Law Practice Management Tip of the Week

Two partners of a mid-size Westchester County-based law firm, who recently elected to serve on their firm's newly constituted management committee, called the author to talk about how they may learn about their newly acquired job of managing their firm. "Your articles about law firm management appear regularly in the NYSBA Management Blog and you have been consulting with law firms for over forty years", said one of the partners, "Surely you must know what it takes to manage a firm. . . what differentiates the more successful managing partners from those who are less than or only marginally successful."
The body of information available about managing law offices in which authors of books and articles and speakers at seminars describe the role of lawyer management generally and the specific types and utilization of the myriad financial and management reports generated by data processing systems is expanding. Hardly a week passes without receiving information about a new publication or seminar about law office management. However, specific information is not readily available about what managing partners and members of management committees should do to coalesce their partners, associates and staff into a well-managed and informed organization, with all of the professional and administrative personnel working together to achieve the firm's immediate and longer term objectives.
After years of analyzing the personal and professional styles of lawyer managers, three inescapable conclusions have become readily apparent to me: (1) The authority of lawyer management is derived from the willingness of partners to be managed; (2) Partners in most law firms perceive themselves as being owners of the firm, having certain prerogatives and independence, not as employees to be "managed"; and (3) Law firms have their own personalities, cultures and management techniques that may be effective in one firm, but be marginally or not successful in another.
Following the above partners' telephone call, the author surveyed managing partners and members of management committees of twenty-five larger and mid-size law firms located in the surrounding areas to obtain their perceptions about their roles, training and concerns about being lawyer managers.

Leadership Role:
A significant majority of those surveyed, agree that their greatest, and most frustrating challenge is the best approach to follow to provide leadership to their firms. Central to this conflict is whether to lead by consensus or decree. All of the partners interviewed agreed that astute lawyer management must achieve the appropriate balance of building consensus among the partners versus managing as an autocrat. . . and which works best, under what conditions.
Most managing partners agree that in today's highly competitive environment, authority for managing their firm's administrative and substantive activities needs to be centralized in a managing partner and/or a management committee, to some extent. It is no longer feasible or desirable for attorneys to exercise their independence on virtually every issue. Partners must be willing to subordinate their prerogatives as owners of the firm for the "good" of the firm. This was referred to by one partner as "being a good citizen of the firm." To achieve this level of acceptance it is incumbent upon lawyer management to determine how the following will apply to their respective firms:
1. What specifically should be the role and responsibility of the partners, the managing partner and department heads for:
a. Policy determination and implementation
b. Long-range planning, including practice development
c. Recruiting and Training lawyers
d. Practice management and quality control
e. Confronting underachievers
2. How to improve the quality of communications between and among the partners and associates and staff for substantive and administrative matters, including:
a. The types of issues/matters partners and associates would like to be kept apprised of regularly
b. How these issues/matters should be brought to the attention of partners and associates, by whom and at what frequency.
3. What specifically should be the role and authority of department heads (coordinators) and individual partners for:
a. Accepting work from clients
b. Assigning work to other attorneys
c. Overseeing billing and collecting fees and disbursements
d. Developing plans for marketing legal services to existing and potential clients
e. Providing for an interdisciplinary approach for serving clients

Younger Partners in Management:
More younger partners are involved in the management process today than a decade ago. These younger partners have been educated about firm economics in published surveys and have set high economic objectives for themselves and their partners. Hence, many of them are willing to make those difficult and oftentimes unpopular decisions which may be necessary for the well-being of the firm.

Major Concerns of Lawyer Managers:
"Sacrificing their client development activities", "making enemies among partners" and "the short memories of those partners not involved in the management process concerning the personal and professional sacrifices and contributions of lawyer managers" were identified as the major concerns confronting managing partners and members of management committees. Several lawyer managers are apprehensive about "remaining too long" in their management positions, in light of the "overemphasis placed by many partners on business development and revenue production when setting compensation percentages." Half the lawyer managers interviewed questioned the extent to which those partners not involved in firm or department management are willing to "pay" those partners who serve as managing partners, members of management committees or managers of substantive department managers or whether the lawyer managers are expected to manage the firm "on their own time" and also maintain a full client workload during the firm's usual business hours.

