Law Practice Management Tip of the Week

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.

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."

Setting Economic and Practice Objectives:
Every firm that strives to be profitable must make the effort to formulate, identify and express its objectives in terms of revenue, firm-size, management structure, type of practice, staffing, etc. This means answering what may be some difficult questions, such as: Which areas of the practice should be retained or reduced? Which attorneys are able, and willing, to contribute to the firm’s objectives? What should the firm be doing to attract more business and enhance its reputation? What are the sources of difficulties with clients? Are any of the partners directly responsible? How can these partners be weaned from the relationship without the risk of losing the client? Are the department heads actively involved in managing the practice areas or is their function mrerely titular? The answers to these kinds of questions are essential in formulating a plan that provides direction and is compatible with the personal, professional and economic objectives of the partners. The point of defining and establishing objectives is to ensure that maximum effectiveness can be achieved in the day-to-day operations of the firm.

Utilizing Professional Staff:
A firm’s success in providing quality legal services in an effective and timely manner is directly related to its ability to manage and control its lawyer personnel. Firm management must be willing to manage the firm and ensure that its members accept their responsibilities and satisfy their obligations for the management of administrative and practice areas. This means management must assume a proactive role for recommending policy and maintaining adequate control over such activities as recruitment, training and career development of associates; staffing of the firm’s practice areas; allocation of work to attorneys; assuring adequate administrative support; developing an associate evaluation program; utilization of paralegals and law clerks; establishing criteria for admission to partnership; developing a compensation plan and benefits program; assuring adequate communications between partners and associates, etc.

A law firm’s profits are fundamentally linked to its ability to successfully utilize the professional personnel complement. If there is any slackening in leadership and firm management is perceived as lacking direction and the necessary skills to be effective, the result will be little or no organization and the effort will ultimately fail. Most attorneys will readily subordinate their independence for the benefit of the firm, if they see tangible evidence of management’s effort to meet their objectives. The benefits are obviously of mutual advantage.

Budget for Expenditures:
Management of the firm’s financial affairs begins with careful monitoring of its past and present activities and establishing projections for the future. This involves reviewing the present and potential monetary aspect of each client matter. In addition, a systematic review of receipts, disbursements and productivity data will enable the firm to make decisions that will assist in formulating and ultimately achieving practical objectives.

Most firms routinely develop projections for financial goals for the year ahead. In order to develop the information necessary to establish the budget, the firm may be required to take a long and objective look at itself to determine whether its current volume of business will generate sufficient income to meet the partners’ expectations and pay all the operating expenses. A firm must maintain a volume sufficient to fully utilize the time of its attorneys. The most efficient system will not result in a satisfactory net income unless the volume and value of the matters is plentiful. Adequate financial planning includes consideration of the firm’s present client base, its billing and collection procedures, and specific method for managing the firm’s finances. Efficient and effective management involves overseeing such matters as the day-to-day activities of the accounting staff; advising on the firm’s capital requirements, and annual budget and fee policies; assessing the results against the budget; developing fee policies for various practice areas; determining controls over billing performance including profitability, unbilled time and costs, receivables, delinquencies, write-offs, etc.

One other critical aspect of financial planning involves maintaining adequate controls over costs. Management must be persistent in tracking overhead costs. Generally, overhead rises more rapidly than revenue. The increases may be warranted, however, and are most often assessed by dfetermining whether the overhead charges serve the partners in supporting them by means of a budget for each type of expense. This means developing a budget for such items as non-lawyer employment costs, occupancy costs, library, equipment, and efforts to provide a satisfactory net income. Regardless of the size of the office, overhead should have direct and indirect costs, etc. This budget should be established as part of the annual financial plan and should represent the total expenses required to support the expected level of revenue producing activities.

Conclusion:
The “right” kind of financial planning by firm management will permit a law firm to effectively evaluate its success in attaining a variety of goals. If a firm decides that it wishes to grow at a specific rate, it may very well have to exercise some selectivity in the work it accepts. There is not better way to do this than to include the most profitable work and exclude the least profitable. Without the type of planning describe above, the selection process becomes little more than guesswork. Good firm management should strive to minimize the guesswork when attorneys and administrators are attempting to manage their financial affairs.

Managing partners, financial partners, members of executive committees and administrators must devote more of their time today to planning and managing their firms' finances and those functions that improve the cash flow.

This article describes six aspects of law firm management and economics I recommend to lawyers in charge of a firm's business matters to improve their firm's cash flow. These factors include: cash flow; a business plan; budgets for revenues, expenses and client advances; partner compensation; a recommended new business and billing committee; and partners' capital and borrowing.

Good cash flow requires management and financial controls, two disciplines which operate as limitations on the independent actions of attorneys in group practice.

Attorneys realize that they must submit to systems and controls to manage the financial aspects of their practices in order to survive in the ever increasing competitive environment which has engulfed them. Nevertheless, the introduction and implementation of these systems and controls by lawyer management do not engender "love" from their partners. On the other hand, careful financial management will bring rewards in terms of improved operating results and avoidance of unhappy or even painful surprises.

