Survival Planning For “Accidentally Successful” Law Firms
1:49 pm September 30, 2008 by Brian J. Ritchey · Leave a Comment
Measuring profitability is more important now for small and mid-size law firms than ever. In the past, lawyers have been able to yield large profits without understanding or measuring the drivers of their profits. Some called it being “accidentally successful“. Regardless of whether you want to look at your firm as primarily a business or a profession, competition will be more fierce for dwindling reliable clients. Although a well positioned law firm can take advantage of economic downturns, improper management may cut so far into your margin that the firm doesn’t thrive - which can lead to an exodus of talent.
More and more regional and national firms are marketing heavily on the Internet that will be competing for your clients - and some of these firms can price you out of business. Flat fee and “value billing” firms have spent the time to determine the amount of resource cost each task takes and invests in technology to be the most efficient in producing. They then build in their margins to maximize profit. They advertise their efficiency as superior service (and it is in some compelling ways) and offer money-back guarantees. Clients then have the ability to forecast legal costs through cost certainty.
This is what I call the “walmarting” of the legal industry. Whatever you may think of these firms, they won’t do anything but take your best talent to man a local office and let your firm wither - much as the old hardware stores did once Walmart came to town.
Those who survive either adopt their methods or focus on client relationships to compete. It wasn’t long ago when the mantra was “those who don’t embrace technology won’t survive”. I believe that those who don’t embrace performance measurement, accountability and planning will have great difficulty surviving the altered marketplace for legal services that will be the result of both undesirable economic conditions and “value bill” law firms.
Even a simple strategic plan may be the difference between a firm that survives and one that fails. I recommend a book sold through the ABA called The Lawyers Guide to Strategic Planning. You can get a copy by clicking here.
No plan is effective, though, without management. Of Counsel Consulting is dedicated to helping law firm managing partners develop plans and implementing them, allowing fee earners to focus on practicing law and maintaining the rewards, both professionally and financially, of providing quality legal services.
Related posts
Another To Blame: IFRS
2:05 am September 30, 2008 by Brian J. Ritchey · Leave a Comment
Funny that the world markets would be tanking at the same time the US market tanks. The arrogant American in me just presumes that it is the thrust of our power internationally that we can pull others into financial chaos when we have a large (seismic) correction. But there is another explanation. What a surprise - the rest of the world that uses IFRS utilize fair value accounting. And our adoption of it was to conform better to the world’s accounting standards!
When proposing the adoption of FASB 157 (providing Fair Value Accounting for financial assets and liabilities), Leslie F. Seidman, FASB member and Board collaborator on the project, said
Oh my. We are emulating the international community. In fact, we are abandoning our own accounting standards for those employed internationally. The same international group of nations that make up (at least part) of the United Nations, a body not known for its credibility. Now we face an economic crisis not seen since the 1930’s and we can point to movement from the GAAP to IFRS for at least exacerbating the crisis.
Some have come out for the immediate suspension of the mark-to-market, or fair value accounting, rule. I am amazed that it hasn’t already been done. In fact, it is surprising that the (unsuccessful) “bailout bill” only reiterated a power that is already in the hands of the SEC: the power to suspend the rule.
The only reasons put forward are conspiratorial in nature so not worth discussing. If in fact the suspension of the rule saves the taxpayers several billion dollars, it is in the best interest of our economy that it be suspended. If it we do nothing but throw more money at the problem, it is my view that the correction will take much longer and a return to prosperity will be long delayed.
However, if we suspend the rule and our markets recover, then once again we can show the world how free markets prevail - without government intervention - and maybe help them re-think some of their accounting standards.
Keep in mind that even without our current crisis, our economy was already heading into an ugly time period where our growth was minimal and inflation was creeping up. The prosperity we have enjoyed for many years is likely to end for at least a few years - perhaps more if government intervention doesn’t work or is employed improperly.
A great read on Fair Value Accounting, written by Robert E. Jensen, can be read by clicking here.
