Unsound Management Lowers a Firm's Income

Under the direction of a strong management committee, a firm can flourish because while the firm's attorneys toil to serve clients, the management committee takes time out to watch the shop and give attention to the practices that keep the firm profitable and growing.

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].

Too many lawyers in private practice are frustrated as they attempt to achieve both their personal and professional objectives due to the absence of sound management and administration of their firms.

Many attorneys take comfort in the notion that, like the legendary shoemaker, if they work hard for their clients, the business end will take care of itself; they are too busy with client affairs to look after their own administrative and financial matters. But the primary cause of many of their problems results directly from their own doing. Many attorneys, highly trained and skilled in substantive areas of law, regard their prime mission in life to be of service to their clients. When this attitude is coupled with the belief that firm administration is a “necessary evil,” the situation often leads to the neglect of the business affairs of their law firms.

Frequently attorneys join firms to achieve benefits that would not be possible if they were to practice on their own. These benefits include the opportunity to consult with one's partners; to acquire a diversity of skills; to take advantage of the accumulated experience and reputation of a firm; to attract larger and more prestigious and profitable clients; and to benefit from the economy of size through more efficient and effective management practices, systems and services, etc.

These advantages have contributed significantly to the dramatic increase in the number and size of general practice specialty law firms in recent years. From the point of view of an attorney in a smaller firm, growth generally is considered desirable. However, growth does pose problems in the management of individual lawyers, facilities and resources. Attorneys in smaller law firms can keep well informed about their firms' activities through personal observations and involvement. However, once a group of lawyers reaches a certain size, some formalization of the management processes must be imposed to ensure adequate control over all of the firm's affairs.

Symptoms of the Need for Better Management

Vague and Ambiguous Economic and Practice Objectives

In growing law firms, vague and ambiguous economic and practice objectives are often indicative of an absence of direction toward results that are compatible with the personal, professional and economic objectives of their partners. Every law firm that expects to have a profitable practice must identify firm objectives. These objectives should be formulated and expressed in terms of revenue, firm size, management structure, type of practice, etc. An important reason for defining objectives is to ensure that maximum effectiveness can be achieved in the day-to-day operation of the firm.

Poor or Uneven Utilization of Professional Personnel

Adequate control over the utilization of professional personnel is fundamental for a law firm to be profitable. The level of success that a firm achieves in providing quality legal services in an effective and timely manner is directly proportional to the firm's ability to manage and control its lawyer personnel.

The extent to which lawyers may be utilized most effectively, ie., working in certain substantive practice areas as opposed to others; training of new associates; managing the firm, etc., depends on the willingness of the members of the firm to subordinate their personal and professional goals for the benefit of the organization. Unless lawyers perceive that firm management possesses the prerequisite skills to manage effectively, there will be little or no organization.

The Unreasonableness of Overhead Costs

Control of overhead in growing law firms is particularly important because many overhead and administrative support costs tend to grow disproportionately to professional activity. Accordingly, firm management must be watchful about the persistent increase of unreasonable overhead that may drain away profit.

Overhead costs are usually the most complained about, but frequently the most neglected, from the standpoint of management control. Overhead tends to increase more rapidly and to decrease more slowly than the level of professional activities which it supports. Regardless of the size of the law office, overhead should be controlled by means of a budget for each type of expense, i.e., nonlawyer employment costs, occupancy costs, other direct and indirect costs, etc. This budget, established as part of an annual financial plan, should represent the total expense required to support the expected level of revenue-producing activities.

Poor Control over Cash Flow

The impact of management control on cash flow is most crucial in the areas of billing, collections and utilization of lawyer personnel. Costs for administrative and associate personnel, rent and other overhead items are relatively easy to anticipate. However, the timing and the amount of cash revenue, especially in firms with a high proportion of transactional-type matters, must be well controlled, starting at the point where lawyers accept client work. Every hour of billable client work creates an opportunity to receive income in the future.

Three points are important in this connection. The first is the necessity of management to arrive at a clear understanding with each lawyer to produce revenue that exceeds his or her salary or draw, direct and indirect overhead, and some provision for retirement. The second is the need to communicate to and obtain from clients their agreement about the amount to be billed and the timing of billings for fees and disbursements. This understanding should be reached at the time of acceptance of a client matter and confirmed in writing. The third point is that the revenue derived from the representation should be measured against a standard, mainly the time/dollar value of the work performed, which represents the number of hours devoted by the lawyer, multiplied by the assigned hourly rate. This standard is recommended because the assigned hourly rate should be based upon the number of billable hours to be worked, overhead, profit and/or retirement.

Any client billing not equal to or less than time/dollar value by some agreed-upon dollar amount or percentage involves a write-down which, by firm policy, should be approved by a partner other than the billing partner. Because of the myriad reasons for write-downs, i.e., less favorable results, training time, underestimating the fee, etc., a distinction should be made in the management reporting of each.

The billing process should include a systematic review of unbilled time and accounts receivable. Unless a systematic procedure has been designed and implemented to ensure adequate control over billings and collections, cash flow will suffer.

Absence of Management Leads to Disorganization

Many lawyers are less proficient in managing their own firms than they are in serving their clients because of the organizational nature of the partnership form of business. Law firms, organized as partnerships or structured as professional corporations that function as partnerships, may enjoy financial success and growth because of the close association between the client and one or more of the partners who bind the firm to that client. Although the partnership type of organization may be effective for maintaining client relationships, it frequently fails to clarify the differences between the equity position of attorneys and the organizational structure and management obligations of partners. For this reason, a relatively loose organization involving a purely democratic relationship is often unsatisfactory for handling many of the firm's internal affairs and for assuring the desired profitability and growth.

The need to make distinctions among ownership, management and professional practice becomes readily apparent as a firm increases in size. Generally, there are two types of rights and responsibilities involved in a partnership form of organization. The first are those arising from the partnership agreement, which are proprietary in nature. The second are those arising from the method of firm governance, which includes functional responsibilities of certain partners for managing the day-to-day and long-range planning activities and substantive areas of practice.

Good management practices in a law firm cannot be achieved unless the privileges, obligations and responsibilities of partners are established and agreed upon. Effective management begins with organization. Organization for a law firm begins with the identification of a managing partner who may function as a chief executive officer, an executive committee that functions in a manner similar to a Board of Directors, or a more representative committee system that receives direction from the managing partner or the executive committee.

Under the direction of a strong management committee, a firm can flourish because while the firm's attorneys toil to serve clients, the management committee takes time out to watch the shop and give attention to the practices that keep the firm profitable and growing.

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].