A recent study by Redwood Analytics as reported by Larry Bodine identified the distinguishing characteristics of clients retained by law firms. The absence of those characteristics and the presence of others can identify clients most likely to go elsewhere. The study is a reminder that law firms can use their business system to create a scorecard according to attrition risk and having done so can target those clients for remedial steps. The scoring part is the easy part; developing a culture willing to take action to improve retention is the harder part. As for actually producing the attrition risk scores, your business software should track the necessary indicators. To produce a scorecard you will need a custom reporting procedure. Law firms with in-house capabilities should be able to do that internally using reporting tools but, in any case, your software provider should offer custom reporting services for a reasonable fee. If not, you have the wrong software or wrong software provider.
What are the attributes you want to measure?
On the plus side Redwood found that long-term clients had the following attributes:
-
Provides the firm a large amount of legal work
-
Has a mature, established relationship with the firm
-
Uses the law firm for matters involving two or more practice areas
-
Two or more partners are significantly involved with the client’s work
Redwood also found the following:
-
First year clients have an attrition rate of 50% compared to 20% for clients with a four year history.
-
Clients with only one partner involved have the greatest attrition rate.
-
Too much or too little partner time on matters creates an attrition risk. Morepartnerincome believes that the danger zone is anything less than 10% or more than 60%.
-
Clients most at risk have an overall realization of less than 80%, i.e., discounts don’t retain clients.
You will have to play around with this but start out trying the following:
- Give 10 points to a firm whose prior year fee revenue met the 1% test. (To keep it simple, divide your annual fee revenue by 100. Use the amount in your report to identify clients meeting the “large amount of legal work” test.)
- Deduct 5 points if the fee revenue for the prior three months x four is less that the 1% test, i.e., fee revenue is declining.
- Add10 points if the client has been with the firm for three or more years.
- Add 5 points if the client has matters in at least two practice areas.
- Add 10 points if the client has multiple billing (supervising) attorneys on active matters with billed amounts during the prior three months.
- Add 5 points if partner hours on the prior three months’ bills were greater than 10% but did not exceed fifty percent.
- Deduct 5 points if unbilled fees exceed the prior two months’ fees.
- Deduct 10 points if billed but uncollected fees exceed the prior three months’ fees.
- Deduct 5 points if prior year collections where less than 80% of the prior year value of billable hours at standard rates.
- Deduct 5 points if the percent of partner hours on the prior three months bills were less than 10% or greater than 60%.
There is nothing magic about the above weights for the items listed. You can and should vary the weights to fit your firm’s experience. There is no perfect score. Those with the highest points are the least likely to abandon the firm within the next three years. Those with the lowest score are the most likely to leave.
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.
Related posts
Filed under Risk managment by Tom Collins
I was paging through an expensive resource guide for managing partners when I saw it. It was A Model Collection System, a semantic or procedural flow chart illustrating recommended collection efforts for a law firm. The chart included the following steps:
-
Send the client a bill
-
If there is no payment in 30 days, send a statement and letter and have the lawyer make a reminder call to the client
-
If there is no payment in 60 days, send a statement and letter
-
If there is no payment in 90 days, send a statement and letter
-
If there is no payment in 120 days get serious about collection:
-
Strong letter
-
Lawyer to call client
-
Refer to committee
-
Pursue collection or write-off
“It is too late to close the door after the horses are out of the barn.” Old sayings like the previous sentence are sound business advice for managing partners. Why in the world would collection efforts be directed at past due accounts? Why not close the barn door before the horses get loose and have to be rounded up?
The typical law firm, according to the Juris Economic Survey, has 76 days of unbilled time still in its work-in-process at the end of every month. It takes another 72 days on average to collect for amounts once they are billed. That is a 148-day cash flow cycle. That is getting close to half a year!
Improving collections is achieved through procedures to avoid collection problems rather than trying to solve them after the fact. How do you do that? You do it by directing your energies as follows:
-
Improve intake procedures
-
Bill faster—speed up your billing process
-
Move routine collections out of attorney’s hands
-
Work accounts before they become past due
For more on improving law firm collections, including a checklist for speeding up billing and collections, read the following previous posts:
Speeding Up Law Firm Billing and Collection
Attorneys Are the Wrong People to Collect Firm Accounts
Collection Tip – Honey vs. Vinegar
You might also reread or distribute the post on problem solving, A Problem Solving Policy for the Law Firm.
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.
Related posts
Filed under Cash Flow Issues by Tom Collins
On July 26, 2006, the Grapevine section of the United Kingdom-based online publication The Lawyer.com reported on UK firms desperately trying to come to terms with the loss of 170,000 files destroyed in a massive east London warehouse fire. The publication noted that in the aftermath of the fire, one firm has new plans to convert all paper documents to electronic records.
The warehouse fire is another reminder. It could happen to you!
As morepartnerincome has previously noted, electronic scanning is the only way to realistically protect the contents of paper documents from destruction in a disaster. As a bonus, you gain all the other advantages of digitized information and images.
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.