Related posts
“Bailout” Includes Authority To Suspend Market-To-Market Accounting Rule
12:41 am September 29, 2008 by Brian J. Ritchey · Leave a Comment
Last week I wrote about how the effects of the financial market implosion would affect law firms. The National Review has posted a discussion draft of the House version of the “Emergency Economic Stabilization Act of 2008″ and it appears that at least one of the suggestions made by former FDIC chairmain William M. Isaac made it into the bill: the suspension of market-to-market accounting rules (or at least the potential for suspension).
Under section 132 of the Act,
The Securities and Exchange Commission shall have the authority under the securities laws (as such term is defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.
Further, section 133 requires a study be done to determine:
(1) the effects of such accounting standards on a financial institution’s balance sheet;
(2) the impacts of such accounting on bank failures in 2008;
(3) the impact of such standards on the quality of financial information available to investors;
(4) the process used by the Financial Accounting Standards Board in developing accounting standards;
(5) the advisability and feasibility of modifications to such standards; and
(6) alternative accounting standards to those provided in such Statement Number 157.
Other provisions include (as reported by media outlets):
- creating an insurance program guaranteeing “troubled assets originated or issued prior to March 14, 2008, including such mortgage-backed securities”;
- creating a “financial stability oversight board” which will be responsible for:
(1) reviewing the exercise of authority under a program developed in accordance with this Act, including—
(A) policies implemented by the Secretary and the Office of Financial Stability created under sections 101 and 102, including the appointment of financial agents, the designation of asset classes to be purchased, and plans for the structure of vehicles used to purchase troubled assets; and
(B) the effect of such actions in assisting American families in preserving home ownership, stabilizing financial markets, and protecting taxpayers;
(2) making recommendations, as appropriate, to the Secretary regarding use of the authority under this Act; and
(3) reporting any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for the Troubled Assets Relief Program or the Attorney General of the United States, consistent with section 535(b) of title 28, United States Code.
- foreclosure mitigation efforts, including a requirement that “the Secretary shall consent, where appropriate, and considering net present value to the taxpayer, to reasonable requests for loss mitigation measures, including term extensions, rate reductions, principal write downs, increases in the proportion of loans within a trust or other structure allowed to be modified, or removal of other limitation on modifications;”
- Mortgage assistance, including encouraging mortgage holders “to take advantage of the HOPE for Homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures.” Such assistance also includes reduction of interest rate and reduction of loan principal;
- Prohibiting “golden parachutes” for executives of companies in the event of involuntary termination, bankruptcy filing, insolvency or receivership - although the terms aren’t included in the Act. Instead, the Act requires the Secretary of the Treasury to come up with guidelines within 2 months of the Act’s enactment;
- Minimize negative impact to taxpayers by selling the assets only when the asset’s value is high (among other provisions);
- Limiting authority to purchase assets to $250 billion at any given time, except when given the written certification by the President, in which case the amount may be up to $350 billion. Congress then has 15 days to enact a joint resolution of disapproval - if none is made, the amount increases to $700 billion;
- Requiring the financial sector to reimburse the treasury for any assets sold at a loss.
To read all of the provisions of the House version, click here.
In my view, short term jubilee, long-term disaster and further eroding of capitalism in America. As my contracts professor in law school would say when discussing government intervention in markets, “Hello Havana!”
Related posts
Adobe Acrobat Professional - A Lawyer’s Best Friend
12:00 am September 25, 2008 by Brian J. Ritchey · Leave a Comment
For those who don’t have the professional version of Adobe Acrobat - get it. There is just too much you can do with this application to not have a copy of it available. No matter if you practice primarily in litigation or transactional law, Acrobat Pro is a must-have tool for lawyers.
Version 9 adds some new features that are geared to legal professionals:
- Enhanced Redaction and Bates Numbering
- File splitting
- Better Save to Word with flowing text
- PDF Portfolios (Packages on steroids!)