CASH FLOW

It is vital for lawyer management to understand that cash flow, although principally the result of your firm's net income flow with depreciation added back, is also affected by changes in their firm's balance sheet that do not "pass through" the income statement.

For example, an increase in assets reduces cash. Decreases in liabilities, including capital accounts, do the same. But the reverse is also true - decreases in assets and increases in liabilities, including capital accounts, increase cash.

The obvious cash drain from distributions to partners, the purchase of automated equipment, the repayment of bank loans, borrowing and advances to clients are examples of transactions which do not show up in the income statement, yet can materially affect cash. Therefore, the application of funds statement, a financial report usually prepared by the firm's administrator or bookkeeper, which combines the effect of net income plus depreciation and balance sheet transactions, requires careful analysis on a continuing basis.

A well conceived budget and business plan offers a road map for the future. Financial statement analysis records history and will tell you whether you are on or off course, positively or negatively. Without appropriate planning, controlling cash flow and improving financial management are impossible. There is really no mystery to this concept of cash flow, yet I never cease to wonder how often partners in law firms recognize that capital expenditures affect net income.

BUSINESS PLAN

Your firm should have a business plan spelling out those strategies and initiatives that the firm, its practice groups and individual attorneys intend to implement to reach the immediate and longer term goals and objectives agreed to by the partners. Even if the goals are purely financial, they will require a business plan and the necessary follow up by lawyer management to be achieved.

FINANCIAL PLAN

The financial plan follows the business plan in that it spells out the investments, commitments, financial resources and bottom line results that can be expected from the implementation of the business plan.

The business plan may identify the fields of toxic waste disposal, health law and bank holding companies as areas of opportunity. The financial plan should tell you the estimated cost and income opportunities if you decide to embark in that direction.

Budgeting is a significant element of the financial plan. The budget should include the projected revenues and expenses. The assumptions underlying the budgets in each of these areas should be carefully developed and understood.

During law firm retreats that focus on methods for improving revenues and retained earnings, it is not unusual for some partner to say that it cannot be done because lawyers never know where tomorrow's business comes from. The answer is that revenues can be budgeted by analyzing your firm's largest clients, reviewing their relative standing as revenue producers over the last several years, looking at the type business they produced and talking to the lawyers responsible for each of those clients. Pretty soon, you will be able to detect trends and client needs that can be translated into assumptions and revenue estimates. If your firm does nothing more than ask each attorney responsible for a significant client to give an "off the cuff" estimate of billings, you will be able to establish a data base for your revenue estimates. Should you have enough courage, you might consider establishing financial incentives for those lawyers who reach or exceed their own clients' revenue estimates.

A sound revenue estimate is probably the most important step in budgeting - a law firm is highly labor intensive (personnel and related expenses being by far the largest cost) and lawyer hiring decisions tend to be made in advance at least once a year. In the absence of revenue estimates, hiring decisions will be made from the seat of your pants, so to speak, with potentially adverse results, either on the up or the down side of your business cycle.

Budgeting expenses is easier because the commitments are either already made or result from decisions that at least appear more in your control than revenues. However, lawyer management in your firm must establish appropriate and reasonable policies to control expenses.

What good is the finest expense budget, if it is not enforced or if the persons affected by it do not have an incentive to live within that budget?

People must feel that the budget is "their budget," both in terms of revenue and expenses. All departments and functions of the firm should be involved in the budgeting process.

Expenses include not only operating expenses, but also capital expenditures. Some expense categories deserve particular attention.

Entertainment and client development expenses are areas in which lawyer management should pay close attention. Allocate to each lawyer an annual budget based upon his or her anticipated volume of business or past records or any other standard you choose to select. Review his or her expenditures and hold him or her accountable. A simple start is to keep a separate ledger on each lawyer and require that each request for reimbursement contain a written justification for the proposed expenditures.

Control the use of facilities through such devices as computerized code numbers (i.e., Danyl System) for mail, duplicating, messenger, client advances, telephone, postage and similar expenses. Your firm's recovery of such expenses from the clients should increase enormously. Whether you bill your client specifically for each such expense, make an average charge to each client or absorb the expense, you still need to know what these services cost and keep them under control.

CLIENT ADVANCES

For years, this category of expenses has been of great concern.

Controlling these advances is not easy. Every litigator will tell you that you must advance filing fees. I have no problem with filing fees, but when it comes to court reporters, costs of transcripts, exhibits and expert witness fees, I see no earthly reason why these expenses cannot be paid directly by the client. The same is true with incorporation fees and charges, blue sky fees, SEC registration fees and other incidental costs of conducting the client's business. Part of the problem is created by the cash accounting practices of many law firms that do not run advances to clients through the income statement. Unfortunately, no matter how you account for client advances, they are a drain on your cash and their write-offs affect your net income.