Related posts
Yesterday’s post was a reminder that when hiring new talent, the firm needed to look for candidates who have the personality and fire in their belly to bring new business to the law firm. While those traits are needed by the law firm, it turns out that they are not that important in the minds of your existing clients. Perhaps a better way to say it is that the client is looking for more than just a personality.
Most mid-sized law firms are in the B2B business. B2B, of course, is the new age shorthand for an enterprise (a business) that provides services or sells products to other businesses. Law firms are viewed as businesses by their business customers.
The April 2006 Harvard Business Review reports that a Zurich, Switzerland team carried out extensive research to determine the difference between what customers wanted in a company's representative and what the providers looked for while recruiting new team members.
Customers placed considerable value on whether the provider’s representative understood the customer’s business and industry; whereas, industry knowledge was near the bottom of the qualifications that providers looked for when recruiting.
Philip Kreindler and Copal Rajguru with Infoteam Sales Process Consulting in Zurich said, "Our survey suggests that vendors would be wise to put industry and subject matter expertise ahead of social skills when it comes to recruitment." The point was made that instead of learning industry subject matter on the job, the ideal candidate brings that knowledge with them.
That characteristic is usually available to the law firm only through lateral hires. But in that regard, it is clear that knowledge of industries targeted by a law firm should be high on the list of qualifications when searching for a lateral prospect.
The question this raises is: "Does industry and customer knowledge trump relationship building skills?" I’m not sure these are separate skills. Relationship building requires one to have an honest and sincere interest in the other party. To acquire customer and industry knowledge requires that interest, and the more you know, the more interested you become in contributing to both.
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.
Related posts
Filed under HR by Tom Collins
Always keep in mind that the approach to raising per-partner income should be done with long-range considerations. First, determine how the firm stacks up against its peers. Use survey benchmarks like those available from Altman Weil, http://www.altmanweil.com. Take corrective steps where you fall short.
The list below is a reminder of steps that you can take, among others, to increase margin and improve per-partner income.
Steps for Increasing the Firm’s Margin
- Consider relocating for a lower cost per-square-foot
- Pursue alternatives for lower communication cost
- Conduct a general cost reduction campaign and work with administrative staff to improve on-going cost controls
- Take advantage of outsourcing for lower or variable cost
- Improve marketing, especially to existing clients to increase fee revenue
- Improve productivity both at support staff and professional level through capital investment—technology, equipment, training, etc.
- Increase professional and front office direct access to systems and information
- Reduce support staffing ratios through use of technology
- Plan office space to enhance workflow
- Establish systems and controls to improve recovery of client expenses and soft costs
- Implement an administrative charge (3%-5%) of fees billed to cover soft costs
- Budget firm expenses and compare to actual for improved performance
- Engage in structured strategic planning to reduce the cost and impact of off-track or poorly planned activities
- Set goals and hold people accountable
- Invest in better business systems that eliminate duplicate work and increase performance and efficiency of the accounting and administrative staff
Related posts
Filed under Law Firm Bus Model by Tom Collins
“Leverage or not to Leverage?” seems to be the question now days.
It really is pretty simple. Leverage is good and works when it is “working”. You have to have enough work to keep them “working” and they have to have enough skill to do the “work”. If your leverage isn’t “working” then you either have too much of it or the wrong kind. If you are turning down business or not looking for more business because you are doing work others could do, then you have too little of it - leverage that is.
Bruce MacEwen in his Blog, AdamSmith,Esq.com, does a great
job in exploring the
relationship between
leverage on one hand and utilization on the other as he reports on an article in
The Recorder.
Leverage and under utilization leads to lower partner income. High utilization together with high
leverage results in high partner income. People without work to do are a cost not an income source.
The list below is a
reminder of steps that you can take, among others, to increase
leverage and improve per-partner income.
· Reduce the number of partners through retirement and attrition
· Raise partnership criteria
· Consider classes of partners
·
Create or expand layers (titles) of permanent
leverage— paralegals, staff associate, senior associate, executive associate, senior council, non-
equity partners, etc.
· Improve recruiting to hire more associates and paralegals
· Increase lateral hiring to add experienced associates
·
Invest in a better
business system to provide business intelligence information that facilitates management of associates and paralegals
Fix the areas where you fall short.
The first item to consider should always be improved marketing, especially to existing clients. The second item is adjusting
leverage to fit the nature of the practice. Third is to engage in structured planning to identify the main things the firm should concentrate on to improve the business over the long term. Fourth is to improve management with focus on the law firm
business model -
leverage, utilization, rate,
realization and margin. Doing so requires a sound
business system that provides the business intelligence and tools to keep the firm in line or ahead of its
peers at all times.
Related posts
Filed under Law Firm Bus Model, Leverage by Tom Collins
The approach to raising per-partner income should be done with long-range considerations. The first set is to determine how the firm stacks up against benchmarks such as those available from Altman Weil surveys, http://www.altmanweil.com. Concentrate on the areas where you fall short.
The list below is a reminder of steps that you can take, among others, to increase realization and improve per-partner income.