- More powerful Document Comparison
The feature I like best in version 9, though, is the new PDF Portfolios. Click here to see a video outlining the features of PDF Portfolios.
With the ability to do Bates numbering, redact documents, create forms, collaborate with others, all without sacrificing security, Adobe Acrobat Professional is a must-have application for lawyers.
As an added bonus, Rick Borstein of Adobe has a blog for legal professionals where he provides ways to utilize Acrobat in a legal environment. You can view his blog by clicking here.
Related posts
How The “Market Meltdown” Affects Your Law Firm
11:12 pm September 21, 2008 by Brian J. Ritchey · Leave a Comment
This past week has been a scary time for the financial markets. According to democrat Senator Chris Dodd last week, “we’re literally maybe days away from a complete meltdown of our financial system, with all the implications, here at home and globally.” The New York Post reported that traders were “500 trades away from Armageddon on Thursday” with pre-open sell orders inundating the market and forcing the fed to pump $105 billion into the market to avoid a total collapse of the financial system. There is little question that last week was historical.
I don’t believe that the end of this crisis is near. The Executive Branch, along with the Federal Reserve, is planning a “bailout” (or what I would rather call a “clean out”) of the albatross of bad mortgage debt that is seriously deprecating the value of bank collateral and causing institutions to stop lending to each other. Some are saying upwards of $1 trillion. You can add another trillion to that (UPDATE: Try $30 trillion). And this is to just keep our financial system from collapsing.
The damage has already been done. Our economy will be feeling the effects of the past week well into next year - and perhaps for several years to come (and I am not counting the effect of the massive printing of money to pay for the bailout).
What caused this to happen? And how does it affect your law firm?
In the Friday (September 19th) Wall Street Journal, William M. Isaac, chairman of the Federal Deposit Insurance Corporation from 1981-1985, wrote an opinion piece titled “How To Save The Financial System“. Mr. Isaac compared the current crisis with the one he faced when chairman of the FDIC - at that time, the prime rate was 21%, the savings bank industry was insolvent more than $100 billion, “the S&L industry was in even worse shape, the economy plunged into a deep recession, and the agricultural sector was in a depression.” 3,000 banks and thrifts failed. However, if the rules that are in place now were in place then, Isaac argues, it could have been much worse:
The country’s 10-largest banks were loaded up with Third World debt that was valued in the markets at cents on the dollar. If we had marked those loans to market prices, virtually every one of them would have been insolvent. Indeed, we developed contingency plans to nationalize them.
The economic conditions of the current crisis were nowhere near as bad as it was then. What caused an estimated 20% loss to mortgage debt to institutions that held them to bring our financial system to the brink of collapse? Isaac believes “[t]he biggest culprit is a change in our accounting rules that the Financial Accounting Standards Board and the SEC put into place over the past 15 years: Fair Value Accounting.”
Fair Value Accounting dictates that financial institutions holding financial instruments available for sale (such as mortgage-backed securities) must mark those assets to market.
The rule can be a boon for an asset when times are good. However, a company must also “mark the assets to market even though there is no meaningful market”. Even though the value of the assets are depressed because of market conditions, not actual value of the asset, regulators have still required that accountants continue to mark down assets as the market tanks. This has led to heretofore financially secure banks to go to the brink of bankruptcy within days of bad news. Isaac argues that regulators must suspend such rules when the health of the industry is at risk.
On November 15th, 2007, Fair Value Accounting was officially enacted by the FASB in rule FAS 157.
Isaac also argues that regulators should suspend the “naked selling” (or short selling a stock without possessing it). Late last week it was announced a ban on short selling altogether. This sweeping measure was met with opposition by options traders, who argued that the ban was “a draconian measure that will result in the sudden and severe removal of liquidity from the marketplace.” The argument is that disallowing short selling altogether prevents investors from learning the real value of a company - in essence, taking away information from investors - and thus will discourage investment. Isaac only argues for the ban of “naked selling”, not all short selling.
