dropped over $10k on building a 110 gallon reef aquarium), but Chris Colin from the San Francisco Chronicle writes of an old friend who developed a passion for crafting dinner plates based on legal themes.

Jesse Hines (a guest author on Write to Done) argues that a single-idea post often works better than list posts.  Though I didn't follow that particular advice in writing this entry, I look to that blog as a source of writing guidance.

Thanks to all who emailed suggestions this past week.  Blawg Review has information about next week's host, cearta.ie, and instructions how to get your blawg posts reviewed in upcoming issues.

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Pricing has been a frequent topic at More Partner Income.  Some past topics include the science behind pricing, the ill effects of inflation on pricing, pricing management, and discounting.

RainToday has recently released the Fees & Pricing Benchmark Report:  Law Firm & Legal Services Industry 2008.  David Maister wrote a blog post on a similar report released by RainToday focused on the consulting industry on April 28th.  There were some striking similarities between the two reports:

• 65% of consulting firms reported they discounted fees.  76% of law firms reported discounting fees;
• Average discount of responding consulting firms was 11.7%.  Average discount of responding law firms was 9.9%.

Of the two pre-bill adjustments (mark downs and discounts), discounting is the most difficult to change.  Both show weakness in the firm, but discounting creates a feeling of entitlement from clients.  How?

Marking down time tells your client one of several things (the below is not exhaustive):

• I spent more time than I can reasonably charge you for the service provided:  ie, I am not efficiently working the matter;
• My associates spent more time that I can reasonably charge you for the service provided:  ie, my firm has less competent attorneys working on your case or I have inefficient staff working on your case;
• Even though I spent an adequate amount of time on this, it "seems" too high to me:  ie, I am unclear on the value of my service.

All of the above are correctable.  They are entry-specific adjustments that can be seen as temporary.

On the other hand, discounts are typically applied to the entire bill.  This gives rise to expectations of entitilement.  They can tell your clients one very negative thing:  I am overcharging you up front and adjusting it on the back-end. 

Just as discussed on this site in the post Discounting At Law Firms, the RainToday report suggests that there may be valid reasons to discount, but only when the discount is intentional, strategic, and, ultimately, mutually beneficial to you and your client.

Some reasons to discount given in the report include well-funded start-up clients (in expectation of long-term payoffs) and absorbing the cost of training new associates.  It is also something to consider when trying to win RFPs, in exchange for quick payment of invoices or in return for a threshold amount of work that the client will provide to the firm.

The important part of discounting is that it is mutually beneficial to you and your client - there needs to be consideration for the discount.  It needs to be binding so that if the client does not perform on their end, the discount doesn't get applied.  If there isn't quid pro quo, you are giving a clear message to your client that you overcharge up front - and that your rates are open to negotiation.  

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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.

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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 following is the first in a series of posts on compensation written by Ron Paquette, an analyst with Redwood Analytics, now part of LexisNexis.  Ron is a new contributor to the blog who we hope will write regularly.

Most law firms want to evaluate client and matter profitability. When deploying profitability models, one of the most common questions Redwood receives has to do with determining the cost of partner time on billable work. Since most matters in the legal industry today are billed on an hourly rate, the most effective means of allocating costs is on an hourly cost basis. There are two components to costs, direct and indirect (overhead) – the focus of this discussion is on the direct component, e.g. partner compensation. And since most firms set billable hours expectations for their partners, the question becomes:  How much of a partner’s compensation should the firm consider when calculating this “hourly cost rate” allocated to each billable hour he/she works?

• Billable hours;
• Originations;
• Matter & client management;
• Attorney management & development;  and
• Their status as a co-owner of the firm.  

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• Partner Cost and Client Profitability (Part V)
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• Partner Cost And Client Profitability, (Part III)

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.

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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.

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