Time Devoted to Management and Learning to Manage:
A majority of the managing partners surveyed, supported by an experienced law firm administrator, reported spending one-third to one-half of their time or more managing. Only four of the twenty-five firms surveyed had full-time managing partners. Several managing partners suggested that their power base within the firm resulted from their work in business development, client maintenance and fee production rather than their management skills. However, each of these partners emphasized the importance of their interpersonal skills combined with their business sense and their ability to "do the right thing" as key elements contributing to their success as lawyer managers. Several of the managing partners surveyed believe it takes a year or longer for them to learn their job, even if they served previously as a member of the firm's management committee.
Virtually all of the managing partners learned their job while doing it. Several partners learned "what not to do" by observing the mistakes of their predecessors and listening to the comments and criticisms of other partners. Those few partners who obtained their positions by dint of their strong personalities confided to the author that they perform certain management functions by decree and others, by consensus, "as long as they agree with the consensus." All of the partners surveyed subscribe to management publications. Most of them attend management seminars and informal, periodic meetings of managing partners of peer firms. Others may meet informally and exchange management ideas during bar association meetings, etc. During these formal and informal meetings partners discuss various business related subjects including developments in automation, compensation programs, budgeting and fixed fee arrangements with insurance companies and other clients, use of consultants for non-sensitive projects, etc., careful to avoid potential problems of collusion or price fixing of salaries, fees, etc. Obviously, no one discusses their firm's "dirty laundry”, however, the problems of other firms which may have been reported in the legal press and elsewhere are usually reviewed - usually in terms of how to prevent similar situations from occurring at your firm. Inherent in these discussions is the moral support that managing partners receive from one another. This sentiment was echoed by a partner from a large Westchester area firm who said, "It may not be articulated openly, but it is comforting to learn that we are not the only firm experiencing these particular problems."
Virtually all of the partners surveyed acknowledged that succession of management on the administrative as well as the substantive sides of the practice are sticky problems. Although all of the partners may benefit personally and professionally by serving in some lawyer management position, the importance of the management function in today's law firm business environment has placed a particular burden on those partners who have a business background and are perceived by other partners as being capable lawyer managers. No longer is it feasible for partners to "take turns" serving on the management committee as though the firm was a service organization. The most able individuals must be chosen to lead and manage their firms. From the firm's perspective, talented individuals who are chosen to serve as lawyer managers should be encouraged to remain in that position. Incentives suggested by managing partners include reduced obligations for generating or producing revenue - with more time to manage the firm, providing a stipend for managing the firm, in addition to their regular compensation, delegating sufficient authority to allow the managing partner to function independently on non-policy issues, etc. without being challenged at every turn. Two partners suggested that offering a sabbatical to the managing partner would enable that partner to "re-charge his/her batteries," however, the concept would be a difficult sell to most partners.
Most managing partners agreed that changing managing partners every two or three years, to share the management burden may, on the surface, appear to be fair. However, as reported by half the partners interviewed, in the practical scheme of things, it doesn't make sense. As indicated above, it may take a managing partner a year or longer to learn what it takes to manage the firm. A few partners asked, "How many of our financially successful client corporations change their CEO's every two or three years?" Further, these partners said, "It may take more than one year for a managing partner to formulate and begin to implement plans and ideas that begin to address the firm's immediate and longer term needs and priorities."

Changing Values Affect Management Styles:
In concluding their interviews several managing partners opined that as their law firms have evolved, the values and the culture of their partners also changed. Consequently, a majority of partners valued different factors as being important and necessary for their firm's development. This caused some lawyers who were quite pleased with the former values and objectives to become happy. Unless the managing partner is capable of "taking the partners' pulse" and can keep in touch with the other partners, the firm will experience serious difficulties, regardless of how much money the partners earn. It was stated by the managing partner of an 85 lawyer firm, "For each year we continue to exist and partners achieve their personal and professional goals within the broader firm context, those of us on the executive committee feel that we have accomplished some sort of miracle."

At meetings and retreats, partners are openly discussing the implications of a continued economic downturn that already has resulted in fewer clients, lower revenue, reduced profits and ultimately, the need for fewer attorneys at the partner and associate levels. Before taking drastic steps, however, parners and their managing-partner colleagues should consider implementing strategies such as those enumerated below that can maintain cash flow and improve margins:

(1) Engagement Letters:

The elements of this program typically include signed engagement letters, billing and collections, purchases and payables, banking relationships and capital reserves. An engagement letter should define the firm's specific work to be performed for the client, the billing and payment policy for that client matter and the firm's response if the client does not comply with the agreed upon billing and collection policy.

