WHAT LAWYER MANAGERS SHOULD DO WHEN FIRM ECONOMICS ARE LESS THAN IDEAL

by Joel A. Rose
 

What happens when the economics of the practice are less than ideal and there simply isn’t enough money to go around?  It is not unusual for partners to feel frustrated and thwarted in achieving their personal and professional objectives.  Many partners may attribute the firm’s financial problems to what they perceive as the absence of sound management of their firm.  As the result, lawyer managers may at this point begin to examine more closely their role on the “business” side of the firm’s practice.

While both the partners and the lawyer managers may be 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 financial problems experienced by law firms are of the attorneys’ own creation.

After many years consulting with partners to improve their firms’ management processes and enhance firm revenue and distributable dollars available for partners, it has been my experience that the cause of many firms’ financial problems lies in the very nature of the successful partner. He or she may know their respective field(s) of expertise and be respected and consulted by their clients. They perceive their prime mission as an attorney to be of service to their clients and may have difficulty meeting all of the demands on their time. Too often, busy partners are willing to relegate the business affairs of their law firms to the bottom of the pile.  When this attitude is coupled with the tendency of some partners to consider the firm’s administrative systems and procedures, including setting revenue and expense budgets, billing and collecting fees and expenses, etc., necessary evils, a situation results which may lead to neglect of the business affairs of their own firm.

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: not setting objectives, under-utilization of lawyers, lack of appropriate budgeting for revenue and expenditures and the absence of accountability of the lawyers.

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 profitable business and enhance its reputation?

(4)       What are the sources of difficulties with clients and why?

(6)       Are the partners actively involved in managing the firm’s business and substantive sides of the practice willing and able to manage or do they perceive 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 and longer term objectives of the firm.

To Ensure Maximum Effectiveness

A firm’s success in providing quality legal services in an effective and profitable manner is directly related to its ability to manage its lawyer personnel.  Firm managers must be willing to manage the firm, hold partners accountable for their actions or inactions and ensure that partners accept their responsibilities and satisfy their obligations to perform those fee-producing and non-fee-producing activities to progress the firm. This means managers must assume a proactive role for recommending and implementing policy, 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; practice development, the financial well-being of the firm, 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 partners and associates. If there is a slackening in leadership and firm management is perceived as lacking direction and the necessary skills to be effective, the result will be
lower revenue and less distributable dollars for the partners.

It has been my experience that most attorneys will be willing to subordinate their independence and autonomy, to some extent, 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.

Financial Planning

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 present 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 revenue and expense budgets, the lawyer managers may be required to take a long and objective look at the firm’s financial performance to determine whether its current volume of business will generate sufficient income to meet the partners’ expectations and pay their firm’s operating expenses.  A firm must maintain a volume of business 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 sufficient.

Adequate financial planning includes consideration of the firm’s present 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 area; 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 control over costs. Management must be persistent in tracking overhead costs.  Generally, overhead rises more rapidly than revenue.  The increase may be warranted, however, and are most often assessed by determining whether the overhead supports their efforts to provide a satisfactory net income.  Regardless of the size of the firm, overhead should be controlled by means of a budget for such items as non-lawyer employment costs, occupancy costs, marketing, library, equipment and other direct and indirect costs, etc.  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.

Increase Marketing Efforts

Today, when a firm’s important clients are being targeted by other law firms, marketing efforts assume greater importance.  A firm’s marketing activities should be coordinated by a marketing committee/partner, rather than implemented in an ad hoc manner.

Partners should be accountable to the committee for their business development efforts.  Personal marketing plans should be developed by those attorneys who have demonstrated the potential to generate new clients or to proliferate work from existing clients.  Variable hourly budgets of time and out-of-pocket costs devoted to business development activities by these attorneys should be recommended.  Their billable and marketing goals must be adjusted accordingly.

Ideally, the marketing committee should develop and implement marketing strategies that call for client development programs that may result in one-third of the firm’s clients using at least two of the firm’s services.  Selected partners should meet with clients having significant potential for additional fees, either through growth of their own operations or their ability to refer business.

Opportunities for cross-selling of legal services to clients should be pursued to further “bond” the client to the firm. To accomplish this, partners must understand a client’s business as well as its legal needs.  Partners must review with appropriate lawyers what is involved in cross-selling their legal services.  Introductions of appropriate client executives to appropriate lawyers should be arranged.

Partners should meet with clients periodically to determine their legal needs.  They should survey their clients to measure client perceptions of the firm, determine the client’s expansion or contraction in particular areas, specify work in practice areas needed to be performed by the client, and determine other areas of legal work the client might use if the firm had the expertise.  Also, the lawyer managers and the marketing committee must be willing to address the issue of planning the orderly transition of clients from senior partners to other members of the firm.

Partner Accountability

Each partner should be expected to produce working attorney revenue, on a yearly basis, in an amount that would cover their compensation plus allocated overhead and an added profit factor.

Lawyer managers must be prepared to cope in a straightforward manner with those partners who are unwilling or unable to comply with the firm’s policies, initiatives and directives designed  to increase firm revenue.

With the agreement of the partners, lawyer managers must administer consequences and not be willing to sit by and allow these recalcitrant partners to take advantage of the firm or others.

The complexities of life when there is not enough money to go around require a firm to have appropriate leadership if it wishes to deal with the professional, financial and personal challenges presented by the partners.

©1999-2017 Joel A. Rose & Associates