Finally, Isaac argues that the new Base II regulations, though perhaps too new to have caused this crisis, must be suspended before they make matters worse:
Basel II requires the use of very complex mathematical models to set capital levels in banks. The models use historical data to project future losses. If banks have a period of low losses (such as in the mid-1990s to the mid-2000s), the models require relatively little capital and encourage even more heated growth. When we go into a period like today where losses are enormous (on paper, at least), the models require more capital when none is available, forcing banks to cut back lending.
Contrary to the rhetoric coming from both Presidential campaigns, the problem hasn’t been lack of regulation - but the regulations (and regulators) themselves. At this point it is academic, and any remedy will not undue the damage done. What firms need to do is prepare for cash flow problems in the near and long term.
As with any economic slowdown, transactional practices will suffer and litigation will do well. However, if lending dries up, firms need to confront the possibility of losing significant numbers of corporate clients. They also need to confront the high probability of clients having difficulty paying their bills.
As law firms are typically the bottom of every client’s stack of invoices (due to the lack of late fees and interest - unless you are one of those who actually charge for lack of payment), it may be a good idea to consider retainer billing your corporate clients. Retainer billing simply requires a certain amount to be paid up front and set off against work performed. When the retainer goes below a certain amount, a letter is sent to replenish the funds. This ensures cash flow and, in coordination with setting budgets for services, can provide clients with some cost certainty - something corporate clients will be requiring with more and more frequency.
If your firm hasn’t addressed receivables that are over 90 days and don’t have a coherent, consistent, and reliable collections process, the time is now to develop and implement one. It may be the difference between your firm managing a difficult economy and becoming a victim of it.
Related posts
The Perils Of Free Email Accounts
3:01 pm September 19, 2008 by Brian J. Ritchey · Leave a Comment
Never conduct business on a personal email account. I have written previously on the dangers of communicating via email with clients, but the assumption was that the communication was taking place within the company network. Many, including myself, have also taken to free email accounts like gmail, hotmail (now called Windows Live), and yahoo. The problem with using these services is the “consumer-grade” security placed on the accounts.
The “hacking” into Vice Presidential candidate Sarah Palin’s Yahoo! account this past week illustrates the ease in which anyone can not only read your emails, but can take control of your account. I use the word “hacking” lightly - it was nothing more than using publicly available information and taking advantage of weak password recovery questions.
For example, for Yahoo, all you need to answer is one recovery question to reset your password. For most people, the easiest answer wins. Much of the time, the answer is publicly available - or easily guessed. This is exactly what happened with Governor Palin’s account. The account was breached by simply using the password recovery feature and answering a single question - and in this case, the answer was already in the public domain.
In her case, the intent appears to be (based on the bragging online by the perpetrator) on finding more dirt on the Governor (there was none to the poor criminal’s dismay), but I am willing to bet in many other cases there would be business-related communications taking place.
Company policies have become more secure by requiring strong passwords and changing them often. However, there are no such requirements for most (if not all) free email accounts.
The ease in which someone can get control of a free email account is ridiculous. It takes relatively little skill in social engineering to get someone to give up information that may in fact be the password on their account. A few such examples can be read by clicking here.
There are ways to determine if someone in the organization is conducting business through their personal emails - though in many cases it can’t be determined by your IT people. However, if the person at some point contains the business email address in the thread (the history) of the email, that information can be found and researched in your mail server logs.
It may not be a bad idea to have your IT people do an audit of the mail server logs to determine if you may be vulnerable. And a policy announcement pertaining to any restrictions you have in place (and you should have restrictions on using non-business email accounts to conduct business) wouldn’t hurt either.
Related posts
Quote of the day
4:50 pm September 16, 2008 by Brian J. Ritchey · Leave a Comment
”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
from the New York Times, September 11, 2003 (click to read the entire article).
The cause of the current financial crisis can be traced to the insistence, by Congress, that financial institutions provide “affordable housing” to those who couldn’t afford it. Congress is to blame, not President Bush.