To control advances to clients within reasonable limits requires toughness. A combination of approaches is needed:

• Don't permit them at all;

• Insist on retainers or at least deposits to cover estimated advances;

• Bill client advances immediately and separately from fees;

• Record certain advances, i.e., contingent fee disbursements, as expenses to reflect them in the income statement;

• Hold your lawyer accountable for write-offs; and

• Insist that your accounting department not accept requests for client advances in excess of a predetermined minimum amount.

One of the biggest components of client advances is travel expense. Many of your larger corporate clients have instituted in-house transportation departments which enable them to obtain significant savings.

Why not place your travel and lodging arrangements through your clients' transportation department? The client will appreciate the savings and it will do wonders for your cash balance, not to mention saving costs in your accounting department.

EFFECTIVE BILLING

Converting a revenue budget into reality requires not only the efficient and effective handling of client business, but an effective discipline of billing and collecting for services rendered to clients.

Probably the most fundamental change in the practice of law resulted from the introduction of computerized billing. Some say "billing rates and the computer have robbed the lawyer of his professionalism" - obviously an exaggeration, but what can be more degrading for a member of the "honorable profession" than to be asked by a client for his hourly rate. A lawyer's likely response is "I am not a plumber." You have all heard the old story about the lawyer who complained about his plumber's bill.

Another problem is the time it takes to prepare a bill in the face of in-house counsel's demands for detail. Good cash flow requires prompt billing and the chances of collecting a bill in full and promptly are greatly increased by prompt billing. This is complicated by the fact that more and more clients want monthly bills. Yet unbilled time inventories seem to be an ever increasing problem for many law firms.

Under systems that I recommend, each billing attorney is required to give a monthly report when the matters for which he or she is responsible are expected to be billed and when collection will occur. I suggest that billing attorneys with unbilled time in excess of $4,000 for any client matter are called upon personally by a member of the firm business administrator's staff to review unbilled time and accounts receivable. If necessary, a member of lawyer management will also make these rounds. In addition, I suggest distributing monthly to all partners a tally sheet for each partner showing the unbilled time inventory, total accounts receivable and unbilled time and accounts receivable over 90 days. A little peer pressure seems to do wonders.

Obviously, a partner's compensation system which contains an element recognizing cash collection encourages prompt billing and follow-up on accounts receivable.

The computerized invoice presents an additional opportunity. I have initiated in many law firms the introduction of a system whereby centralized billing, rather than lawyer-initiated and manual billing, becomes the rule. A problem is obviously the matter of editing computer prepared invoices. Firm-wide monthly billing as a rule is the goal. In my opinion, this objective can be achieved only with the help of a centralized billing system. My suggestion is that the computer should be instructed to prepare the desired invoice for each client on a monthly basis - the billing or responsible attorney reviews this invoice within a specified time limit and then the invoice goes to the client. The same system would be used to mail reminder invoices when an invoice is not paid within a specified period of time.

While we are talking about invoices not being paid on time - we have discovered that placing the credit tracking company Dun & Bradstreet's little gummed sticker on a reminder invoice can do wonders in speeding up certain collections. Many of our clients use it freely and it costs very little.

COMPENSATION

Your compensation system should provide recognition of lawyers who are prompt in billing and collecting, and if it doesn't, you should consider it. I recommend this be accomplished through the judgmental portion of your profit distribution system. Of course, certain types of legal business do not lend themselves to monthly billing - i.e., probate administration, contingent fee litigation and certain financings. However, in that case you should recognize the time value of money in setting hourly rates and fees.

Old accounts, billed and unbilled, should be written off, not necessarily off the books, but for the purpose of determining current compensation. Some firms do this with respect to all accounts over one year old.

NEW BUSINESS AND BILLING COMMITTEE

In the old days, each partner made his or her own decision whether or not to take on a particular piece of business. Unfortunately, the growth of the business and the eagerness to take on new business, have led to billing and collection problems.

My response has been the creation of a new business and billing committee that serves several purposes:

No new client matter (for a new or an existing client) can be accepted without prior approval of the committee. This committee should meet weekly. Any committee member may approve new matters which cannot wait for committee approval. The committee checks the conflict of interest questionnaire, client credit information, applicable hourly rates and billing arrangements proposed by the responsible attorney.

The committee also reviews every invoice in excess of certain amounts to audit the amount to be billed versus previously approved or agreed upon billing arrangements and applicable rates. Most lawyers have found this committee to be most helpful in ferreting out clients or matters which should be not acceptable, or acceptable only on the basis of a significant up-front retainer. I need not mention the benefits of the conflict of interest review.

Finally, it is expected that the review of invoices will produce noticeable results in increasing your firm's realization of established billing rates and avoid discounting of time or rates. It is a fact of life that most lawyers tend to be tough in evaluating business prospects, have more courage in billing top rates and do a better job in advising clients of our billing practice ahead of time if we held accountable to a committee of peers.