(2) Retainers, Advance Fees and Security Deposits:

Make it mandatory for attorneys to receive retainers from new clients in advance of accepting client representation. Also, encourage clients to agree to pay "Evergreen Retainers." This type of retainer allows the firm to bill against the retainer. When the balance of the retainer is reduced to a specific minimum amount, a bill is sent to the client to replenish the retainer balance.

It also should be mandatory for attorneys to obtain from new clients a retainer, an advance fee or a security deposit. The advance fee payment or retainer constitutes funds paid in advance for some or all of the work the attorney is expected to perform on the client's behalf. The security deposit is a sum of money that will be held by the lawyer to secure payment of fees for future services that the attorneys are expected to render.

(3) Billing and Collections:

Generally, clients tend to pay their bills in relation to the promptness with which they are billed once the work is done. Since some time usually elapses after a client matter is completed and the bill is sent, the sooner a bill is mailed, the sooner a firm is likely to be paid. In an attempt to maintain a steadier flow of incoming cash, many firms have shifted to a continuous billing cycle throughout the month rather than waiting until the end of the monthly billing period to submit bills. They bill clients immediately after the work is performed instead of waiting for the end of the month cut-off period. To support this practice, the partner responsible for billing the matter should ensure that all lawyer time and disbursements be submitted promptly after the conclusion of the matter so that a bill can be prepared.

The shortening of payment cycles has also given added impetus to this procedure. If the firm completes work for a client at the beginning of the month and waits until the end of that month to submit the bill, payment may not be received until 60 to 90 days after the billing date, thus in effect lengthening the cycle to 120 days or more. If the client had been billed immediately after the work was performed, however, the payment might be received that much sooner. More frequent billing during the month will help the firm to avert a cash crisis, avoid the cost of borrowing money.

(4) Clients Pay Costs Directly:

Firms should encourage clients to pay costs directly. Rather than permitting "use" of the firm's money, the clients should be billed for travel, litigation support costs, expert witness fees and other major out-of-pocket expenses as they are incurred. Even clients who insist on being billed annually or at the end of the case should be willing to pay costs advanced at regular intervals, at least quarterly or when they exceed a reasonable amount.

(5) Peer Pressure for Unbilled Time and Receivables:

Some firms are utilizing peer pressure to motivate partners who are delinquent in billing clients. These firms circulate a monthly report on "late billers." The value of this method is to apply some pressure on delinquent billers to be accountable to their partners for their "inaction." This method strives to encourage more timely billing while also stressing that the behavior of one partner directly affects the well-being of every other partner in the firm. Some smaller and mid-size firms have instituted monthly billing meetings to ensure that bills are prepared and reviewed in a timely and systematic manner.

A number of law firms reportedly are fining partners who have not satisfied their billing obligations to the firm. Some of these firms routinely penalize partners who are chronically late in preparing client bills. The firms acknowledge that although the partners grumble about this method, the results have been effective. To further reinforce the importance of the billing process, a few firms have actually computed the interest that would be due if the firm were forced to utilize its line of credit to pay operating expenses and/or the partners' salaries. The delinquent partners who do not bill in a timely manner must be made aware of the fact that when the firm's source of cash is not tied up in unbilled time, distributions can be made on a regular basis.

(6) Write-offs/Write-downs:

Another method of expediting the billing process that is used by many firms is generally referred to as the "15 percent rule." This rule holds that the billing attorney may write-up or write-down a bill by up to 15 percent of the total fees independently without obligation to review the matter with any other partner. However, if the amount of the fee write-up or write-down is in excess of 15 percent, the billing partner must obtain the concurrence of the head of the practice area and managing or financial partner before submitting a bill to the client.

(7) Educate Partners about Firm Economics:

Many firms have authorized their administrators to educate partners about the financial realities of operating a law firm and the importance of billings and collections. The effort is geared to ensure that partners understand the necessity to bill and collect for work performed. In this manner, the partners are made to realize that since working capital is required to carry unbilled time, less unbilled time will result in fewer demands on the firm for cash.

The effort to regulate cash flow does not end with the billing of time and costs. To facilitate collections, most firms have developed a program that includes centralizing control over collections with an individual lawyer, a committee or the firm's administrator. When lawyers have to justify delays in billing or lack of follow-up on the collection of receivables to a designated individual or group, this creates a greater incentive for the billing lawyer to initiate the billing procedure and become more active in the collection process.