Related posts
Empowering Others To Achieve The Extraordinary
11:15 am September 8, 2008 by Brian J. Ritchey · Leave a Comment
The Harvard Business Review Editor’s Blog recently posted an article (”Pixar’s Collective Genius“) highlighting the achievements of Pixar’s co-founder, Ed Catmull. The article highlights several qualities that has helped make him successful at “empowering others to achieve the extraordinary”:
- Redefining the vision. After successfully creating the first full-length computer-animated feature film in Toy Story, “he set himself a new goal: to build an organization that could continually produce magic long after he and Pixar’s other co-founders were gone.” Rather than draw lines in the sand, develop a “silo” mentality, or developing other “turf-building” habits, Catmull looked beyond his achievements and focused on a sustainable, long-term success that would succeed him.
- Delegating Power. The irony of leverage for law firm partners. Catmull delegated authority to the directors of films and allowed those entrusted with performing the freedom to perform. Asking law firm partners to delegate work, on the other hand, is asking them to reverse years of drive and ambition - in many instances the very things that helped make them partner. However, the facts are indisputable - proper leveraging of associates increases profitability and the long-term sustainability of your firm.
- Fighting success syndrome. Once a business succeeds in achieving its goals, the natural tendency is complacency. This is the gift for competitors that helps avoid domination of the marketplace. However, there are those who dominate - those who don’t accept complacency like Catmull, who “personally ensures that post mortems of productions are taken seriously. And he regularly reminds employees–especially young new hires–that Pixar has made plenty of mistakes in the past and still doesn’t have it all figured out.” Law firms can fight “success syndrome” through the establishment of processes that not only gauge client satisfaction, but gauge associate satisfaction through “upward reviews“.
Related posts
Google Browser Signals End of “Mandated” Operating System
9:51 am September 2, 2008 by Brian J. Ritchey · Leave a Comment
Google is set to release on Wednesday a first public “beta” of a web browser that at first glance appears to join a suddenly crowded web browser marketplace. After reading its “comic” explaining the idea behind the browser, it becomes apparent that Google isn’t just trying to enter the web browser market - it is trying to transform the web browser into a vehicle for stable, web-based application delivery.
As explained in the comic, traditional browsers can crash pretty easily when delivering web applications. This is due to the framework of the web browser. It was initially developed to do small tasks such as render text and graphics quickly. As browsers grew, they added tools for email and calendaring that were fine for individuals, but added bulk and instability for those who wanted to use browsers to push internal applications.
Google has responded by placing each tab of the browser in its own process (ie, each tab is like opening a new instance of the browser) so that if one tab becomes unstable, it doesn’t affect the other tabs. This also prevents a script that is slowing down the rendering of a page to affect the other tabs.
This comes with a cost - additional overhead (more RAM memory, better hardware). But for business use, this can finally usher in the end of executable-based client server applications and push all business applications through your browser. This will not only simplify administration of applications from an IT perspective, it gives freedom to end users to choose whatever operating system they want to use (which may end up increasing IT administration, so that may be a wash - IT isn’t going to be less of a need in the future in any event).
Perhaps this is what will challenge virtualization (something Microsoft envisions as it prepares for the end of Windows).
The above is merely scratching the surface of the new features of Google Chrome. The browser will be open-source, meaning developers around the world will be free to see, use, and improve upon the source code (and create their own applications based on the technology without paying licensing fees). It also tries to improve upon the user experience that takes advantage of Google’s omnipresence on the internet. Read the comic by clicking here to see more of what Google envisions with its browser.
The bottom line is that computing as we know it will soon be a thing of the past. New technologies that are in their infancy now will be in the forefront of your technology decisions soon. Make sure your IT department is testing these technologies now so they can give you a better opinion on which to choose when the time comes.
UPDATE: As if on cue: ”Google believes any task done in a standalone desktop computer application can be delivered via the Web and Chrome is its bet that software applications can be run via a browser.” Read more here.