Forecasting Attorney Revenue
8:17 pm December 29, 2008 by Brian J. Ritchey · Leave a Comment
Forecasting is important for law firms so that they are not found “accidentally” out of business. There are tools available, perhaps within your own organization, that are more than capable of helping you forecast attorney revenue. However, some tools are better than others at showing the results.
Below is a graphic showing attorney monthly productivity, any variance from the budget and the attorney contribution percentage. Clicking on any of the attorney initals changes the data to show the chosen attorney’s productivity numbers. (You must have the free Adobe Flash Player to view. You may download it by clicking here).
Graphical dashboards such as the one below provides an easy way for managers to stay informed as to the critical performance drivers of the firm without having to pore over rows of data. This, in turn, makes the information more actionable and thereby helps focus the firm on reaching its goals.
Feel free to click on any of the sample attorney initials below to see the data change. If you would like more information on how you can have dashboards like the one below implemented in your firm, please feel free to email me or call 205.588.4OCC (4622).
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All Bets Off - Massive Deflation And Fed Still Lowers Rates
12:00 am December 17, 2008 by Brian J. Ritchey · Leave a Comment
All the ingredients are coming together for protracted, painful and seriously impaired economic conditions. As stated in an earlier post, a deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow. It appears we are in the midst of one. Consumer prices, after a record decline in October, set another record in November, pushing inflation down to 1.07%. After a year that saw inflation hitting almost 6% in July, this is a painful indicator of things to come. In spite of OPEC’s threat to drastically cut production, oil prices are still relatively low.
Worse, the Federal Reserve appears to be acting counter-intuitively by lowering interest rates to “zero to .25%“, leading to speculation that once our economy does rebound, hyperinflation will be the next crisis. It doesn’t help that our government continues to spend money it doesn’t have.
On top of all this, President-Elect Obama announced that his “stimulus plan” will be somewhere between $600 billion and $1 trillion. The spending spree never ends.
The time to voluntarily liquidate assets has passed. Foreclosures dipped in November, but few expect that trend to be anything but temporary in spite of Fanny Mae’s Christmas gift to renters of homes in foreclosure proceedings. Best to hold on to assets and try to keep as much cash on hand as possible.
We can hope that the aggressive moves by the Federal Government will prevent another depression, but it sure seems like we are about to embark on the same policies of the Roosevelt administration that arguably kept the country in a depression for an entire decade. One of the proponents of further governmental intervention is oddly a scholar of the Great Depression. Fed Chairman Ben Bernanke believes that the cause of the Great Depression was the lack of action by the Hoover administration to stop banks from failing and by keeping interest rates too high. In Bernanke’s mind, it was Hoover’s inaction that caused the depression, not Roosevelt’s activism.
There are (at least) two arguments as to what caused the Great Depression. One argument postulated by Irving Fisher and furthered by Bernanke states that debt deflation caused the Great Depression and, in at least Bernanke’s case, government inaction during the 3 1/2 years between the stock market crash of 1929 and the swearing in of Franklin Roosevelt caused productivity to become depressed and unable to recover in spite of FDR’s programs for an entire decade.
Fisher was not exactly on target with his arguments in his lifetime (from wikipedia):
The stock market crash of 1929 and the subsequent Great Depression cost Fisher much of his personal wealth and academic reputation. He famously predicted, a few days before the Stock Market Crash of 1929, “Stock prices have reached what looks like a permanently high plateau.” Irving Fisher stated on October 21st that the market was “only shaking out of the lunatic fringe” and went on to explain why he felt the prices still had not caught up with their real value and should go much higher. On Wednesday, October 23rd, he announced in a banker’s meeting “security values in most instances were not inflated.” For months after the Crash, he continued to assure investors that a recovery was just around the corner.
Once the Great Depression was unavoidable to notice, he theorized that debt deflation was a major cause - debt deflation that could have been avoided (according to some) had the Hoover administration taken more aggressive steps to intercede.
