How a Practice Plans to Attain Profitability

by Joel A. Rose
 

Once lawyers join forces, good management practices in a law firm cannot be achieved unless the privileges, obligations and responsibilities of all its members are established and agree upon.  Effective management begins with organization.  For a law firm, organization begins with identifying a managing partner who may functions as a chief executive officer, an executive committee that may serve as a board of directors or a representative committee system that receives direction from the managing partner or the executive committee.

The need to make distinctions among ownership, management and professional practice becomes readily apparent as a firm grows.  Generally, two types of rights and responsibilities are involved in a partnership form of organization.  The first kind are those arising from the partnership agreement and are proprietary in nature. The second kind arises from the method of firm governance that includes functional responsibilities of certain partners for managing the day-to-day and long-range planning activities and substantive areas of practice.  In addition, attorneys must be willing to subordinate some degree of control to designated individuals for the satisfactory operation and ultimate good of the firm. 

Many lawyers are less proficient in managing their own firms than they are in serving their clients, because of the organizational nature of the partnership form of business.  Law firms, organized as partnerships or structured as professional corporations that function as partnerships, may enjoy financial success and growth because of the close association between the client and one or more of the partners who bind the firm to that client.  Although the partnership type of organization may be effective for maintaining client relationships, it frequently fails to clarify the differences between the equity position of attorneys and the organizational structure and management obligations of partners.

For this reason, a relatively loose organization involving a purely democratic relationship, although desirable, is often not practical for handling many of the firm’s internal affairs and for assuring the desired growth and profitability.  The firm’s structure must be formalized, and key individuals must be willing to assume responsibility for its functioning.

What happens when the economics of the practice are less than ideal and there simply is not enough to go around?  The lawyers begin to feel frustrated and thwarted in achieving their objectives because of what they perceive as the absence of sound management and administration of their firms.  The firm management may at this point begin to examine more closely the “business” side of running the practice.

While both are aiming in the right direction to pinpoint the source of the problem, they may want to keep one critical point in mind.  Many of the administrative and financial problems are of the attorneys’ own creation.  Too often, attorneys are willing to relegate the business affairs of their law firms to the bottom of the pile.  They pride themselves on being so busy with client matters that they simply do not have the time to look after their own administrative and financial affairs.  This kind of benign neglect may have serious consequences.  Generally, the symptoms of less than adequate planning and management are traced to: setting objectives, use of staff and budgeting for expenditures.

Every firm that strives to be profitable must make the effort to formulate, identify and express its objectives in terms of revenue, size, management structure, type of practice and staffing, among other things.  This means answering difficult questions: Which areas of the practice should be retained or reduced?  Which attorneys can and will contribute to the firm’s objectives?  What should the firm do to attract more business and enhance its reputation?  What causes difficulties with clients?  Are any partners directly responsible?  How can these partners be weaned from the relationships without the risk of losing the client?  Are the department heads actively involved in managing the practice areas or is their function merely titular?

The answers to such questions are essential in formulating a plan that provides direction and is compatible with the personal, professional and economic objectives of the partners.  The point of defining objectives is to ensure that maximum effectiveness can be achieved in day-to-day operations.

Professional Staff:

A firm’s success in providing quality legal services effectively and timely is directly related to its ability to manage and control its lawyer personnel.  Management must be willing to ensure that firm members accept their responsibilities and satisfy their obligations to manage administrative and practice areas.  This means management must actively recommend policy and maintain adequate control over such areas as recruitment, training and career development of associates; staffing of practice areas; allocation of work; assuring adequate administrative support; developing an associate evaluation program; using paralegals and law clerks; establishing criteria for partnership; developing a compensation plan and benefits program, and assuring adequate communications.

A law firm’s profits are fundamentally linked to its ability to successfully use professional personnel.  If leadership slackens and management is perceived as lacking direction and the necessary skills to be effective, the result will be little or no organization and the effort will ultimately fail.  Most attorneys will readily subordinate their independence for the benefit of the firm, if they see tangible evidence of management’s effort to meet their objectives.  The benefits are obviously mutual.

Budgeting:

Management of financial affairs begins with careful monitoring of the firm’s past and present activities and establishing projections.  This involves reviewing current and potential monetary aspects of each client matter.  In addition, a systematic review of receipts, disbursements and productivity data will help in making decisions that will assist the firm in formulating and achieving practical objectives.  Most firms routinely develop projections for financial goals for the year ahead.

To develop the information necessary to establish the budget, the firm may have to look long and objectively at itself to determine if current volume of business will generate enough income to meet the partners’ expectations and pay operating expenses.  A firm must maintain a volume sufficient to fully use the time of its attorneys.  The most efficient system will not result in satisfactory net income unless the volume and value of matters if plentiful.  Adequate financial planning includes consideration of the firm’s current client base, its billing and collection procedures and specific method for managing the firm’s finances.

Efficient and effective management involves overseeing such matters as the day-to-day activities of the accounting staff; advising on the firm’s capital requirements, and annual budget and fee policies; assessing the results against the budget; developing fee policies for various practice areas; determining controls over billing performance including profitability; unbilled time and costs, receivables, delinquencies and write-offs.

One other critical aspect of financial planning involves maintaining adequate controls over costs.  Management must persist in tracking overhead costs.  Generally, overhead rises more rapidly than revenue.  The increases may be warranted, however, and are most often assessed by seeing if the overhead charges support the partners in their efforts to provide a satisfactory net income.

Regardless of the size of the office, overhead should be controlled by a budget for each type of expense.  This means developing a budget for such items as nonlawyer employment costs, occupancy costs, library, equipment and other direct and indirect costs.  This budget should be established as part of the annual financial plan and should represent the total expenses required to support the expected level of revenue-producing activities.

©1999-2017 Joel A. Rose & Associates