Strategies for Improving Your Firm's Profitability

The number one topic of discussion among most partners these days is the implications of increased competition from within and outside the legal profession, resulting in more firms chasing fewer clients, lower firm revenues, reduced profits and, ultimately, the need for fewer attorneys at the partner and associate levels. This article describes several strategies that managing partners and administrators should consider so that firms may help improve their profitability.

Develop a Short-Term Plan

Today's competitive environment requires that all law firms engage in some type of strategic planning. When properly conceived and implemented, this planning process enables lawyers to reach consensus on shared goals, identify benchmarks, and develop action plans that include timetables and lawyer accountability for performance.

The initial phase of this process involves the managing partner or management/strategic planning committee surveying firm personnel to obtain their perceptions about internal and external developments that may influence the firm. The issues usually addressed during this process may include:

1. The firm's culture, i.e., its philosophy, objectives, and current guiding plans;
2. The manner and method of firm governance, organization, and administration;
3. Partner/associate relationships, i.e., the ratio of associates to partners, classes of partners and associates, criteria for admission to partnership, communications among and between partners and associates, etc.;
4. Firm economics, i.e., partner satisfaction with gross revenue and net profit, individual net income, hourly and billing expectations from partners and associates, etc.;
5. Areas of practice management, ( i.e., are services delivered in a timely and profitable manner?);
6. Firm resources and capabilities, strengths and weaknesses, reputation and position in the marketplace;
7. Business development, willingness and ability of attorneys to sell legal services and cultivate new prospects; and
8. Assessment of the market and forecast of the political, social, and economic trends that will affect the firm and its clients.

Analyze the Firm's Database

An important approach for evaluating the firm's current position involves analyzing its database to highlight the key factors affecting the firm. For example, the managing partner should be interested in focusing on:

1. The firm's strengths and weaknesses;
2. Competitive advantages and disadvantages;
3. The number of partners and associates and their ages, and anticipated changes in the partner complement (retirement, withdrawal, etc.);
4. Administrative personnel/staffing requirements;
5. The extent to which the present partner compensation plan is a disincentive to achieving the firm's short-term objectives;
6. Main sources of clients: income from principal clients and substantive areas of practice over the past three years; factors that will affect client volume;
7. Inventory of unbilled time, accounts receivable, costs advanced;
8. Billable and nonbillable hours of partners and associates; and
9. Health problems or personal idiosyncrasies of partners.

While the fact-gathering may be accomplished in-house by the managing partner/committee, there are numerous scenarios in which a firm may be better served by retaining the services of an outside consultant to assist in the strategic planning process. For example, a firm's lawyers may be disgruntled as a result of management's lack of control over specific areas or other reasons. Perhaps the firm has expanded too rapidly without regard to the market. Maybe the firm has over-invested in some area and neglected others that could prove to be profitable.

Partners may be more willing to discuss their views and grievances with an outside consultant rather than firm management. An experienced consultant can expedite the short-term planning process.

Identifying Objectives and Developing Strategies

The information obtained from the partners, associates, and the firm's database will help the managing partner/committee formulate strategies for presentation to the partners. Following is an abbreviated presentation of marketing plan objectives and strategies that may be prepared for the hypothetical law firm.

Objectives

1. To serve well, efficiently, and economically the firm's existing clients (this objective is probably the most important);
2. To increase the number of quality clients in targeted industries and practice areas;
3. To increase firm revenue and net profit;
4. To identify and market whatever strengths or unique services the firm may have to offer;
5. To increase the firm's exposure in the marketplace and enhance its reputation in the community;
6. To develop and maintain relationships with potential sources of referral; and
7. To cultivate and ensure the firm's image as a “good citizen” through pro bono and other civic work.

Strategy

1. Remedy situations where the firm is perceived as weak or understaffed;
2. Bring the firm's strengths and expertise to the attention of existing and prospective clients;
3. Assign responsibility for dealing with prospective new clients to specific lawyers;
4. Meet with each major existing client to determine and, if necessary, improve its satisfaction with the firm's representation;
5. Cultivate potential referral sources by informing them about the firm;
6. Sponsor and participate in appropriate seminars for market exposure;
7. Develop and use a concise firm resume that highlights firm strengths;
8. Participate in selected service, political, social, alumni, etc., organizations and activities;
9. Keep the lawyers in the firm informed about and involved in marketing activities; and
10. Publish informational memoranda and pamphlets on new areas of law.