The other argument is that it wasn’t Hoover’s inaction that led to the Depression but the Smoot-Hawley Act of 1930, which raised tariffs on goods sold to trading partners and led reciprocal action, skyrocketing unemployment and global isolationism. 
Those who would argue this would point that both low interest rates and ample liquidity were available in 1930, but that due to economic uncertainty, few wanted to borrow and take risks. Further, FDR prevented the economy from pulling itself out of the depression by overly taxing the population (specifically the producers) and redistributing wealth using a “trickle-up” philosophy of using government to employ the people. Even with FDR’s policies, unemployment was still over 19% in 1938.
You can argue both arguments are right and wrong. It is plausible that at least having a Federal Reserve that would have released funds to troubled banks could have avoided the panic that led to over 9,000 banks failing in the 1930’s. However, there is ample evidence that government intervention did more to exacerbate the Depression than remedy it. The primary force that led us back to economic expansion was the Second World War.
Unfortunately for Bernanke, debt deflation is intensifying in spite of his actions to improve liquidity. What may come from all these measures, however, could spur the same depressed conditions that he is trying so hard to avoid. If liquidity does improve, even moderately, inflation will be a large concern. The question will then be whether it would be better to allow inflation to run amok or to raise interest rates and threaten the improving economy.
One thing I feel relatively certain in predicting: so long as the government intervenes in the economy, there will not be a lot of certainty in the markets, which will result in further volatility. And, it doesn’t appear the government is planning on taking its hands out of the economy anytime soon.
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False Sense Of Security Still Prevalent Among Law Firms
11:46 pm December 15, 2008 by Brian J. Ritchey · Leave a Comment
In spite of overwhelming evidence that the booming economy enjoyed practically uninterrupted for the past 20 years has ended, at least for the near term, many law firms are still optimistic of their 2009 prospects. I beg to differ. I believe 2009 will start a strong shift in the make-up of many law firms due to the lack of any planning for the economic conditions.
Who can blame attorneys for being optimistic? Regardless of the economy since at least the early 1980’s, lawyers have enjoyed consistently increased business and profits. This has led to a complacency and a denial of the economic conditions that are facing the country.
Law firms aren’t alone. In fact, the “big three” auto makers (Ford perhaps excepted) are acting out of a similar denial as they attempt to scare Congress and the President into paying for their internal problems. Who didn’t see the failure of GM coming? Was no one noticing the extravagant pensions being offered to the employees? Did anyone who dared notice believe the ever slimming margins would cover the ever growing benefits? Not likely. As the Legislative and Executive branches delve deeper into the phantom pockets of our tax base, a nice summary of the fallacy of “avoiding acting like Herbert Hoover” has been inked in an opinion piece by Todd J. Zywicki in the Wall Street Journal.
Law firms, though not nearly in the long-term slide as the domestic auto industry, is more sensitive to this economic downturn than many attorneys would like to admit. Many firms have been spoiled by margins that exceed 50% without spending more than a passing glance at the indicators that led them to such bounty. The issue isn’t so much a drop-off in business, though some firms who specialize in areas that are in the midst of collapse will certainly feel the pain. Rather, the issue is how firms will retain good talent, retain their expected incomes and avoid layoffs of associates.
These are regular issues for most industries but are foreign to the mid-size law firm. Many firms pride themselves in their “family” atmosphere, which includes the bratty sibling rivalries that are tolerated when times are good. Salary incongruousness may seem a bothersome itch when profits are high, but once the deadwood becomes heavy the scratching becomes intolerable. Some may panic to find their balance sheet showing a loss without ever seeing it coming. Drastic change is put into place - at a time no worse to prepare. No more is it wise to visit a market when hungry than to suggest change while in the midst of a spiral.
Yet our economy has afforded all of us time to prepare. It was suggested by many (myself included as far back as March) that our economy was in for some hard times. Firms with the foresight and gumption to plan and hold timekeepers accountable for providing not only quality service to their clients but ensuring prompt billing and payment for the betterment of the long term financial health of the firm are in a position now to profit over the firms who were complacent.