PARTNERS' CAPITAL AND BORROWINGS

For years, most firms have followed an arbitrary rule of thumb that calls for partners' capital to equal about 60 percent of the firm's investments in fixed assets such as office equipment and leasehold improvements. Partners add to capital each year and receive interest on this capital account at the average prime rate.

In addition I frequently recommend the firm withhold 5 percent of the annual net income and distribute same at the beginning of the second quarter of their next fiscal year.

Cash flow from operations, partners' capital and the 5 percent hold back enables many firms to limit their bank borrowings to cover short term needs.

Cash balances should be monitored carefully to maximize return on cash. Most cash should be invested to the extent that firms sometimes have to borrow money short-term. Partners should be on fixed monthly draws which may be supplemented with partial distributions on June 1 and Sept. 1, cash flow permitting. However, partners' draws should be on the conservative side.

SERVICE IS THE KEY

I want to emphasize that systems and controls do not give you results in and of themselves. It is the quality of legal services, marketed in a common sense way, rendered to clients that produces the psychic and monetary reward lawyers seek.

Financial planning can only help improve the monetary aspect of this equation.

The danger inherent in such systems is that they can hamstring a firm's daily practice. Lawyer managers must be careful to avoid implementing financial systems and controls that make little sense to anyone other than the individual who created them and create unnecessarily burdensome obstacles to the firm's core function of servicing of client matters in a timely manner.

The true measure of leadership among lawyer managers in today's law firm is the ability to maintain a careful balance between the need to encourage each lawyer's initiative, provide the much needed atmosphere of professional camaraderie typical of the partnership type of law practice and plan and implement the modern financial tools without which the best practice can fail.

Despite a strengthening of the economy, quality performance is no longer the single most important issue in deciding whether to promote associates to partner status. Economics, available workloads, whether the practice area can support another partner, who else is a candidate for admission to partnership next year and two or more years down the road need to be considered.

The performance expectations of partners in most firms have changed. No longer can firms afford to have partners who are unable to pay their own way. In fact, many firms expect their partners to work harder and are evaluating their performance accordingly. More firms are operating in a "lean and mean" mode and are interested in retaining partners and elevating those associates to partner status who are exceptionally bright, possess a high level of legal intelligence and capable of "retooling" quickly to work in diverse practice areas, in teams, or multi-client matters.

The author's management consulting firm has been retained by several mid-size and larger law firms to articulate the criteria to be considered by partners in their deliberations regarding the progression of associates to partner status. The criteria suggested in this article are intended only as a guide to assist law firms in the assessment process and are not intended to be all- inclusive and are subject to periodic review, change and modification as the needs, goals and objectives of the law firm change.

Partners recognize that the value of an associate's services and contribution to the firm cannot be determined with mathematical certainty nor can their overall performance be measured or described in terms of metes and bounds, yards or meters, or any other precise unit of measure more suitable to an artisan's calibre. Partners also recognizes that rarely will an associate achieve the highest level in each of the established criteria. The reality is that some associates do certain things better than others, thus, each must be considered as an individual. High marks in every category is not an absolute requirement for promotion to partner status.

Nevertheless, the criteria, when considered as a whole, provides a law firm with a framework of discussion or at least some objective measure of comparison so that some degree of uniformity and fairness can be achieved in the selection process.

The criteria set forth below are not ranked in any order of priority. However, certain of the criteria, carry more weight than others. This is not to say that the other criteria are less important or given any less weight or consideration in the selection process.

Criteria:

1. Economic Consideration
As a professional business organization, a law firm must be able to justify on an economic as well as professional basis, the progression of associates to partner status. Factors which must be considered when determining the feasibility of adding another partner include: (a) The present and projected strength of the practice area (or whether the department can sustain another partner?); (b) The individual's historical productivity level (billable hours history); (c) The individual's ability to sustain a high productivity level at a partner's billing rate; and (d) generally, the individual's ability to support himself or herself as a partner.

2. Non-Billable Hours
Promotion to partner status requires more than simply billing hours during the work week. Non-billable time is a yardstick by which the firm can measure an associate's level of interest in the success of the law firm. Non-billable hours would include such endeavors as attending educational seminars and bar association functions, participating in continuing legal education programs, attending work-study groups, performing approved pro bono work, monthly billing activity, marketing and firm promotional work such as writing articles and participating in the firm's newsletter, and the expenditure of other time clearly motivated by a desire to promote the interest, image and success of the law firm. Excluded from non-billable time are such as monthly attorney lunches, associate meetings and other purely administrative undertakings within the firm. Taking graduate courses at a local university or law school to further the associate's own education does not count as non-billable time. Participating in the local tennis or health club, while it may end up producing a client or two, does not count as non-billable time. However, participating in the Chamber of Commerce or other civic organizations is important and could be counted as non-billable time when attendance during the work week is necessary.