(8) Credit Worthiness of Clients:

To gain better control over collections, more firms are screening income matters by evaluating potential clients' credit-worthiness before agreeing to commit the firm's resources to their representation. One method of testing the client's ability to pay is to request an initial retainer at the inception of the matter. Furthermore, an increasing number of firms have standardized policies concerning retainers and deposits. Arranging a monthly retainer billing schedule, for example, may enable the firm to regulate its cash flow.

Some firms have attempted to implement a program of charging clients interest for late payment of bills. However, more firms avoid this practice in favor of applying pressure on the billing attorney to determine the proper type of follow-up action that may be required to collect the receivable. In some situations, a reminder statement may be sufficient. In other cases, a telephone call from the billing partner may be necessary, and as a last resort, a personal visit may be in order.

(9) Purchases and Payables:

Periodically, every law firm administrator should test the cost of office supplies and related items to ensure that the firm is paying the lowest price available for the quality supplies, matters and equipment required to operate the firm effectively. This will involve an ongoing review and comparison of vendors' and suppliers' rates and special offerings. Also, it is recommended that the terms of purchase orders and contracts be reviewed in order to use the maximum time allowed before actual payment of bills. In today's competitive environment, law firms should negotiate terms for payment to encourage lower prices, discounts or extended payment schedules without incurring penalties or late charges.

(10) Cash Management:

All partners should be encouraged to promptly submit any checks they receive to the accounting department for deposit. In most firms this is accomplished readily by centralizing the mail receiving and opening process so that all checks routinely are forwarded directly to the accounting department, with the cover letter that may accompany the payment being routed to the billing lawyer. Obviously, in order for the program to work effectively, the individual who opens the mail must be instructed to process the mail and checks accordingly.

The necessity for more stringent management of cash also has prompted firms to review their procedures concerning lawyer-expense accounts. To expedite the billing of clients for costs advanced to attorneys for expenses, firms are establishing tighter controls over blank checks given to partners in advance of trips and other activities. As an added measure, most firms request that credit cards be issued in the partner's name rather than the firm name. This practice insures that partners will submit their requests for reimbursement when they return from trips instead of waiting for the credit card company to bill the firm. This also places the burden of setting the billing process in action upon the lawyer rather than the firm. Once the costs are routed to the bookkeeper or accounting department, a bill can be prepared and sent to the client in a timely manner insuring that the firm does not carry costs for an extended period of time.

(11) Establishing a Capital Reserve:

Since the financial position of a law firm fluctuates in response to a variety of factors not necessarily within the firm's control such as general economic conditions and a client's ability to pay bills promptly, many more firms have established the practice of maintaining a capital reserve. A reserve of working capital will enable the firm to maintain a reasonable cash position to accommodate operating expenses without resorting to the line of credit when receipts are poor and the firm's financial obligations must be met. Depending upon the firm's areas of practice and its collection policies, the general rule is to establish a cash reserve that is equivalent to one to three months of operating expenses. Relatively few firms include partners' draws in the reserve amount. In addition to maintaining a capital reserve, it is sound financial management to set aside funds for specific purposes such as relocation, acquisition of capital equipment and the like as a routine practice.

Monitoring the firm's requirements for both present and future cash outlays will enable it to avoid getting caught short which invariably results in dependence upon the line of credit. Prudent cash management calls for the line of credit to be viewed as the line of last resort. Undue reliance upon the credit line can set in motion yet another drain on the firm's available cash. Maintaining an adequate cash flow requires balancing the firm's demands upon its reserves.

A member of the New York State Bar Association who was recently elected to serve as her firm’s Managing Partner asked the below question about what should be the role of an administrator in a 30+ attorney law firm.

Question: As the recently elected Managing Partner of a 30+ attorney law firm located on Long Island, I have some questions about the effective performance of our firm’s administrator. It would be appreciated if you would kindly provide a job description for a law firm administrator for our size firm.

Response: Professional law firm administrators may make important contributions to the financial and operating success of their law firms. The value of these administrators can increase as they apply business principles to their firms and to enhance productivity by:

• developing automation to insure the delivery of high quality legal services,


• maintaining, analyzing and interpreting financial data and management information for the Managing Partner and the partners,


• managing/coordinating the human resources functions for the administrative support staff,


• providing administrative management support to those partners who are responsible for substantive areas of the practice and


• performing/coordinating all of the other operational functions required of a growth oriented law firm.