Steps for Increasing the Firm’s Realization
- Implement and enforce client intake standards
- Pursue alternative fee arrangements that let the firm benefit from increased efficiency and technology
- Shorten the billing cycle to speed up collections and reduce bad debts and adjustments
- Pre audit bills against engagement standards (rules) to eliminate bill rejection and reduce adjustments by corporate and financial clients
- Establish controls over unilateral write downs during the billing process—so-called invisible expenses average $31,000 per attorney per year
- Improve training to reduce write-offs
- Centralize follow-up on accounts receivable
- Improve collection tools and procedures
- Set goals and hold people accountable
- Invest in better business systems to speed up billing, track adjustments and write-offs by those responsible, automate engagement rule compliance and manage the collection function.
Related posts
Filed under Law Firm Bus Model by Tom Collins
In general firm's looking to increase partner income should engage in structured planning to identify the main things the firm should concentrate on to improve the business over the long term. Almost all need to improve management with focus on the law firm business model - leverage, utilization, rate, realization and margin. This post deals with the firm's effective or blended rate.
The list below is a reminder of steps that you can take, among others, to increase billing rates and improve per-partner income.
Steps for Increasing the Firm’s Effective Billing Rate (its Blended Rate)
- Increase low rates to their higher competitive level
- Set higher rates for selected areas of specialization and expertise
- Take a more disciplined approach to annually reviewing and renegotiating rates
- Identify new specialty areas, train or acquire expertise, thereby increasing value and the potential for increased billing rates
- Market for better clients; those willing and able to pay more
- Develop and enforce case acceptance standards that emphasize the value of matters undertaken
- Improve (and sell) the quality of service, presentation of work product, technology, efficiency and responsiveness
- Take advantage of opportunities for alternative billing (value based) pricing
- Invest in a better business system for pricing flexibility, easier price changes, improved anniversary date tracking, etc.
Related posts
Filed under Law Firm Bus Model by Tom Collins
Since posting the item on launching a new legal specialty last week, I haven’t been able to get the danger of doing so out of my mind. Starting a new business venture and that is what it is, or acquiring another firm is risky business. If you ask around, you will find out that the success rates are not high. That doesn’t mean that you should do neither. Depending on the firm’s goals and objectives, doing so may be a wise or essential move. However, most firms would be embarking on something for which they have no prior business experience.
Given that, I want to introduce you to a management concept called the “no-cost consultant”. Essentially, when the benefit from using a consultant exceeds the cost of their advice and guidance, their services are “free”. I can’t think of a better time to seek the help of an expert than when you are considering “going where you have never gone before”. An acquisition or launch of a new legal specialty that goes wrong can cost you the “farm” as the saying goes.
In yesterday’s posting, I highlighted Tom Clay’s article that answered the question, “What do you need to know to launch a new legal specialty?” While the article is good, it is still just a one and a half page article. I would strongly encourage a firm looking to acquire or start up a new specialty to engage the services of a consultant like Tom Clay or one of his associates at Altman Weil. Get the advice and assistance of people who have been through the process with other firms. Remember if the benefit of their advice and assistance is greater than what you paid for their services, then they will not have cost you a dime. They will have been “no-cost consultants”.
Related posts
Filed under Blog by Tom Collins
Since I have been on a soapbox about the 138 days (4.6 months) that the average law firm takes to bill and collect for work performed, Beth Keno shared some of her research with me. Beth Keno is a Juris representative in the Michigan and the greater Chicago market areas. Her research is in connection with a speech she will be making at a regional bar association conference.
As a reminder, the typical law firm takes 78 days to bill for services performed and another 60 days, on average, to collect that bill. In addition to excessive investment in uncollected services, long delays result in unnecessary adjustments, write-offs and bad debts. Statistics show that an invoice over 60 days has only a 70% chance of being collected in full. After 90 days, the chance of collecting the invoice in full drops to 45% and after 120 days, it falls to 20%.
The average overall realization (the percent of services rendered that actually get collected) for US law firms is 91%. 9% of the firm's revenue goes down the tubes and most, if not all, is a result of the long delay between rendering that service and collecting for it.
The 2.8 months of unbilled fees results entirely from a combination of inadequate tools and procedures, plus a lack of management discipline and enforcement. In short, you can fix it and it is easy to do. The additional two months it takes to collect the bill can be shortened, but is beyond the total control of the firm. However, one of the things a firm must understand is that if you are going to take almost three months before you bill your client, that client is not going to have a sense of urgency about paying the bill.
Speeding up payment starts with faster billing, followed by implementing procedures that create a sense of urgency for payment.
Don’t wait for bills to become past due. Have a member of the administrative staff call and confirm receipt of the bill. The engagement letter should clearly set out payment terms and provide that payment does not waive the client’s right to dispute charges later.
Invest in the right tools. Collection software will track all collection activity between the firm and its clients. That software will let you know when payment promises have not been kept. When integrated with your client accounting system, collection software will automate dunning communications, lowering cost as well as shortening collection time.
Related posts
Filed under Cash Flow Issues by Tom Collins
Leave a Comment