Increase Marketing Efforts

Today, when most of a firm's important clients are being targeted by other law firms, a firm's marketing efforts assume greater importance. A firm's marketing activities should be coordinated by a marketing committee/partner, rather than implemented in an adhoc manner. Partners should be accountable to the committee for their business development efforts. Personal marketing plans should be developed for those attorneys who have demonstrated the potential to acquire new clients or to generate additional work from existing clients. Variable hourly budgets of time and out-of-pocket costs devoted to business development activities by these particular attorneys should be recommended. Their billable and marketing goals must be adjusted accordingly.

The marketing committee should implement a client development program that will result in one-third of the firm's clients using at least two of the firm's services. Selected partners should meet with clients that have significant potential for additional fees, either through growth of their own operations or their ability to refer business.

Opportunities for cross-selling of legal services to clients should be pursued to further “bond” the client to the firm through a deeper, multifaceted relationship. To accomplish this, partners must understand a client's business as well as its legal needs. Partners must review with client-contact lawyers what is involved in cross-selling their legal services. Ideally, introductions of the right client executives to appropriate lawyers for cross-sales should be arranged.

Partners should meet with clients periodically to determine their legal needs on all levels. They should survey their clients to measure client perceptions of the firm, determine the client's expansion or contraction in particular areas, specify work in practice areas needed to be performed by the client, and determine other areas of legal work the client might use if the firm had the expertise. Also, the marketing committee must be willing to take the initiative to suggest alternative billing arrangements. After all, competitor firms are now commonly using fee arrangements as marketing tools.

Commitment of Partner Time to Marketing Efforts

Much of the marketing work cannot be done on the partner's own time. The firm must realize that marketing time is as important as fee-producing time. This means an effective marketing program may produce fewer billable hours for selected individuals, although it will increase the firm's total billable hours, fee income, and profitability. Firms must be selective in determining which attorneys are best able to carry a heavier workload of billable time and those attorneys who may be most productive by devoting a portion of their time to marketing efforts.

Modifying the Partner Compensation Plan

Partner compensation plans may have to be modified to reward certain partners for their total contributions to the firm and to encourage them to do the things they do best. If a firm overemphasizes billable hours, partners may eschew marketing or other management activities to record a higher number of billable hours. Partners' talents should be recognized; a well-conceived and implemented compensation plan will be a positive incentive to accomplish the firm's objectives.

Cleanup of Dated Unbilled Time and Accounts Receivable

To improve cash flow, the firm should consider providing a one-time 25% discount credit for the cleaning up of accounts receivable and unbilled time that is more than 180 days old. This may provide a stream of operating capital that may not otherwise have been available. To the extent that this plan is implemented, it is imperative that these monies not be distributed to partners. This extraordinary action plan should be undertaken by the individual lawyers who provided the services, with the approval of the managing partner or the management committee.

Downsizing

A contingency plan for firm survival sometimes does include a program for downsizing. Firms are often reluctant to terminate employees, especially at the professional level, even if some attorneys have not been productive or if there is insufficient client work to keep all partners and associates busy.

The timing of layoffs is frequently as important as the decision to terminate. Managing partners must consider this step carefully and weigh the pros and cons.

Implementing the Plan

Implementing a firm's improvement plan is often the most difficult part. It is recommended that the plan be executed through the firm's existing organizational structure. Individual partners should be assigned responsibility and held accountable for the satisfactory implementation of each phase of the plan in accordance with an agreed-upon timetable.

The implementation phase must be monitored to assess the effectiveness of the plan and to recommend when corrective action be taken. Partners responsible for the implementation phase should report to the managing partner, the management committee, the strategic planning committee, or other group designated to oversee the planning process. Problems and/or progress should be reviewed on a regular basis. Ongoing assessments should be made to determine the most appropriate strategies to continue and make any necessary modifications to the plan. Status reports should be provided to management during each phase of the plan to keep all members apprised about the progress of planning activities.

Sound Management Required

During periods of prosperity, many law firms are financially successful in spite of the partners' management abilities. In today's competitive environment, sound management practices are required to manage a firm's resources, ensure adequate cash flow, and develop and implement the marketing and planning process. Lawyer management in more financially successful firms recognizes opportunities, implements action plans, and assumes risks that will provide their colleagues with the framework for building stronger and more profitable law firms.

Joel A. Rose, a member of this newsletter's Board of Editors, is a Certified Management Consultant and President of Joel A. Rose & Associates, Inc., Management Consultants to Law Offices, in Cherry Hill, NJ. He has extensive experience consulting with private law firms, and performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, mergers and acquisitions, and legal services marketing. He has extensive experience planning and conducting retreats and special expertise resolving problems within firms. Rose may be contacted at 856-427-0050 and [email protected].