As requested, below is a detailed job position of what I believe should be the role of the law firm’s administrator.

Position Description for Firm Administrator

The Firm Administrator shall be responsible for managing the administrative operations of the Firm, including supervising all non-attorney personnel; evaluating and managing the Firm’s operating and information systems; overseeing the Firm’s finance functions; assisting in the marketing of the Firm’s legal services and client development activities; and evaluating, managing and supervising the facilities of the Firm.

The Firm Administrator will report to the Firm’s executive committee and will meet with the executive committee on a regular, periodic basis. The Firm Administrator may consult on an as-needed basis with the executive committee or any member of the Firm so designated by the executive committee for specific purposes. The Firm Administrator’s responsibilities, which may be altered or added to from time to time by the executive committee or by action of the members, are described in more detail below:

Personnel and Human Resources Management

The Firm Administrator should have an extensive background in personnel and human resource management and will be responsible for overall non-attorney personnel management, including the following:

• Determining non-attorney staff needs in coordination with the executive committee, practice group leaders, and supervising attorneys, as appropriate.
• Interviewing and screening applicants for non-attorney positions.
• Supervising the training of non-attorney personnel.
• Evaluating non-attorney personnel, including consulting with the executive committee, practice group leaders and supervising attorneys.
• Coordinating vacation schedules of non-attorney personnel.
• Counseling non-attorney personnel who are not complying with Firm procedures and requirements and taking appropriate disciplinary action when necessary.
• Handling termination of employment of non-attorney employees after consultation with the executive committee and, where applicable, the supervising attorneys.
• Conducting non-attorney personnel meetings.
• Maintaining personnel records for all employees.
• Handling unemployment compensation hearings.
• Determining and recommending salary adjustments for non-attorney personnel.
• Maintaining the non-attorney employment manual.
• Maintaining the attorney manual, containing policies and procedures applicable only to attorney personnel.
• Assisting the executive committee in associate attorney compensation and bonus evaluation process.
• Administering, evaluating, and recommending changes, as appropriate, to, the benefits offered by the Firm, including welfare and retirement benefits.

Management of Firm Finances

The Firm Administrator should have a strong financial background and will be responsible for the overall financial planning and financial management for the Firm, including responsibility for the following:

• Planning and implementing the Firm’s annual budget.
  
• Tracking client development efforts.
  
• Financial and tax reporting.
  
• General ledger and trust accounting.
  
• Assisting with billing and collections.
  
• Cash flow control.
  
• Managing banking relationships.
  
• Payroll and fringe benefits for employees.

Management of Computer and Other Operating and Information Systems

The Firm Administrator should have a broad knowledge of computer systems and other operating and information systems, both hardware and software, as used in a law firm environment. Duties of the Firm Administrator with respect to management of the Firm’s computer systems and other operating systems will include the following:

• Evaluating periodically the computer systems used by the Firm, including hardware and all software, to determine whether changes in these systems are merited to increase efficiency and to achieve cost savings.
  
• Securing and managing appropriate maintenance contracts for computer hardware and software systems.
  
• Managing records retention, including information storage and retrieval.
  
• Managing the library, including all reference materials and subscriptions.
  
• Managing the telephone system, including periodically evaluating the telephone system to ensure that the Firm has a cost effective and up-to-date system.

Facilities Management

The Firm Administrator will be responsible for the overall management of the Firm’s physical facilities and related functions, including the following:

• Office space planning.
  
• Renovation of office space when necessary.
  
• Communicating with the Firm’s landlord.
  
• Office furniture.
  
• Office equipment, including copy machines, fax machines, postage and other mail equipment.
  
• Purchasing office and breakroom supplies, including food and drink items, and miscellaneous equipment.

Firm Marketing and Client Development Activities

The Firm Administrator will assist the attorneys in the marketing of the Firm’s legal services and client development activities, including the following:

• Coordinating the preparation and periodic updating of the Firm’s brochure.
  
• Assisting in preparing and disseminating in a timely manner the Firm’s announcements for new members, new associates and other matters.
  
• Handling Firm advertising.
  
• Handling other activities that will promote and enhance the Firm’s visibility and image in the communities served by the Firm.

Other Activities

The Firm Administrator should assist the Firm’s attorneys in recruiting attorneys, training associates, training legal assistants, and improving the total quality of the practice of law for the Firm’s attorneys. The Firm Administrator also is responsible for coordinating business and social functions of the Firm.