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How to run a legal practice AND sleep at night (June 2012)

Some business planning suggestions that will underpin your marketing plans

In recent years many law firms have endured difficult business conditions. In addition to the economic slow-down the profession has experienced more awareness about legal fees and certainly firms are becoming more competitive.

There is no single model that will ensure you have a successful firm with healthy profits. Your firm does not have to be big to be profitable nor does it need to be “over” busy.  A busy firm can be poorly run with little or insufficient management structure to support it.

Whilst it a good business move to have a marketing plan and to pursue the marketing journey, it is essential that the marketing is not wasted. It is no good to have the work coming in the door, only to find that you cannot service it properly or your firm is overwhelmed with costly systematic or administrative flaws that are preventable.

The key is to introduce good workable management systems and manage them thoroughly ̶ that will make the firm profitable and enable it to continue on that path.
Below common management issues are addressed along with practical suggestions to consider in addressing them. Sort these issues out and the managing partner is guaranteed to sleep at night.

Are your firm budgets properly calculated?

Gone are the days when partners just add 10% to last year’s revenue and expenditure to establish the budget levels for the coming financial year.  Usually partners dwell on watching the expenditure outlays only to ignore the untapped income capacity the firm could deliver if it had proper management structures in place.

As far as expenditure is concerned the largest component is labour.  Ensure that you have the right people in place and that they are fully resourced and trained.  If you don’t have the right people take steps to remedy that.  We strongly subscribe to the “hire for attitude and train for skill” approach.  If your staff have the right attitude but need more training then address that. We make the point here simply because this is where these decisions have an impact. 

We recommend planning the expenditure and revenue budgets on spread sheets that capture every detail, line by line, to provide detailed insight into the financial position of the firm.   We recommend that all firm members time record and that all the variables be set out in this spread sheet for the entire year. It is a big document but it needs to be, because it is the detail that enables you to draw confidence that the budget is logical, accurate and workable.

In the revenue budget you need to set out the budgets for all the fee earners and we recommend every staff member is included as well. You need to calculate the number of working days in the year for each one, less annual leave then apply each and every firm members hourly charge rate. This is multiplied by the number of client hours to be targeted every day. This produces a high client time annual figure which then should be discounted to allow for the realisation rate. So you may apply say 85% to the “high” figure, thus producing an annual figure.  Divide that by 12 and you have your monthly fee target for the firm as a whole.

Sometimes partners and employed staff are daunted by the size of these figures because they can be significantly higher than previous budgets.  But this may only be the case because the budget wasn’t calculated this way before and may have been masking an under-performing regime.

If you have not been properly time recording leading up to this new budget there will need to be an allowance in the monthly fee income figures for several months to gradually rise up to the proper levels.   You will be able to see how that is tracking in advance of billings by checking on work in progress produced month to month (and by applying the agreed realisation rate).

What is being measured?

With the coming year’s budget locked in you have agreement with each staff member about the budget as well as a discussion concerning their remuneration (and any bonus or incentive). You now need to monitor it.

Certainly, you need to monitor the fees billed each month but this can hide an employee’s hard work because he happens to work on files he is not able to currently invoice.  For example, in personal injury work the invoice is normally sent at the end of the case.  You, therefore, need to check that the solicitor is time recording properly and after checking the time sheets you are satisfied there is no “padding”.

So even if a person’s billings are not meeting targets there may be no problem as it may just be a timing issue.   Cases not reached, or adjourned for example, can add to this issue. (Although cases being adjourned may suggest inefficiencies or a lack of attention to detail by the practitioner, which is another issue altogether and should be checked). This can be checked by looking at WIP created in the month (or even the file/s).

Another consideration is for the new employee just building on his work in progress.  This takes a few months to build and plateau so an allowance needs to be made for that. You will need to make a judgement call on what the fee targets should be for the first few months and this will depend on the nature of the work, how quickly it can be invoiced and so on. Essentially for new employees there needs to be a gradual upswing to “normal” levels and this may take several months. But once there they should remain at those levels. 

Other elements that should be checked are debtor collection and disbursements spent during the month.  This will ascertain whether the fees are being chased properly or if collections are not happening because many of the invoices come as such a surprise to the clients that they are disputed. This suggests a clear communication issue about fee discussion or about the solicitor’s failure to even ask for funds into trust in advance.  He could be brilliant at time recording and invoicing but might cost you thousands each month in disbursements because of this.  It also has an adverse impact on the firm’s overdraft and adds to the costs of running an overdraft.