It’s not too late, however. Many firms are just now seeing the first bumps in the road. It is my opinion that the economic downturn is just now really beginning to hit middle America. The massive layoffs (over 533,000 in November) are an indicator that the many months of body blows caused by the collapse of the credit and housing markets (not so unlike what happened in the late 1920’s, speaking of Herbert Hoover) are finally taking its toll. The question now is, where is the bottom?
No one knows. That is a troubling concern that should make you want to hug every dollar your firm receives and not let go of it. In times such as these, power goes to those who hold cash. This may change if our government attempts to over-spend its way out of our economic downturn (thereby devaluing the dollar, leading possibly to hyperinflation combined with stagnant productivity - a prescription for the “d” word), but as of right now, many believe that the economy should rebound sometime in 2010.
In my opinion, firms need to pay more attention to the profitability of each fee earner and place more emphasis on marketing activities and their key profit drivers. Please feel free to email me (by clicking here) if you would like some ideas on how to not only retain your current income, but increase profits during an economic downturn.
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Review of Kensington Slimblade™ Trackball Mouse
12:42 am December 3, 2008 by Brian J. Ritchey · Leave a Comment
Everyone has a favorite mobile mouse; that is, except me. I have tens of them and can’t seem to get comfortable with any of them. One thing all have in common, though, is that they are bluetooth. I hate having to plug something into my USB port to just run a peripheral and already have to do that with my scanner and
presentation remote. I don’t want that with my mouse.
Kensington seems to be moving more and more into the business traveler’s briefcase and with their innovative mice, they look to be establishing a foothold on the market. I have both their Slimblade™ Bluetooth Presentation Mouse and the Trackball Mouse. This review will focus only on the trackball mouse.
First, a little history of my distaste for trackballs. Whenever I had to help someone at their desk and they had one of those large, rounded trackball mice, I winced. I hated having to try to maneuver around the desktop with this clumsy and uncomfortable mass that seemingly required strong middle fingers. I never felt comfortable using them and never really gave one a chance to convince me that there was utility in the idea.
With that prejudice, I did find the concept of this mobile trackball mouse intriguing. The reason is not so much the trackball itself; it is more the functionality possibilities. Kensington didn’t just place a trackball in it - it gave the user the choice of using the trackball as a pointer (regular mouse function) or as a (rounded) wheel to scroll down and across documents. To change the function of the trackball, you need only double-click a button surrounding the ball.
Before I get to how well Kensington delivers on this, I’ll speak to the basic functions of the mouse.
1. Footprint - the mouse is acceptably small (not the smallest and it won’t fit in your outdated PC Card slot as some will but it doesn’t take much space in your bag) and is light as you would expect from any portable peripheral. It uses two AA batteries and has a power-saving mechanism that puts it into sleep mode when your computer is turned off. You can also turn it off by pressing the button surrounding the trackball for 3 seconds.
2. Usability - I read some reviews where users complained about dirt getting into the trackball roller and causing it to lose its trackball function. I haven’t experienced that yet but understand any frustration that this would cause since it doesn’t appear that you can take the trackball mechanism apart to clean it. In my experience with the mouse, the trackball worked flawlessly as did the laser that sits under it for normal mouse function. As a regular mouse, it works well.
Underneath the mouse is a cover that opens and closes around the laser - I assume this is for transit but not sure why it is necessary if the mouse goes into sleep mode. There is also a large (relative to other mice) blue button that is used to pair the mouse to your computer.
The reason why I wanted to review this mouse was to see if the trackball function would allow mobile users to use a mouse in cramped spaces where you didn’t have room to use a traditional mouse. How did the Kensington deliver on this feature?
Pretty well in my opinion. I have found myself using it in chairs and couches, resting the mouse on the arm (or on my lap) and using the trackball as a pointer. Then, when I want to scroll the document, I double-click on the button, wait for the short delay, then scroll. When I am ready to use as a mouse again, I double click again.
Granted, this took some getting used to. At first I found myself trying to will the mouse into behaving the way I was thinking. However, after some mental training on my part, I became pretty adept at utilizing the mouse as intended. It literally allowed me to use the trackball both to scroll documents and as a pointer without moving my hand.
