Are Macs Viable In Law Firms?

I love technology.  It is exceedingly difficult for me to not purchase the latest gadget, and eventually I succumb regardless of my intention.  Therefore, I own both a Mac and PC even though I have no practical use for a Macintosh.  But they are now using Intel chips!  And Windows can get so irritating – can’t I just use a computer and it work as intended?

Well, that was my intention in purchasing the Mac.  I heard all the great things from Mac folks.  They are a die-hard group that nearly died before Steve Jobs came back to the company and did an incredible imitation of Bill Gates – except to cool people rather than geeks.  That is, if you find a guy wearing a black mock turtleneck cool.

The question for me, however, wasn’t whether I was going to learn how to run Mac applications – they were way too expensive for me – it was whether I could run Windows inside of OSX, Mac’s operating system.  So, my first foray into the Mac world was definitely through the lens of someone wanting to keep his desktop, but just access it through another operating system.  A thoroughly weak reason to purchase a computer (which ended up being a 15 inch MacBook Pro).  However, shortly after blowing a few hundred on a few virtual machine apps (Parallels Desktop and VMWare Fusion) and feeling my lap burn from the intense heat generated from running both applications, I realized I was wasting my time.  This is a Mac.  Don’t run Windows on it unless you have to.

From that point I set out to learn how to use it on its terms.  In many ways it reminded me of the old OS/2 Warp look and feel, but definitely mature and full of features.  But can it run my office?

The simple answer is no.  I know of no legal software vendor who is actively developing Macintosh native applications – at least any that write to a database.  So in my view, the debate is dead in the water until Apple or a software developer on that platform begins to cater to attorneys.  There are some tempting technologies that may make platform irrelevant – for example, cloud computing – but these are still emerging technologies and last I checked law firms were not cutting edge in utilizing technology.  Cloud computing is a newer model where a vendor sells a web application that is hosted on their end but accessible on any compliant web browser.  This simplifies roll out, training, and administration.  It also holds confidential business information off-site.  In my world that won’t do.  There are ways to host web applications locally but you’d best find a good consultant or an in-house developer or you will be nickel-and-dimed to death by vendors.

I use mine primarily to manipulate images, video and other intensive artistic endeavours that PCs are getting better at doing but are far behind Apple in perfecting.  In a legal environment that pretty much limits its usefulness to marketing, website development etc.

I know of some firms who have attorneys who just like the look and feel of the Mac keyboard and the superior touch pad (that allows you to scroll by using two fingers, for example).  Still, the key to them is connectivity to a Windows environment.  Windows Terminal Services allows just about any platform to connect to a server and run applications as if you were sitting at your desk using Windows.  This allows anyone with a prior propensity to use a Mac the ability to use it at work.  But this technology has been around for a while.

The bottom line, in my opinion, is that whatever platform your end users prefer, the back end is still going to be Windows.  With the relatively stable Windows XP and the coming Windows 7 (which, like every other version of Windows, incorporates some of the best ideas from Apple into it), the only reason I see at this time to use a Mac is to just want to use a Mac.  Administratively and for the end user, there are complexities you must overcome that are on top of what other Windows users already face (unless you run the entire network through terminal services).  

Therefore, I see no reason for using Macs in the law firm unless you just want to be cool.  And I mean the figuratively, because if you run either of the virtual machine applications listed above on a MacBook, your desk/lap/whatever the laptop sits on will be searingly hot.

If your firm uses Macs and your experience differs from mine, please feel free to share your experiences in the comments section.

Are Law Firms Ready For Rate Deflation?

After hitting 5% in July of 2008, inflation has dropped rapidly and is now in negative territory (annualized) for the first time in 54 years.  This creates tremendous spending opportunities but there are many risks.  One of the risks to law firms is a deflating billable rate.  With deflation hitting most aspects of the economy (food and energy being notable exceptions that at least in the latter case isn’t expected to deflate for a while and in fact may be the next credit “bubble” if, err, I mean when cap and trade is passed), it is only a matter of time when clients will either request more discounts or a reduced rate – and if clients don’t ask, other attorneys will offer lower rates to lure new clientele.  Many businesses will be working from much tighter margins while the cost of doing business, including defending lawsuits, won’t lower with their margins.  Something will have to give – either longer A/R outstanding or reduced rates.

It may not come.  But there is reason to believe it will.  Attorneys from large law firms who have been laid off are finding themselves entering the mid-firm market and some enterprising ones will start their own firms, determine a model that maximizes profit, and “Wal-Mart” some out of business while still raking in incredible profits.  All it takes is better efficiency in serving clients (and, in my view, an unprofessional but very business-like approach to targeting and accepting clients).  The relationship you have with your clients puts you at an advantage right now.  However, in forecasting models you should prepare for a fight for your business based on  rate.    