So from a management perspective, the staff need to know what the firm’s policies are concerning disbursements and asking for funds to be placed into trust in advance, before the firm’s money is spent; how they are to communicate fees and disbursements to clients up front, how to properly disclose them so there are no surprises (this is an ongoing issue for litigious matters); and what is expected in terms of debtor days with regard to collection.  Importantly, are your staff members properly trained in how to collect money from clients?  There are simple techniques here as well and none involve raised voices.

All this should be laid out in writing so there is no doubt as far as the staff are concerned. (Tip: It is not usually the employees here who are at fault).

Does everyone time record?

Your firm needs to make a decision about time recording.  So should everyone do it? And if everyone does time record then does everyone have a fee budget?
Whatever is decided it must be fair across the firm.  This can be a fantastic KPI measure and many people can be incentivised to perform fee generation beyond your wildest dreams (and we mean proper time recording not any inflated time that will only lead to trouble).  But your system has to have integrity and people have to honestly believe it measures their performance fairly and not have a skewed result.

Consider this: Solicitor A with 3 Conveyancing clerks in his team who don’t time record might all together generate fees of say $150k x 3 = $450k pa. In contrast to that, solicitor B in a different area might not have any support staff and if he was to generate an average of 7 hours per day x 230 days a year and has a charge out rate of $250/hr results in $1,750 per day. Then $1,750 x 230 = $402k. Less realisation at say 85%= $342k.

Yet in the eyes of some (usually solicitor A for starters), solicitor A is the “more valuable” staff member because his area brought in more fees.  This is rubbish of course and on the above figures Solicitor A would be doing hardly any effective client time at all, let alone “pulling his weight”.

In our experience whatever system you use to calculate the effort or contribution made by everyone at the firm, the system must be transparent and fair to everyone. People can spot unfairness a mile away; not addressing it doesn’t solve the problem it just delays it.  And the longer a problem remains unaddressed the bigger it becomes and the harder it is to resolve.

This is the harsh reality.  Whatever you do as a partnership has to be on a business basis otherwise it is the business that will suffer. If in the circumstances above, solicitor B leaves the firm, you can understand why. If these systems were not changed his replacements C, D and E probably will leave, too.  B doesn’t even get any recognition in his own firm for working his heart out at a low hourly rate, when solicitor A’s effort is probably next to meaningless.

We believe there are compelling reasons to time record everyone’s time. This is so even if you provide a fixed fee service.  By time recording (rather than time costing) at least you have a measure that determines how accurate your fixed fee calculation was or is as well as being more fully informed. Remember you can be a busy firm and not make a profit.
These might be hard issues to tackle and may make some people squeamish but once tackled the business of managing the firm becomes easier because everyone knows where the firm’s management stands and, importantly, the partners or directors have actually had these important discussions which are essential for a firm to be run properly.

Are staff members given KPIs and how are they determined and measured?

The risk of course is that if you are hiring for attitude and running a team-oriented business, staff members will be disillusioned if their KPIs are not taken seriously by management. Management has to ensure the employee knows what the KPIs are and the targets are agreed; target which are real and achievable. We are in a new world and a different era and accountability works both ways for every firm member.

Picture this: you are in the middle of a paddock and your boss tells you “run” so you do.  He doesn’t say where you are running to or how fast to run and what the purpose is, he just says “run”.  This is what life is like for those poor staff members who do not have proper KPIs in place with effective management communication systems. 
Contrast that to a staff member who is involved in pre-budget discussions with his employer so there is an understanding about time recording budgets and what fees should be attained in the coming year.  Once that is agreed and their salary is agreed, it is locked and loaded.  You are then able to have a proper business discussion about performance in specific detail.

How should the staff member and managing partner communicate during the year about his performance?  Well it should be monthly at least, there is no point telling anyone that their performance has been appalling for the past 8 months. Just think how much loss in potential fees that is.  It is best to have the KPIs in a simple and clear one pager for the employee to see and retain.  Preferably it should track performance on a year-to-date basis so trends are visible.  We have such documents that provide a Dashboard Indicator for both the staff as well as for the firm.

Set all this up and there is no ambiguity which benefits both parties.  Then if the employee excels and easily achieves budget for the year, he is entitled to a good bonus. He knows it and so do you. Conversely, if he is not measuring up he knows that just as you do.

And now for the marketing…

Now that the systems are in place and the staff aware of all their targets, it is just a matter of the work being done efficiently.  Now what work is available? Underutilised lawyers never achieve benchmark performance. So let’s get the marketing done ̶ we have a plan for that right?