3. Longevity
This is an obvious factor to be considered. Longevity of about 6.5 to 7.5 years, more or less, may be one appropriate time frame. One must recognize, however, that achieving the designated period of longevity does not, of itself, assure promotion to partner status.

4. Client Origination
The ability to develop and originate new clients for the firm is another of the many significant criteria which will be considered. In this connection, some individuals possess a natural and innate talent for producing new business while others achieve a lesser degree of success. While this criterion is certainly important, it is not of itself a condition precedent for evaluation to partner status. It is generally recognized, however, that the ability to originate new business is a much desired attribute.

5. Collection of Hours Billed
Realization on hours billed is certainly as important as the number of hours billed. While billing 1750, 1800 or 1850 hours in one year reflects dedication, hard work and devotion to the firm, nevertheless, realization on only 40 percent of the hours billed adversely impacts on the bottom-line productivity of the substantial investment of time made by the billing associate. For this reason, all attorneys, not just associates, must constantly monitor the quality of hours billed. High quality hours are generally collected. Low quality hours are frequently written off. Thus, while high billable hours will achieve high marks in one category, the high level of success could easily be offset by the quality of hours billed. Associate attorneys are frequently not in a position to control the payment of bills of the work assigned to them and are rarely able to refuse an assignment. However, some associates are indeed fee-conscious and raise questions about the collectability of assigned work. This is desirable and serves to remind that associates have an obligation to monitor the payment record and of each client account assigned to him or her and to check periodically with the assigning partner to determine the status of payment.

6. Community Involvement
Most firms encourage attorneys to become involved in community and outside activities. While there is frequently no requirement that an attorney become affiliated with one or more outside activities, firms encourage their attorneys to do so. Participation in community activities neatly dovetails with marketing and client origination. Once again, there is no mandatory requirement that affiliation with a civic or charitable organization in the community is a condition precedent to elevation to partner status. Nevertheless, experience teaches that those who become involved in community activities, even on a minimum level, are more likely to succeed in business origination and development, which is an attribute encouraged.

7. Client Relations
Most firms encourage associates to establish a professional relationship with clients. Thus, the ability of the associate to relate and interact with a client is an important factor to be considered.

8. Handle Complex Matters with Minimal Partner Supervision
The demonstrated ability to handle complex matters at the partner level of responsibility and to function effectively without close partner supervision is another key factor. Associates wishing to be elevated to partner status must demonstrate their ability to relate to, manage and service clients without substantial or significant input from the originating partner. When this occurs, the associate has succeeded in nurturing and developing the client, who has become comfortable in dealing with the associate, even though the client may have been brought to the firm by the originating partner. This is a maturing process developed over many years and is an asset. This attribute creates a high level of self-esteem in the associate and projects the image that the associate acts more like a partner than like an associate among the public, other attorneys and employees at the firm. Success in this category argues strongly for promotion to partner status.

9. Professional Skills
Associates on partner track must develop a "professional identity" within and outside of the firm for skill in their specialty area and possess the promise for enhancement of professional identity and possess a breadth of skills or the ability to transcend a narrow specialty, if needed. Also, candidates must obtain strong marks in legal analysis, writing, oral communications, negotiating ability and the sound exercise of judgement, etc.

10. Case Management
This criterion ties in with the above criterion labeled Minimal Partner Supervision. The associate's ability to assume responsibility for and manage cases effectively, and supervise associates and paralegals, is a much encouraged attribute and demonstrates a certain maturity necessary for promotion to partner status.

11. Cooperative Spirit
Every attorney should be a team player. Each attorney desiring elevation to partner status must demonstrate a willingness to participate, cooperate and get along well with clients other lawyers and staff in all aspects of the firm. In today's economic environment, reinforced by downsizing of firms and cross-fertilization of attorneys demonstrated by the overall sharing of workloads, depending upon the individual attorney skills, regardless of who originated the client and the willingness to accept assignments from other attorneys are important considerations. \

12. Personal Presentation
While most firms do not possess any hard and fast dress codes, nevertheless, image is perceived as being important. Personal presentation projects an image. Associates must make a favorable impression upon the public, even when "off duty." One who makes a neat, tidy and clean appearance, enhances the image of himself or herself and of the firm.

Conclusion:
The foregoing criteria generally reflect those areas which are considered by firms when selecting associates for promotion to partner. As a general rule, however, all areas discussed are important and all will be considered by the partners during the selection process.
Prior to assessing the eligible candidate, in fairness to the candidates as well as the firm, lawyer management is obligated to:

*Establish realistic policies and admission criteria that can be supported by a large majority of partners;
*Review these policies and admission criteria to ensure they remain realistic with the passing of time;
*Make certain, especially at partnership consideration time, that partners remain acutely aware of the firm's policies and partnership admission criteria; and
*Improve the associate evaluation procedures to minimize the number of instances in which under-qualified candidates receive actual consideration.