If you are faced with reducing rates to keep clients, efficiency is key to making up the lost revenue.    Don’t rely on volume alone as it can fool you into thinking you are in a better financial position than you are.  You may end up hiring excessive numbers of attorneys, especially as the costs of attorneys goes down (another inevitability that is already happening – salary reduction for new associates).  If you are still making minimal margins because you are too busy to implement efficient processes and you get undercut by someone willing to lower their rates, your firm will be in for a rather intense correction.

Even assuming rates don’t increase, there is a high probability that any planned rate increases will be difficult to implement.  Firms have been contracting for several months and most have already cut costs as low as they can.  A reduction in rate is an unplanned occurrence that can place even more pressure on firms to reduce costs.

From the firms I have consulted, most are still unwilling to invest in efficiency – rather, they are placing more emphasis on productivity and staff reductions.  There are a few firms who are changing their model to streamline processes – those who invest in better procedures will not only be in a better position to absorb rate stagnation (or deflation) but will be in a better position to increase profitability later this year when the economic numbers start to improve.  The test will be whether they retain earnings, a concept that is anathema to many firms.

Please note that due to the activism of the Federal Government to re-inflate the credit markets, there are arguably two possible results:  massive inflation or another asset bubble (which will lead to a result similar to what we are experiencing now).  Either way, the pattern of erratic markets is not likely to end anytime soon and with trillions being poured into the economy, money may get loose for a while – smart firms will invest in their firms (take advantage of the deflation) and set aside sufficient amounts to take short hits on revenue rather than make distributions (in case of a rapid spike in inflation or another asset bubble).  We are in for a long period of uncertainty.  Universal health care, carbon emission taxes, and of course the obvious tax increases to pay for the action taken already and to sustain the new entitlements.

Law firms will not be needed less (and in fact in some areas they will be needed more) but they are not immune to shifts to the economy.  There will be areas of rate inflation but your firm may not be one of the beneficiaries.  Some areas of law that have flourished for decades will suffer greatly and some boutique firms will cease to exist entirely.

Prepare for it.  If your firm flourishes and all the doom and gloom above doesn’t come to fruition, great.  Your bottom line thanks me for helping you have such a strong equitable position during your time of saving – go buy a new touch screen whiteboard or make a distribution so you can pay for all those projects at home.  If the firm struggles, however, you may avoid having to make decisions that are not only uncomfortable but can lead to a fracturing of the firm.

Forecasting Attorney Revenue

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).

False Sense Of Security Still Prevalent Among Law Firms

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.

The Role Of “Effective Rate” To Law Firm Profitability

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.

Survival Planning For “Accidentally Successful” Law Firms

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.

“Bailout” Includes Authority To Suspend Market-To-Market Accounting Rule

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!”

Empowering Others To Achieve The Extraordinary

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“.

Amlaw Daily: Profit Down in 2008

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).

Array Formulas Solve Complex Excel Needs

There are plenty of reporting tools available for law firms.  However, one of the common questions firms have when looking at reporting software is “Can you export to Microsoft Excel?”  Microsoft Excel has become the tool for manipulating financial data.  Therefore, an understanding of some of the more powerful features will help you with the more complex needs, such as (from Microsoft):

• Counting the number of characters in a range of cells.
• Sum numbers that meet certain conditions, such as the lowest values in a range or numbers that fall between an upper and lower boundary.
• Sum every nth value in a range of values.

An array formula “is a formula that works with an array, or series, of data values rather than a single data value.”  In other words, for example, you can set up a formula to show a result based on a range of results from a column.  One way to use this is to measure your AR numbers.  Let’s say that you rank AR priority based on age, amount, and payment history.  You can create a column representing the average age of AR, one for the amount of AR, and one with a credit rating based on past payment history (using a scale of A-F). 

You can then create an array formula in a cell that can produce a result based on your logic for determining AR priority.  If you decide that A list clients with AR between $1,000 and $10,000 with an average age under 200 days should be excluded from your collections process, you can create an array formula that can sum all of the clients that fit these variables.  There are many uses of array formulas that will help you track important metrics.  They can be used to track fee earner capacity, mark-down frequency, and really anything you want to measure that is being tracked by the firm.

There are several websites that help in creating array formulas, but I really like the one set up by Pearson Software Consulting.  Instructions on creating an array formula from the Pearson site:

To enter a formula as an array formula, type the formula in the cell and press the CTRL SHIFT and ENTER keys at the same time rather then just ENTER. You must do this the first time you enter the formula and whenever you edit the formula later. If you do this properly, Excel will display the formula enclosed in curly braces { }. You do not type in the braces — Excel will display them automatically. If you neglect to enter the formula with CTRL SHIFT ENTER, the formula may return a #VALUE error or return an incorrect result.

To learn more about array formulas, visit their site by clicking here.