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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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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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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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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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.
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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.
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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“.
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Goodbye GAAP, Hello IFRS
3:40 pm August 28, 2008 by Brian J. Ritchey · Leave a Comment
I wrote in April on More Partner Income about a CFO magazine article about the impending replacement of the Generally Accepted Accounting Principles (GAAP) standard for public accounting to the International Financial Reporting Standards (IFRS).
It appears the time has come. According to a August 27th article in the Financial Times, “US companies are set to switch to international accounting rules in a move that will, for the first time, see all the world’s most important listed groups reporting according to the same set of standards.”
A “roadmap” has been proposed by the SEC to have US companies conform to the standard by 2014.
Christopher Cox, SEC chairman, said more groups were reporting under IFRS than US GAAP and the number would rise as other large economies made the switch. He said US GAAP would be marginalised if the US did nothing, making it harder for international investors to consider US companies.
As noted in the April post, this may mean nothing to you, especially if you report only on a cash basis. However, if your firm is looking to get a true look at your financials, accrual based accounting is needed. For those who were looking to GAAP, look again. IFRS looks to be the new standard.
For more information on IFRS, click here to visit a page dedicated to it by Price Waterhouse Coopers.
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Survey Your Clients To Improve Performance
5:00 am August 25, 2008 by Brian J. Ritchey · Leave a Comment
When talking about improving performance, we talk about measurement. Measuring productivity, rate, realization, margin and leverage. But what about measuring the satisfaction of your clients? After all, without their satisfaction, all of your numbers decrease.
Internal “upward reviews” are good to determine how well management is doing internally. Client satisfaction reviews are good to determine how well your attorneys are doing in providing excellent service to the firm’s clients.
Tom Collins wrote a good sample client survey form that posted on More Partner Income in 2005. It’s freely distributable, so I have posted a copy of it that you can download by clicking here.
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Amlaw Daily: Profit Down in 2008
11:00 pm August 21, 2008 by Brian J. Ritchey · Leave a Comment
AmLaw Daily reports that during the first two quarters of 2008, “profit margin compression–that is, expenses increasing faster than revenue–was the greatest it’s been in the last eight years.” The Wall Street Journal Law Blog takes a look at the highlights of the report:
- Too many lawyers:“Because law firms continued to add lawyers to their ranks despite the drop-off in demand,” writes [Citi Private Bank’s Dan] DiPietro, “firms experienced a slowdown in productivity comparable to the second quarter of 2001 and lower than every other second quarter between then and now.”
- Unproductive lawyers, beware: Among other things, DiPietro advises firms to “consider sending a tough message to unproductive lawyers at every level,” and to “conduct a systematic expense review to eliminate redundant or nonessential support staff and functions.” As for hiring in a soft economy, he writes: “[I]t’s particularly important to vet candidates to differentiate between laterals who are looking to move because they’re not happy and those who are looking to move because their firms are not happy.”
- Associate bonuses (a/k/a “The elephant in the room”):DiPietro is paring back earlier estimates for 2008 profits-per-equity-partner. “[W]e now believe PPEP will be flat, or even down by as much as 10%, in 2008,” he writes. “The top-tier firms will have an even tougher year, with profits down by 5-15%. Our reason for providing a range is that there is an elephant in the room: How will firms, particularly the top-tier firms, handle associate bonuses this year? The rational approach would be to pare them back, but, while lawyers display rationality and dispassion in the practice of law, they have exhibited ‘irrational exuberance’ on this issue in the past.”
- Most profitable firms hit hardest:Demand drop-off and expenses were accelerated at a more rapid pace at the top firms, writes DiPietro. He explains that top-tier firms tend to rely on high-end private equity deals, securitization, and structured finance, and have more financial service clients. Now, with those markets in decline, top-tier firms “are paying the price,” and the practices that firms typically rely on in a downturn, such as restructuring, bankruptcy, and litigation, haven’t helped “cushion the drop-off in transactional work.”
- A silver lining?“A bad year (and the numbers suggest 2008 will be even more trying than 2001, when partner profits were down slightly),” writes DiPietro, “will enable firms to take steps that partners would resist in a good year-winnowing out unproductive lawyers and applying greater discipline to expense control.”
What can law firms take from this report? Measure performance. Of Counsel Consulting was created to help firms perform better. Whether you need help in determining your profit drivers, need help in measuring them, or need help in implementing technology to make you more efficient, Of Counsel Consulting can help. For more information, call (205) 588-4OCC (4622).