Legal work of a superior quality is the primary objective of attorneys in most law firms. If good economics are to be achieved, legal effectiveness must come first. A law firm may find that it is developing a serious problem in maintaining high standards of quality among its partners and associates. It is not surprising that more lawyers are becoming increasingly concerned about how a growing organization should provide for quality control over the legal effort.

To provide for successful quality control in an atmosphere free of restraints, the individuals engaged in the legal effort must be of high caliber and established competence. They must exhibit a willingness to adhere to the objectives and policies established by the firm’s management.

Just as the persons who contribute to the legal effort exist at all levels of the firm – the partners, associates, paralegals, secretarial staff, library and research, mail duplicating and messengers, reception and any outside services the firm may use – so does the legal product provided to the client require that quality control be maintained at each level. This means that standards of quality control must be built in to each level.

Built in Quality

The quality must be built into a product of service; it cannot be inspected into it. Thus, each individual is responsible for ensuring exact compliance with established rules and procedures. As an example, the secretary who fastens a letter concerning a statute of limitations date to the wrong file causes a lapse in the process and a delay in a prompt and timely response. This creates a quality control problem that results in a suit against the firm for $300,000 and damages the firm’s image.

Even when the concept of quality control is built in, the firm must take necessary precautions. The best lawyers will unwittingly contribute to quality control problems when they are burdened to the breaking point by fatigue and an inability to complete assignments in a proper or timely fashion.

Lawyers who have taken on the work belonging to another specialty have been sued for malpractice because they were not current with the law or procedures in that specialty. In other instances, they have been brought to court for overcharging fees, and justly so, since they consumed many times the hours that a specialist would normally record.

Quality control should be exercised in the selection, evaluation and retention process at all levels of the personnel system. Decisions to retain legal assistants, law clerks and lawyers are important checkpoints.

The active pursuit of quality control is first exercised in the lawyer selection process. A thorough evaluation of each task performed by the individual should further assess and establish the caliber of the person hired. Determining this individual’s capabilities is carried through with a general periodic review process.

One method of doing this is to assign every new matter to a partner and associate. The partner may decide to share the work with the associate or to delegate more of the work to that associate. The partner is responsible if anything goes wrong with the file. The responsible partner may exercise varying levels of supervision and control, depending upon the associate’s legal intelligence, background and experience, accuracy, thoroughness, ability to get things done and overall judgment. Oral presentations should also be evaluated. Procedural methods for processing different types of work should be reviewed for correctness, timeliness and cost effectiveness.

By the time an attorney is designated as “lawyer in charge,” he or she is the principal quality control check point. Not only must the attorney ensure prompt delivery of top quality legal service, but it is his or her responsibility to oversee the typing or publication and all final details, including appearance, packaging for delivery and even the mailing and/or delivery instructions.

Quality Checkpoints

By the time an attorney becomes a partner, he or she should be fully aware of the quality required for any given case. The attorney should be conscious of the need to consult with other lawyers in the firm on fields of law that are new or unfamiliar or to refer the case to a specialty lawyer. Another important quality control checkpoint is knowing when to make the decision not to accept a case that the firm may be unable to handle satisfactorily.

An increasing number of law firms have gathered valuable feedback on the general quality of their services by conducting personal interviews with long-time and continuing clients. While the clients may not be able to evaluate the quality of the legal input, they may prove helpful in establishing the overall promptness of service, effort expended, results achieved and attorney-client relationship. At the same time, and within the ethics of the profession, the firm may be able to ascertain whether the client is aware of the full range of services and capability of the organization.

Some firms have set up more rigid quality control systems through the formal training and evaluation of associates and partners. Many firms establish a partner review system whereby the work product is reviewed by partners (other than the performing attorney) within the specialty practice area.

A final key point must be emphasized. At the partner level, the department administrators and individuals responsible for accepting business play an essential part in the quality control process. The firm members should be particularly aware of matters that require handling by specialists or, in rare instances, when an individual is physically or mentally incapable of handling the matter for which responsibility has been assumed. In the latter situation, the firm may rely on a medical check-up (biennial, or annual after a certain age) to reveal problems that can interfere with performance.

To ensure continuity and avoid gaps in service, the management committee should undertake an annual review of the specialties provided by the lawyers and supplement the listings within each department on an ongoing basis. For example, if a lawyer is listed as a trademark specialist, another attorney involved in a related matter would be able to refer to the specialist for assistance.

It cannot be over-emphasized that the primary responsibility for quality control of legal work rests with each partner and lawyer in charge of the matter. The specialty or division leaders can best provide the capability for “sampling” the work product or results of partners or lawyers in charge. Signatory responsibility may be specifically set forth in a policy statement for defined situations such as auditor’s letter, SEC matters, opinion letters, etc.

Where appearance is a quality factor, sampling can be accomplished by the administrative manager and secretarial supervisor.

The billing partner’s contribution to quality control is implicit in his or her responsibility to the client. This position enables the billing partner to receive complaints or criticism about the manner in which the case was handled. Serious criticism or complaints that reveal a pattern should be conveyed to the individual(s) responsible for recruiting and training lawyers for evaluation and remedy, as required.

