An appraisal of prior year’s performance and planning tool for next year

by Joel A. Rose

As the year draws to an end many of the more enlightened managing partners and members of the executive committee assess the results of the current year and begin to develop plans for the coming year.

One management tool that we recommend in the course of our consulting with law firms is the preparation of an annual report that might be considered as “The State of the Firm.”

This report would provide an appraisal of prior years and planning for the coming period.  We suggest that this report should be distributed to the partners at least two to three weeks before the firm’s annual meeting or retreat.  While the preparatory work involved in collecting and presenting the information can be rather time-consuming, the ultimate success of the firm is directly proportional to the amount of time and preparation involved in the identification and resolution of firm problems on an ongoing basis.  Without the basic information suggested in this report, the firm’s ability to resolve basic problems will be limited, and its future in doubt.

The report should be organized into five broad categories, namely: (1) Firm economics; (2) Areas of legal work; (3) Personnel and office administration; (4) Firm facilities and equipment; and (5) Conclusion, which should include personal observations of the executive committee and the managing partner regarding the year’s activities and thoughts for the future.

1.       Firm Economics:
Economic measures are appropriate objective gauges of an organization’s operations.  Graphic presentation should be used if practical.  Some indication of the “real dollars” in inflationary or deflationary economics should be made.

Gross: The firm’s gross fees should be stated and compared to five previous years from the standpoint of dollars and yearly percentages of growth (or decrease) over prior years.  The gross income per lawyer, as a benchmark figure, should be stated.

Net:  The net income of the firm and net income per partner should be stated.  The average dollar increase for each active partner over the five previous years should be indicated.

Sources of Income:  A five-year running analysis (by categories of major billing dollar values) of the firm’s sources of income should show whether a substantial percentage of its gross fees come from a certain number of repeat clients and from certain fields of law or special situations, with comments on trends that seem to be developing.

Budgets and Variances: A brief explanation should be included of the actual income and significant expenses for the fiscal year and significant deviations from the budgeted income and expenses for the year and the actual expenses for previous years.

Use of Time: An overall review of the billable and nonbillable activities of lawyers, legal assistants and law clerks of the firm and recommendations for the most effective use of time and persons in their work should be made.

Fees: The report should provide the past year’s fees per hour for lawyers, legal assistants and law clerks, and the fees per hour to be used in the current year.  Facts should be provided with regard to the types of work in which the firm is engaged and the techniques to be used in setting fees for such work, including a discussion on what is profitable and what is not.

Billing, Collection of Fees and Cash Flow: Comment should be made on the effectiveness of the monthly control over cash flow, including current and overdue billing and collection of fees and costs, unbilled inventory and write-offs, and suggestions for improvement.

Capital: The report should explain various capital needs and improvements made during the fiscal year, itemizing expenditures for leasehold improvements, furniture and equipment and the like, and provide comments on the value of capital interests and the need for future capital.

Cost Control: Mention should be made of new procedures and controls or other improved business-like operations.

Future Planning: Future planning to the extent practical should be provided for a three year period where feasible.  In some cases, only a current year projection may appear to be practical.  However, the firm may need long-range guesstimates for staffing, so that this can be translated into space needs or other plans.  If office expansion is contemplated, the on-stream costs for a specific future period should be stated and income estimates attempted.

When possible, the future should be quantified in terms of a forecast even if changes may have to be made.  Yours is a risk-taking enterprise.  You won’t be able to avoid errors of judgment or events that cannot be predicted, but the practice requires making businesslike decisions such as expansion in some areas and contraction in others.

Thus, it is suggested that the annual report should include forecasts for a year ahead objective and a hoped for two or three years’ goal(s).   It is recognized that while no one can accurately foresee the future, nevertheless, concepts set forth in the form of a plan can aid greatly in achieving firm goals.  The forecast should include a projection for dollars as well as for human resources.

The forecast should be subject to quarterly review, and revision whenever it becomes apparent that this is required.  New major client situations may require new planning without waiting for a quarterly review.

In regard to the planning for the ratio of partners to associates, some larger firms may have a one partner to two or three, or greater associate ratio as a target.  Some firms may have a one to one ratio.  The more important goal is maintaining your economic objectives at a level similar to local firms comparable to yours in size and character.

2.       Areas of Legal Work

This section of the report should derive from separate reports submitted by, or prepared under the supervision of the managing partner with, the heads of various areas of your practice.  It should address expansion or contraction, new areas developed during the year and new fields contemplated.  The gross income and number of cases in each major field of law and the average rate per hour should be discussed.  Problems affecting the firm’s inability to provide efficient and timely performance of legal services should also be included.

Major Clients: The record of performance for prior years and the current year for major clients and steps taken to provide adequate representation and promptness of service should be discussed.  The profitability of these efforts should be reviewed.

Business Development, Civic and Charitable Activities: The time devoted to these activities and their impact on the firm’s work should be analyzed.  The report should review important linkages made during the past fiscal year with respect to arrangements with lawyers in other firms and cities.

Bar Association and Continuing Legal Education: Activities performed and contemplated, including continuing legal education should be a matter of comment.

3.       Personnel and Administration

Legal Staff: The report should note the number of lawyers and legal assistants with the firm at the beginning of the fiscal year and the number at the end, and the use of law clerks.  It should compare those figures with previous years.  Changes in specialty composition should also be described.  It should discuss who has left and why they have left - is this good or bad?  It should discuss plans for staff additions and departments.

Office Administration: The report should include a review of current and anticipated problems affecting office personnel policy and systems for preparing, identifying and retrieving files, time and financial reporting, accounting systems and billing.

Secretarial and Other Support Personnel: The number and quality of nonprofessional employees in various categories at the end of the year should be noted, and ratios and trends discussed.  Turnover should be a matter of comment - good, bad or average.  Staff morale and the accomplishments of non-lawyer personnel should also be treated.

Compensation: The firm’s decision with regard to revising lawyer and nonprofessional staff compensation policy should be noted.

Firm Organization: Organizational and other matters, such as retirement, withdrawal, disability or deaths should be noted.  Insurance coverage should be described.

4.       Firm Facilities and Equipment

Library and Research: An assessment should be made of the organization and adequacy of the library, standardized forms and file or prior efforts.  The quality of research should be a matter of comment.

Effective Utilization of Space: Comments should be provided on the firm’s physical needs during the year and for the coming period, along with the most effective use of new space.

New Systems and Technology for Word and Data Processing, Practice Support and Telecommunications: An assessment should be made of the efficient operation of office equipment in terms of providing attorney assistance, administrative support and management information.

5.       Conclusion

The report should conclude with personal observations of the year’s activities and thoughts for the future. Ample opportunity should be taken for creative thinking, review of strong points and mistakes.

©1999-2015 Joel A. Rose & Associates