The only drawback goes back to my distaste for trackballs. To me they have always been inelegant and take too much effort to use with any precision. In this regard, I have to admit that with practice, the trackball can be pretty precise and without much effort. It is really just an issue of training yourself to work with your finger rather than your wrist.
I can happily say that the Kensington Slimblade™ Trackball Mouse was a good purchase that will be the only mouse in my laptop case for a long time as long as it functions properly.
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Consumer Price Index Plunges In October
1:50 am November 20, 2008 by Brian J. Ritchey · Leave a Comment
The consumer price index plunged “by the largest amount in the past 61 years” in October. This may be an indicator of a very deep recession, if not a depression.
A depression is characterized in part by a persistent, sustained, deep, general decline in production. They are typically preceded by a deflationary crash. A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow.
Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:
In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:
(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.
(f) Credit is credit, whether non-self-liquidating or self-liquidating.
(g) Deflation of non-self-liquidating credit usually produces the greater slumps.Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan - for business start-up or expansion, for example - generates the financial return that makes repayment possible. The full transaction adds value to the economy.
Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income. Contrary to nearly ubiquitous belief, such lending is almost always counter-productive; it adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value to the economy; if someone wants a new SUV to consume, then a loan to buy it does not add value to the economy. Advocates claim that such loans “stimulate production,” but they ignore the cost of the required debt service, which burdens production. They also ignore the subtle deterioration in the quality of spending choices due to the shift of buying power from people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).
Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.
Inflation this year has crept up to a peak in July and has stayed at or near 5% ever since, until October, when it plunged to 3.66%. We all know that the oil prices have been deflationary for the past few months and it appears this is the driving factor in the deflationary prices. I personally haven’t seen prices (other than gas) get lower, especially food.
However, given the above, the question may shift from whether inflation will eat at your bottom line to whether deflation eats away at production and dries up your clients’ ability to pay. Based on the above, the best bet is to hold on to as much money as possible and to the extent you hold assets that are devaluing, consider liquidating to cash. Prepare for lower income for the coming years and offset the loss in revenues by keeping your firm in sound financial condition so that you are better able to help serve your clients without the struggle of wondering how you will pay your employees.
The way to do this is to identify areas you believe will affect your income next year. There are plenty of indicators out there but any prediction is just that. The lower the expectation, the better opportunity to absorb worse conditions.
After you have identified where you will lose and make money, focus on assigning resources towards strategic targets that you believe will improve revenue. Although never a fun endevour, it is time for hard decisions related to re-aligning your staff to optimize your ability to serve your clients during a time when cash flow may be strained.
Implementation must be consistent and applied universally. This of course is the most difficult part of any change, but the future your firm, and/or your best talent, may depend on it.
As always, measure against your forecasts and in this case, worrying about others is irrelevant. Focus on your own predictions and work towards achieving your own goals. What happens with other firms can be compared after the economy recovers.
I’ve never lived through a depression. I am not sure I can even fathom it. However, I do recognize the plethora of signs that our economy is not just taking a temporary hit - it is part of a global downturn marked by the largest expansion of credit in history. Something others have noted invariably lead to deep losses in production. And there is no denying that there will be massive layoffs in the coming year and our auto industry is facing its own collapse. Production can’t improve in this environment.
Plan accordingly.
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Upcoming reviews
9:49 am November 11, 2008 by Brian J. Ritchey · Leave a Comment
I will be reviewing a few new tools in the coming weeks: a Kensington bluetooth trackball mouse and a Fujitsu portable scanner.
The mouse is unique because it allows portable users to use the trackball to both scroll documents and use as a mouse pointer. Should be interesting to see how it delivers.
The scanner is claimed to be the first and only portable scanner that is an automatic document feeder, color scanner that duplexes (scans both sides of a page). There is some information about it you can read about by clicking here.