Ultimately, the management committee should maintain overall responsibility for the success of the firm, and this includes establishing controls for ensuring the quality of its work product. Every firm (and department) must develop its own program of quality control.

Although independence should be supported, it must be balanced by a system that keeps lawyers informed about one another’s activities and encourages attorneys to produce work equal to the best that is done by anyone else.

In theory, all partners are created equal, since, by dint of partnership status, they are accorded the same rights and privileges. In practice, however, this is simply not the case, since individual partners invariably have their own ideas about how to perform their jobs and exercise their authority.

Good law firm management cannot be achieved until all partners agree to subordinate some degree of independence to a managing partner or committee. In essence, the partners must strike a balance between their rights as owners and their responsibilities as citizens of the firm.

If a firm is to establish a form of governance that satisfies all its members, the lawyers must first acknowledge the need for leadership. The designated leader — whether an individual or a management or executive committee — will not succeed unless and until all the firm's lawyers recognize that their willingness to be governed provides the impetus for successful management. The partners also must recognize that management of a firm, either as the managing partner or a member of a committee, is just as important and as difficult as performing client work.

In some firms, one partner assumes the leadership role naturally, either because the individual is a founding partner or controls a significant client base. In firms where the partners are relatively young and inexperienced, however, this process of "natural selection" may be more difficult (if not impossible). In firms where no partner surfaces as a natural leader or no one wants the job, the firm must take aggressive action if it wishes to grow and satisfy its members' professional, economic and personal objectives.

The firm must make some hard and fast decisions about the kind of leadership that is required and what the members are willing to live with. Should a managing partner be elected by the general partnership? Or should this individual be appointed by the management committee?

Sometimes the firm's size will preclude this particular dilemma. The smaller firm is in a position to establish a democratic form of governance that includes all the partners in a leadership role. But when this is not practical, the partners face a difficult choice and risk setting up two power centers — and consequent divisiveness — if the general partnership elects both the management committee and the managing partner. To avoid this debacle, the preferable course is for the management committee to select the managing partner. Once again, the firm is given the chance to chart its own destiny.

Selecting a Firm Leader:

What kind of person makes a good managing partner? Generally, lawyers are not recruited to a firm on the basis of their interest or skills in management. And more often than not, the firm doesn't train them in these skills. Consequently, lawyers' skills and interest in management vary greatly.

As a result, the composition of any management committee will consist of lawyers who are good managers and those who are not. This should not be viewed as an obstacle. As relevant as these skills are when selecting a lawyer to serve on the management committee, they are not necessarily the only factors to be considered. For example, it may be equally important, or perhaps more so, to provide equitable representation on the committee to all the different groups of lawyers that comprise the firm.

When it comes to the managing partner, the firm should sidestep the temptation to resolve the enigma of leadership by acknowledging some basics concerning the issue. The requisites for leadership are, in this day and age, well known: A leader must garner respect and support, have clout, and wield that clout when necessary. Hence, for practical reasons, a junior partner cannot be a successful managing partner. What are other, specific requisites for a managing partner?

The managing partner must keep the objectives of the firm in proper perspective.

The managing partner must be able to rise above the self and understand that the good of the firm comes first.

The managing partner must be able to make decisions and have them stick.

The managing partner must want to manage the firm.

Accepting Responsibility:

Many partners want to have a great deal of say in firm operations, yet they stop short of following up on their advice with any recognizable action. This kind of "management by debate" leads many a management committee down a blind alley of endless discussions and meetings. This is not the way to manage a law firm — and it is not what most lawyers want to do in their professional life.

As lawyers, the managing partner and the members of the management committee want to practice law. The amount of time available for management is limited and must be used wisely. While there are responsibilities that the committee and managing partner should fulfill, their principal role should be to make certain that the firm's operational activities are being managed. This does not mean that the committee or managing partner should undertake any of these tasks themselves unless specifically charged to do so.

While there are management functions that should be performed by the management committee or managing partner and normally should not be delegated, there are other tasks that can be performed by the individual members of the management committee or other lawyers in the firm. The managing partner and the committee should be charged with responsibility for those functions that require their specific talent, energy and interest.

Management Committee:

The firm's management committee will have responsibility for a number of areas. Here are some selected functions the committee should perform:

Monitor the firm's economic performance.

Provide overall long-range planning policy and direction.

Make certain that systems are established and individual are assigned responsibility for all the areas of the firm's management.

Make major decisions and recommendations on such key issues as lawyer compensation, billing rates, additional offices, new areas of specialization, and any other issues with significant economic consequences. The committee needs to evaluate the pros and cons, the effect of the decision on the firm's economics and individual lawyers, and how the decision fits in with the firm's other policies and programs.

Communicate with the firm so that the management committee has the benefit of the views of other lawyers in making management decisions, and so the other lawyers understand the decisions and programs that the committee adopts.

