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Law And Disorder

Oct 13, 2009

We all have a wealth of information from TV on how a modern law firm operates.  LA Law, Boston Legal, Ally McBeal, Damages, Law and Order. High salaries, great suits, beautiful partners (of both sexes), witty interchanges between cases, snarling rivalry between superstar litigators.  What’s not to love?  Of course, in the real world it’s not quite the same…or... is it?

Beneath the smooth exterior, I often find law firms roiled by bitter rivalries over billing issues, who's keeping time correctly, which overhead items should be allocated, out of control overhead, under performing shareholders and associates, mis-directed compensation schemes and more overpaid retainers than a medieval court.  In simple terms it comes down to four main issues: how big is the cake, how expensive are the ingredients, are you making a mess all over the floor, and how big is MY slice.  I told you it would be simple.  Let’s drill down into the gateaux…

How big is the cake?

Many law firms have little idea how they measure up to other peer firms.  There are many measurements available: from net margin to billings per partners to effective associate hourly rate.  Benchmarking a firm against peer companies is the first step in building a bigger cake.  Establishing key metrics and building dashboards to monitor these figures on a weekly and monthly basis is essential.

How expensive are the ingredients?

The key to law firm profitability is efficiency of operations. It’s easy to add overhead, but often staffing grows at the expense of technology.  A gross rule of thumb is that overhead should consume no more than a third of revenue.  Again, producing regular reports with key metrics and benchmarks against best of breed firms will help identify areas that need work. 

Are you making a mess?

If you are leaking hours then you are making a mess – of your compensation.  Many law firms admit to leaking hours.  This is not surprising when the majority of attorneys hate filling out time sheets and generally make their hours up weekly (or sometimes monthly) from diary and phone call entries - while relatively few attorneys document hours in real time.  Consider that just one lost hour per week can cost a firm $87K a year.  Finding one hour per day for 10 partners can bring in an extra $900K a year.  Monitoring billing efficiency against weekly / monthly targets is clearly worthwhile.

How big is MY slice?

Compensation plans can be simple or very complex.  Sometimes they attempt to allocate overhead to mind-numbing levels (who really uses the conference room the most?)  But the big picture is that lawyers have a tendency to value work product over origination. The firm can then devolve into a group of self-employed scribes, instead of a growing enterprise (see: How Big is the Cake above!).   Visibility and accountability are also essential for measuring partner effectiveness and building a better firm.

 

There are many other issues that can help a law firm surge beyond peers such as budgeting, expense analysis, cash flow management, data management, and use of technology.  Unfortunately, while Law Firms often have bookkeepers or office managers, they typically lack the financial management expertise and tools needed to drive growth and truly understand and improve their profitability and cash flow.  One solution is to hire a part-time CFO who can provide long term strategic input with a new perspective, and help drive profitability, growth and thus shareholder value.

 

To consult a qualified business chef who can help you build a bigger cake, call B2B CFO Partner David Kirkup on 404 348 0326 or dkirkup@b2bcfo.com.

This article was recently published in the Atlanta Bar Association - Small Firm Section newsletter.

 

More from David Kirkup…

About the Author

David has over two and a half decades of business experience and is a proven financial management expert. Working in Europe and the USA, David has served as Divisional CFO at a number of Fortune 500 corporations: including Reuters, Marsh & McClennan, Zurich Insurance and ADP as well as numerous small and mid size companies. As part owner of a small software company, he was heavily involved in the marketing efforts and ultimate sale of the company. As CFO with a national PEO firm he dealt with the credit and financial issues facing hundreds of small business clients. David also spent 5 years in Bermuda managing captive insurance companies.

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