See below to watch it in action:
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Perfect Pain: Inflation & Deflation
7:08 am October 24, 2008 by Brian J. Ritchey · Leave a Comment
I have spent considerable time discussing the increasing inflationary threat to the economy over the past year. The rapid popping of the asset bubble, however, has worked its way into the rest of the economy and has had an deflationary effect that is beginning to show in core prices. The most recent Consumer Price Index (for September) has inflation falling under 5% (4.94%) after skyrocketing to 5.6% in in July and 5.37% in August. The inflation rate for 2008 is still 4.5% - over 1.5% increase over the average rate (3%) since 1992.
The recent “bailout” of $800b of new freshly printed money should serve to increase inflation. However, according to Tim McMahon on his site Inflationdata.com, the loss of over $7 trillion in value from the NYSE and NASDAQ creates a “net deflationary effect” on the economy:
And that is not counting the value lost in housing prices. And to make matters worse the mortgage industry took those initial mortgages and leveraged them using “derivatives” to compound the gains on the upside. This leverage was by a factor of hundreds of times. Actually no one even knows the full magnitude of how much compounding went on. So there could easily be Trillions more of liquidity that evaporated when housing prices stopped going up and began their downward descent.
So how do you reconcile a high inflation rate and net deflation on the economy at the same time? McMahon explains that the consumer price index considers over 10,000 items that “take into consideration all aspects of the economy.” What is happening in the stock market is based, at least initially, on housing prices. So, in effect, we get bad news on both fronts: Our house values are deflating and our cost of living is inflating.
Need it be reiterated the importance of measuring performance? The boom economy of the past two decades is unfortunately giving way to an as-yet unknown period of economic decline. We have suffered through two minor recessions during this period, but the extent of this downturn is certain to be more protracted and deeper. The recession in 1990 was practically non-existent and short and was arguably preventable without the massive tax increases placed on the economy. The recession in 2001 was again short and based primarily on the bust of the tech sector - with not nearly the impact on the majority of Americans as a drop in home values.
The good news for law firms is that regardless of who wins the Presidential election, there will be a rush to enact new reactionary laws to protect consumers that will invariably lead to an increase in lawsuits. The bad news is that your personal income will be devalued based on the realities of the economy. Also, those in transactional practices will not be as fortunate, as transactional business typically suffers during recessions.
Next week the government will release 3rd quarter GDP results. Most expect us to report the first negative growth in seven years. The time to plan for the economic downturn was several months ago - but it is never too late.
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The Role Of “Effective Rate” To Law Firm Profitability
2:00 pm October 21, 2008 by Brian J. Ritchey · Leave a Comment
There are 6 main profit drivers for all law firms: Rate, realization, leverage, margin, operating expenses and cash flow. Rate can be tracked in several ways.
- Standard rates are rates you would charge a client, all things being equal. These are typically your highest rates.
- Worked rates are your actual rates you charge a client. Worked rates are affected by client negotiation or perceived need to reduce rates to stay competitive.
- Billed rates are rates after you invoice a client. Billed rates take into consideration both mark-downs and discounts.
- Collected rates are the final hourly fee after the invoice has been reduced to a zero balance. Collected rates take into consideration write offs and other post-bill adjustments.
Rate can be measured from standard to billed or worked to billed to judge how well you are converting your work to invoiced fees. These rates are measured on an accrual-basis.
Rates can also be measured from billed to collected. These rates are measured on a cash-basis.
However, to get a full view of what happens to your standard rate as work moves through the billing cycle, firms need to measure the effective rate. The effective rate can be measured either from standard to collected or worked to collected.
Measuring effective rate means creating targets, forecasting results, and holding your fee earners accountable for results.
The below chart shows how you can measure effective rate. Click on the graph to download.
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Europe Follows US Lead: Eases Mark To Market Accounting Rule
10:45 pm October 20, 2008 by Brian J. Ritchey · Leave a Comment
Weeks after the US drops the mark to market accounting rule requirement (and not so coincidentally bank failures ceased), the EU has fallen in line and has backed proposals to ease the rule.
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Quote Of The Day
7:42 pm October 5, 2008 by Brian J. Ritchey · Leave a Comment
From Democrat strategist Jenny Backus, when discussing Governor Sarah Palin: