A Plan for Your Firm to Grow On
by Joel A. Rose
Over the past decade, the advantages of group practice have significantly contributed to the increase in the number of lateral hires and the joining together of groups of attorneys in general practice and specialty law firms.
Without regard to the actual size of the firm, any level of growth poses inherent problems involving the management of the individual lawyers, facilities and resources. The attorney in the smaller firm may keep informed about the firm's activities by personal observation and involvement, while his or her counterpart in the larger organization may rely more on the official lines of communication. Each of these attorneys will be adequately served so long as some formalization of the management processes has been imposed to ensure adequate control over all of the firm's affairs.
Once two groups of lawyers join forces, good management practices cannot be achieved unless the privileges, obligations and responsibilities of all the firm's members are established and agreed upon.
RIGHTS AND RESPONSIBILITIES IN A PARTNERSHIP
The need to make distinctions between ownership, management and professional practice becomes apparent as a firm increases in size. Generally, there are two types of rights and responsibilities involved in a partnership form of organization. The first arise from the partnership agreement, those that are proprietary in nature. The second arises from the method of firm governance, including responsibilities of certain partners for managing the day-to-day, 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 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 oftentimes 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 leadership and responsibility for its functioning.
WHEN FIRM ECONOMICS ARE LESS THAN IDEAL
What happens when the economics of the practice are less than ideal and there simply isn't enough to go around? The lawyers begin to feel frustrated and thwarted in achieving their personal and professional 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 the practice.
While both are aiming in the right direction in an effort to pinpoint the source of the problem, they may want to keep one critical point in mind: Many of the administrative and financial problems experienced by law firms 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 don't have the time to look after their own administrative and financial affairs. This "benign neglect" may result in serious consequences. Generally, the symptoms of less-than-adequate planning and management are readily traced to the following areas: setting objectives, utilization of staff and budgeting for revenue and expenditures.
Every firm that strives to be profitable must make the effort to formulate, identify and express its objectives in terms of revenue, firm size, management structure, type of practice, staffing, etc. This means answering what may be some difficult questions, such as:
(1) Which areas of the practice should be retained or reduced?
(2) Which attorneys are able and willing to contribute to the firm's objectives?
(3) What should the firm be doing to attract more business and enhance its reputation?
(4) What are the sources of difficulties with clients and why?
(5) Are the department heads actively involved in managing the practice areas, or is their function merely titular?
The answers to these questions are essential in formulating a plan that provides direction and must be compatible with the personal, professional and economic objectives of the partners. The point of defining and establishing objectives is to ensure that maximum effectiveness can be achieved in the day-to-day operations of the firm.
TO ENSURE MAXIMUM EFFECTIVENESS
A firm's success in providing quality legal services in an effective manner is directly related to its ability to manage and control its lawyer personnel. Firm management must be willing to ensure that its members accept their responsibilities and satisfy their obligations for the management of administrative and practice areas. This means management must assume a proactive role for recommending policy and maintaining adequate control over such activities as recruitment, training and career development of associates; staffing of the firm's practice areas; allocation of work to attorneys; assuring adequate administrative support; developing an associate evaluation program; utilization of paralegals and law clerks; establishing criteria for admission to partnership; developing a compensation plan and benefits program; assuring adequate communications among partners and associates, etc.
A law firm's profits are fundamentally linked to its ability to successfully utilize its professional personnel. If there is a slackening in leadership, and firm management is perceived as lacking the direction and 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 of mutual advantage.
Management of the firm's finances begins with careful monitoring of its past and present activities and establishing revenue and expense projections for the future. This involves reviewing the current and potential monetary aspect of each attorney and client matter. In addition, a systematic review of receipts, disbursements and productivity data will enable the firm to make decisions that will assist it in formulating and ultimately 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 be required to take a long and objective look at itself to determine whether its present volume of business will generate sufficient income to meet the partners' expectations and pay all the operating expenses. A firm must maintain a volume sufficient to fully utilize the time of its attorneys. The most efficient system will not result in a satisfactory net income unless the volume and value of the work is plentiful.
Adequate financial planning includes consideration of the firm's 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, write-offs, etc.
One other critical aspect of financial planning involves maintaining adequate controls over costs. Management must be persistent in tracking overhead costs. Generally, overhead rises more rapidly than revenue. The increase may be warranted, however, and is most often assessed by determining whether the overhead charges serve the partners in supporting their efforts to provide a satisfactory net income. Regardless of the size of the office, overhead should be controlled by means of 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.
Systems and controls do not give you results in and of themselves. The danger to be avoided is to hamstring the life of a firm's daily practice with the kind of financial systems and controls that create unnecessarily burdensome obstacles to the servicing of client matters in a timely manner, and make little sense to anyone other than the individual who created the system.
The true measure of leadership of the lawyer managers in today's law firm is the ability to maintain a careful balance between the need to: (1) encourage each lawyer's individual initiative; (2) provide for the much-needed atmosphere of professional camaraderie so typical in the partnership type of law practice; and (3) plan and implement the financial tools of modern business, without which the best practice can fail.
©1999-2017 Joel A. Rose & Associates