The number one topic of discussion among most partners these days is the implications of increased competition from within and outside the legal profession, resulting in more firms chasing fewer clients, lower firm revenues, reduced profits and, ultimately, the need for fewer attorneys at the partner and associate levels. This article describes several strategies that managing partners and administrators should consider so that firms may help improve their profitability.

Develop a Short-Term Plan

Today's competitive environment requires that all law firms engage in some type of strategic planning. When properly conceived and implemented, this planning process enables lawyers to reach consensus on shared goals, identify benchmarks, and develop action plans that include timetables and lawyer accountability for performance.

The initial phase of this process involves the managing partner or management/strategic planning committee surveying firm personnel to obtain their perceptions about internal and external developments that may influence the firm. The issues usually addressed during this process may include:

1. The firm's culture, i.e., its philosophy, objectives, and current guiding plans;
2. The manner and method of firm governance, organization, and administration;
3. Partner/associate relationships, i.e., the ratio of associates to partners, classes of partners and associates, criteria for admission to partnership, communications among and between partners and associates, etc.;
4. Firm economics, i.e., partner satisfaction with gross revenue and net profit, individual net income, hourly and billing expectations from partners and associates, etc.;
5. Areas of practice management, ( i.e., are services delivered in a timely and profitable manner?);
6. Firm resources and capabilities, strengths and weaknesses, reputation and position in the marketplace;
7. Business development, willingness and ability of attorneys to sell legal services and cultivate new prospects; and
8. Assessment of the market and forecast of the political, social, and economic trends that will affect the firm and its clients.

Analyze the Firm's Database

An important approach for evaluating the firm's current position involves analyzing its database to highlight the key factors affecting the firm. For example, the managing partner should be interested in focusing on:

1. The firm's strengths and weaknesses;
2. Competitive advantages and disadvantages;
3. The number of partners and associates and their ages, and anticipated changes in the partner complement (retirement, withdrawal, etc.);
4. Administrative personnel/staffing requirements;
5. The extent to which the present partner compensation plan is a disincentive to achieving the firm's short-term objectives;
6. Main sources of clients: income from principal clients and substantive areas of practice over the past three years; factors that will affect client volume;
7. Inventory of unbilled time, accounts receivable, costs advanced;
8. Billable and nonbillable hours of partners and associates; and
9. Health problems or personal idiosyncrasies of partners.

While the fact-gathering may be accomplished in-house by the managing partner/committee, there are numerous scenarios in which a firm may be better served by retaining the services of an outside consultant to assist in the strategic planning process. For example, a firm's lawyers may be disgruntled as a result of management's lack of control over specific areas or other reasons. Perhaps the firm has expanded too rapidly without regard to the market. Maybe the firm has over-invested in some area and neglected others that could prove to be profitable.

Partners may be more willing to discuss their views and grievances with an outside consultant rather than firm management. An experienced consultant can expedite the short-term planning process.

Identifying Objectives and Developing Strategies

The information obtained from the partners, associates, and the firm's database will help the managing partner/committee formulate strategies for presentation to the partners. Following is an abbreviated presentation of marketing plan objectives and strategies that may be prepared for the hypothetical law firm.

Objectives

1. To serve well, efficiently, and economically the firm's existing clients (this objective is probably the most important);
2. To increase the number of quality clients in targeted industries and practice areas;
3. To increase firm revenue and net profit;
4. To identify and market whatever strengths or unique services the firm may have to offer;
5. To increase the firm's exposure in the marketplace and enhance its reputation in the community;
6. To develop and maintain relationships with potential sources of referral; and
7. To cultivate and ensure the firm's image as a “good citizen” through pro bono and other civic work.

Strategy

1. Remedy situations where the firm is perceived as weak or understaffed;
2. Bring the firm's strengths and expertise to the attention of existing and prospective clients;
3. Assign responsibility for dealing with prospective new clients to specific lawyers;
4. Meet with each major existing client to determine and, if necessary, improve its satisfaction with the firm's representation;
5. Cultivate potential referral sources by informing them about the firm;
6. Sponsor and participate in appropriate seminars for market exposure;
7. Develop and use a concise firm resume that highlights firm strengths;
8. Participate in selected service, political, social, alumni, etc., organizations and activities;
9. Keep the lawyers in the firm informed about and involved in marketing activities; and
10. Publish informational memoranda and pamphlets on new areas of law.

Increase Marketing Efforts

Today, when most of a firm's important clients are being targeted by other law firms, a firm's marketing efforts assume greater importance. A firm's marketing activities should be coordinated by a marketing committee/partner, rather than implemented in an adhoc manner. Partners should be accountable to the committee for their business development efforts. Personal marketing plans should be developed for those attorneys who have demonstrated the potential to acquire new clients or to generate additional work from existing clients. Variable hourly budgets of time and out-of-pocket costs devoted to business development activities by these particular attorneys should be recommended. Their billable and marketing goals must be adjusted accordingly.

The marketing committee should implement a client development program that will result in one-third of the firm's clients using at least two of the firm's services. Selected partners should meet with clients that have significant potential for additional fees, either through growth of their own operations or their ability to refer business.

Opportunities for cross-selling of legal services to clients should be pursued to further “bond” the client to the firm through a deeper, multifaceted relationship. To accomplish this, partners must understand a client's business as well as its legal needs. Partners must review with client-contact lawyers what is involved in cross-selling their legal services. Ideally, introductions of the right client executives to appropriate lawyers for cross-sales should be arranged.

Partners should meet with clients periodically to determine their legal needs on all levels. They should survey their clients to measure client perceptions of the firm, determine the client's expansion or contraction in particular areas, specify work in practice areas needed to be performed by the client, and determine other areas of legal work the client might use if the firm had the expertise. Also, the marketing committee must be willing to take the initiative to suggest alternative billing arrangements. After all, competitor firms are now commonly using fee arrangements as marketing tools.

Commitment of Partner Time to Marketing Efforts

Much of the marketing work cannot be done on the partner's own time. The firm must realize that marketing time is as important as fee-producing time. This means an effective marketing program may produce fewer billable hours for selected individuals, although it will increase the firm's total billable hours, fee income, and profitability. Firms must be selective in determining which attorneys are best able to carry a heavier workload of billable time and those attorneys who may be most productive by devoting a portion of their time to marketing efforts.

Modifying the Partner Compensation Plan

Partner compensation plans may have to be modified to reward certain partners for their total contributions to the firm and to encourage them to do the things they do best. If a firm overemphasizes billable hours, partners may eschew marketing or other management activities to record a higher number of billable hours. Partners' talents should be recognized; a well-conceived and implemented compensation plan will be a positive incentive to accomplish the firm's objectives.

Cleanup of Dated Unbilled Time and Accounts Receivable

To improve cash flow, the firm should consider providing a one-time 25% discount credit for the cleaning up of accounts receivable and unbilled time that is more than 180 days old. This may provide a stream of operating capital that may not otherwise have been available. To the extent that this plan is implemented, it is imperative that these monies not be distributed to partners. This extraordinary action plan should be undertaken by the individual lawyers who provided the services, with the approval of the managing partner or the management committee.

Downsizing

A contingency plan for firm survival sometimes does include a program for downsizing. Firms are often reluctant to terminate employees, especially at the professional level, even if some attorneys have not been productive or if there is insufficient client work to keep all partners and associates busy.

The timing of layoffs is frequently as important as the decision to terminate. Managing partners must consider this step carefully and weigh the pros and cons.

Implementing the Plan

Implementing a firm's improvement plan is often the most difficult part. It is recommended that the plan be executed through the firm's existing organizational structure. Individual partners should be assigned responsibility and held accountable for the satisfactory implementation of each phase of the plan in accordance with an agreed-upon timetable.

The implementation phase must be monitored to assess the effectiveness of the plan and to recommend when corrective action be taken. Partners responsible for the implementation phase should report to the managing partner, the management committee, the strategic planning committee, or other group designated to oversee the planning process. Problems and/or progress should be reviewed on a regular basis. Ongoing assessments should be made to determine the most appropriate strategies to continue and make any necessary modifications to the plan. Status reports should be provided to management during each phase of the plan to keep all members apprised about the progress of planning activities.

Sound Management Required

During periods of prosperity, many law firms are financially successful in spite of the partners' management abilities. In today's competitive environment, sound management practices are required to manage a firm's resources, ensure adequate cash flow, and develop and implement the marketing and planning process. Lawyer management in more financially successful firms recognizes opportunities, implements action plans, and assumes risks that will provide their colleagues with the framework for building stronger and more profitable law firms.

Joel A. Rose, a member of this newsletter's Board of Editors, is a Certified Management Consultant and President of Joel A. Rose & Associates, Inc., Management Consultants to Law Offices, in Cherry Hill, NJ. He has extensive experience consulting with private law firms, and performs and directs consulting assignments in law firm management and organization, strategic and financial planning, lawyer compensation, mergers and acquisitions, and legal services marketing. He has extensive experience planning and conducting retreats and special expertise resolving problems within firms. Rose may be contacted at 856-427-0050 and [email protected].