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

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

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

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

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

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I received an email from Brendon Carr, foreign legal consultant and host of the Korea Law Blog, regarding a recent post of his, “I Don’t Care What You Charge; Whatever It Is, It’s 15% Too Much”.  The post discusses a request from a new client for an across-the-board 15% discount for his services. 

In my experience working with law firms, discounting is the most difficult thing to change.  Where mark-downs to work performed can be addressed internally, discounting becomes an entitlement to a client.  The only ways to recoup the loss in value is to increase rates at a higher percentage than other clients, pad your hours by billing for things you may otherwise not charge to a client, tie the discount to high volume, or tie the discount to fast payment of invoices  The first two are not conducive to a positive trust relationship with the client.

In my opinion, discounting should be avoided at almost all costs - the exceptions being:

•  In return for high volume of business that compensates for the reduced value of your time.  There is nothing shameful in requesting from a client who asks for a discount to provide estimates of business it will provide and tying the discount to their ability to provide that level of business.  Then you can agree to the discount, but will provide it once the threshold business the client sends you is met. 
• In return for fast payment of invoices.  This encourages fast payment and thus a positive effect on cash flow.

When in a situation such as that of Mr. Carr, several questions come to mind:

• Is asking for a discount up front damaging to the relationship between attorney and client?
• Does mandatory discounting encourage mark-up of hours?
• If it becomes known that your firm discounts, does it create a perception by clients that your firm expects rate negotiation and thus overcharges for its services?

What do you think?  Add a comment below to share your thoughts.

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

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

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

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

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

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

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

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In an article for the upcoming issue of the National Law Journal  (NLJ) posted yesterday on their site, law firms are not taking their own advice when it comes to arbitration clauses in employment disputes.

Is this a case of what's good for the goose isn't good for the gander?  Why would arbitration be a good idea for other businesses but not good for law firms?  The answer brings into question the utility of arbitration. 

The arguments for arbitration come from those who have been burned in litigation.  Litigation can have you sitting in front of a jury that likely has no experience in the subject matter at hand and may in fact have motives other than the subject matter at hand to deliver a large award to a plaintiff.   Arbitrators, on the other hand, are picked from within the industry from which the dispute arises and ostensibly provide a more fair, though equally binding, resolution at less cost than litigation.  Where litigation can hinge on perception, arbitration decisions are meant to be grounded in experience-laden fact.

According to the NLJ story, however, only 10% of 200 law firm respondents to a 2003 survey had "mandatory arbitration in place".  I assume this means that equity partners were bound by it through the partner agreement and that other employees were bound by it as a condition of employment, though it isn't specified in the article.  One reason cited is that arbitration clauses may have a detrimental effect on the workplace.  Said a partner with DLA Piper, "Your attorneys can perceive that you are materially changing their position vis-a-vis the firm and attempting to circumscribe the rights they might otherwise have."

I believe that statement holds true to any situation where arbitration exists, not just when applicable to law firms.  Any other reason to not have them?  The article paraphrased a partner in the New York office of Greenberg Traurig, writing "Arbitration [] no longer offers the benefits of a speedier, cheaper resolution, as proceedings have become bogged down in discovery and quasi-motion work that mirrors litigation."

If that is truly the case, then arbitration has a gloomy future indeed, and not just with law firms.  I brought up the article to an attorney I know who defends clients in arbitration and he told me some of his concerns with it:

• Arbitration has become very inefficient, with no control over evidence admission (ie, evidence can come in at any time);
• The arbitrators do not have the same fear of appeal that judges do and thus are unafraid to ignore precedent;
• The quality of arbitrators has declined.

This indicates some serious problems with the arbitation system for dispute resolution.  As the attorney I spoke with said, "Our clients used arbitration to get away from runaway juries.  Now they are going back to the courts to get away from runaway arbitrators".

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

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The Free Management Library has some good information related to developing a strategic plan.  The site lays out several models that can be implemented for both profit and non-profit businesses.   The focus of this post is the "Basic" strategic plan.  This is also the one that most firms use when developing a strategic plan.  The process includes:

• Identifying your core purpose or "mission statement"
• Determining the goals that align with that purpose
• Determine the methods you will use to reach those goals
• Create action plans to implement these methods
• Measure, adjust and modify as needed.

Identifying your core purpose or "mission statement"  - this is the part that starts and sometimes ends the process.  Firms can easily get bogged down in determining the language for the firm's "mission".  If you look around at other's mission statements, you can find that they pretty much say the same thing - client-driven, quality, service, honesty, integrity, seeking justice, etc.  Be careful how you draft your mission statement - you will be judged by the words you choose; by your clients, your employees and your competitors.  The mission statement is the "big picture" so it needs to encompass everything you want to accomplish with the strategic plan.  Answer these 4 "whats" (adapted from The Lawyer's Guide To Strategic Planning by Thomas C. Grella and Michael L. Hudkins) and compress it into a single statement:

1. What areas of practice are our focus?
2. What is our goal in representing clients?
3. What market segment do we serve?
4. What are our core values?

Determining the goals that align with that purpose  - the goals are the metrics against which you will measure success.  Most people think of setting long-term goals.  I think for smaller firms, you should pick short-term goals with long-term objectives.  This is especially true when looking at financial goals, but with any change you have to set goals that are attainable in the short term.  Since strategic plans should be reviewed annually, you can set new goals next year.  It is more important that they are aligned with your core purpose than comprehensive.

Determine the methods you will use to reach those goals - the methods used to reach your goals require a review of all your processes.  Processes that are inhibiting your ability to reach your goals need to be eliminated.  While you are at it, those processes that are inefficient should be streamlined.  If you do not have a clear organizational chart, this would be a good time to develop one. 

Create action plans to implement these methods - who are we kidding here?  Attorneys creating action plans?  It isn't hard to see why firms get lost in the process.  However, you have to set benchmarks to measure success or failure.  The action plan is the blueprint for success that you follow based on the processes set up to reach the goals that align with your core values.  One idea for an action plan (again from The Free Management Library) requires the following to be addressed:

1. The goals to be accomplished;
2. How those results will be achieved
3. Who is responsible for achieving the results
4. When will the results be achieved (timeline)
5. What is the status of the goal (with an as of date)

Considering that action plans will have a short-term negative impact on productivity, many firms will not want to do this.  Understand the purpose and create your own method of accountability.  Some consultants do not promote action plans, but promote organizational focus to implement the plan.  Additional staff are needed and focus placed on them to ensure that processes are in place and functioning.  If it works, stick with it.  If it falters, you need to implement things that work.  How will you know if it falters?  Through measuring performance.

Measure, adjust and modify as needed - measurement improves performance.  In this case, measurement will hold people and processes accountable so that you can modify the processes and mentor the people (to the extent you can).  The largest issue I have found in firms that enact change isn't necessarily the processes - people eventually get used to processes.  It is the accountability.  It is imperative that there is buy-in by the principals or else plans can easily falter and a large investment in time and money is wasted.  If the firm is even-handed and consistent in its application of the plan, positive results will ensue. 

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

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

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

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

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

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

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