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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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Filed under Law Firm Bus Model by Tom Collins
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The participation period is ending for the Law Practice Business Survey. This is your last chance to receive survey results and analysis as a participant.
The survey is conducted by Juris, Inc. as an extension of its Managing Partner Forums and is on track to be the largest financial survey of midsized law firms yet, with over 400 firms participating.
Unlike surveys that target the top 100 law firms or ABA’s surveys skewed to small firms, the Law Practice Business Survey is aimed specifically at midsized law firms. For the first time, midsized firms can compare their own performance to key financial and operating metrics of similar firms to identify areas for improvement.
Aggregate and segmented survey results will be released June 7 2006 when I team up with Juris, Inc.’s president Stephen Collins to present survey results at ALM’s Small Firm Business Forum in Los Angeles, California.
Don’t miss this final opportunity to participate before the survey period ends in the next few days. You can participate online or by mail using a printable survey form by going to Law Practice Business Survey.
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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Filed under Blog by Tom Collins
I spent the last three days (LegalTech NY) talking to a lot of attorneys and their consultants. Times are pretty good, but many law firms have hit a ceiling in per-partner income that they can’t seem to break through.
Here is the reality. If you depend on your own productivity, fee revenues in most locations will max out in the range of $300,000 to $400,000. What you take home as personal income will be about half of that.
So how do mid-sized law firms push per-partner income into the half million plus range? The great thing about the law practice business is that the answer to that question is pretty well known. You have to make fee revenues depend on something other that the partner’s own physical effort.
- Contingency billing arrangements shift financial success to accomplishments verses physical effort.
- Flat fee arrangements let you leverage off of your efficiency including technology and process.
- Leverage lets you eat what others have killed rather than depending on your efforts alone.
Most mid-size firms have some revenues derived from contingency and flat fee work, but the majority of their revenue is still dependent on the billable hour. Leverage is the prevailing strategy for making per-partner income less dependent on the physical effort of the partners.
Unfortunately, partner compensation plans tend to be out of synch with this reality. Too many law firms place major emphasis on each partner’s individual production rather than on the care and feeding of associates. If leverage is the key strategy for driving per-partner income, then rain making, recruiting, supervision and mentoring of associates, project management and firm management have greater importance than maximizing individual partner’s production. Partner productivity must be at a hygienic level rather than an exhausting level. Individual partner productive levels must leave time for the important team work aspects of the partner’s role in the modern law practice. Compensation plans should support the leverage strategy, not fight it.
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Filed under Compensation by Tom Collins
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I am always surprised by the number of law firms whose only financial view of their law practice business is a cash view. Most law firms keep their books and records on a cash basis.
Cash basis financials are misleading views of the business. And worst, they hide trends; thus, preventing management action in time to make a difference. Cash statements do not match revenues and expenses. They don’t match services provided to the value of those services. The average elapse time between work performed and collection of payment for that work is 138 days, more than 4½ months. The largest asset of most law firms is the investment in uncollected fees and expenses.
Half way between full accrual and the cash method is the as-billed method. The as-billed method is simpler for the law firm to implement and administer than full accrual, but is still far superior to the cash method. From a practical standpoint, the as-billed method has a lot to recommend it. All operating expenses are recorded on a full accrual method and unbilled expenses incurred on behalf of clients (hard cost) are, also, booked on an accrual basis. Fee revenue is recorded as billed. Thus, under the as-billed method, the only thing left off the books is Work in Process, i.e., unbilled fees and unbilled soft cost billable to clients. For external statements, the firm will still want to include Work in Process, less a reserve, to adjust those worked, but unbilled, services to the value that the firm expects to ultimately realize.
The proof that accrual is the appropriate view from a management standpoint becomes clear anytime you start to compute the key pieces of information that a firm must understand in order to manage their firm and plan for the future. When you look at the cost per associate to determine break-even point, or profitability per associate, you have to think on an accrual level. If you advance to the issue of matter or case style profitability, you have to think on an accrual level. The importance of the accrual view doesn’t mean that understanding the cash side isn’t important. You can’t realistically forecast cash without starting from the accrual view. For example, on average it takes 78 days for work performed to get billed and another 60 days on average to collect those fees. So to project cash you have to think accrual. It doesn’t work in reverse.
Change to the accrual method and what follows, of course, is that you begin to start thinking about changing things. Why does it take 78 days to get work billed? Why are our clients taking 60 days to pay us? What can we do to reduce the number of days, etc.?
Accrual brings it all together and you can start thinking of your law practice as the business that it is.
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Filed under Management by Tom Collins
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Role of Realization in the Law Practice Business Model
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