Managing Partner Functions:

The managing partner's role is a considerable one. These are among the functions that he or she should perform:

Provide leadership, including maintaining the morale of the lawyers as a group and as individuals.

Anticipate management needs and make recommendations for fulfilling them.

Supervise the firm administrator.

Make decisions on matters that do not warrant consideration by the full management committee (e.g., implementing personnel policy).

Ensure that management committee decisions are fully implemented.

Coordinate all management activities.

Make certain that the systems and individuals responsible for the firm's management are functioning properly.

Overlapping Functions:

Finally, there might be overlapping responsibility for some management functions, since some could be fulfilled by the managing partner, a member of the management committee or another designated lawyers. These tasks include the following:

Overseeing the firm's financial matters and reporting system through the administrator, including budgets, billings, collections and cash flow; analyzing management reporting of time and money; and recommending investment of excess funds and banking relationships.

Overseeing lawyer career development, including evaluation, training and general work assignments.

Investigating, evaluating and making recommendations to the management committee regarding special projects, such as acquiring senior lawyers, opening additional offices and specializing in new areas.

Overseeing the firm's facilities, particularly expansion or remodeling.

In the selection of a compensation system, a firm should first assure that the criteria upon which compensation is to be based are carefully identified and understood. All partners may not agree on the selection process of factors to be considered, or their importance but there should be a sense of comfort generally felt once a decision is made.

Compensation Criteria:

Partner compensation criteria which are evaluated generally include, without reference to importance:

a. Business origination/cross-selling to existing clients;
b. Business retention of valued, productive clients;
c. Seniority;
d. Lega abilities, reputation, diligence, timeliness and quality of work;
e. Efforts made to market the firm;
f. Collection of revenues from billable hours;
g. Community and bar activities;
h. Mentoring and training of younger members of the firm;
i. Firm loyalty and compliance with firm policies;
j. Contributions to firm management and administrative duties;
k. Pro-bono time spent pursuant to and in accordance with firm policy; and
l. Particular accomplishments within the period of evaluation.

There is little doubt that the ultimate result of the evaluation will include a substantial measure of subjectivity and thereby more accurately values the partner’s real importance to the firm. Unquestionably, differences will arise among the partners as to the relative importance of any of the criteria, directed in many cases by self-interest. The ultimate consensus will generally be reached by a belief that there has been an equitable and thoughtful consideration of the various views presented.

Origination Credit:

Origination of new clients is of major importance in assessing compensation, although there must be adequate recognition of retention and expansion of existing client relationships. A critical issue to be decided is the permanency of origination; various alternatives are available, including but not limited to:

• Permanent origination - which assigns origination credit for as long as that lawyer remains with the firm. Once the originating lawyer retires or otherwise leaves the firm, the origination may become a “firm client”, with no individual attribution or may be reassigned (at some defined point after the originating lawyer departs) to the lawyer(s) most closely identified with the client, thereby providing incentive to the lawyer(s) responsible for the client relationship.

• Origination for a defined period of time only - which requires even “rainmakers” to continue the press for new clients.

• Shared origination - which gives credit to lawyers as a result of their marking efforts, the importance of their value to the client initially or the recognition of immediate assumption of principal responsibility.

Obvious importance must be placed upon retention and expansion of existing client relationships in order to assure that lawyers will not ignore clients originated by others while they pursue new origination. Appropriate recognition of origination credit will more likely lead to a greater willingness to delegate work rather than having the originating lawyer sense a need to do all of their own work.

Billing and Collections:

The compensation system must make abundantly clear the importance of billing and collections. Reward for billable hours billed and collected will likely lead to delegation of work which should/could have been accomplished less expensively and more expeditiously.

If origination credit or client satisfaction are measures of value for compensation, delegation will more likely fulfill both criteria. Collection of billed hours is a far more significant measure of productivity, since billable hours alone will not benefit the economics of the firm and, if used as a paramount standard of worth, will less likely lead to delegation unless more working time is not possible/practical.

Delegation of Work:

Although partners should be incentivized to provide/delegate work to others, that will only take place if the proposed delegator has (1) more than enough work to do; (2) more important/profitable work that can be provided to him/her; (3) other responsibilities which require that others do the work; (4) if the work in question should, for the economic efficiency of the client, be done by others; or (5) if the work in question falls within a defined area of concentration which necessitates its transfer.

Train and Mentor Staff:

Compensation should be used to motivate partners to train associates and mentor support staff. For example, very specific duties should be identified, monitored and assessed for each partner so as to assure continued professional growth of firm employees. In order for this to be meaningful, credit must be provided for success and a penalty imposed for ineffectiveness.

Practice Development:

Practice Development is an area that must be carefully identified, since each partner has acknowledged different skills and abilities.

Each partner should have the opportunity to express his/her views fully as to what he/she can “bring to the table” in future practice development. Furthermore, the firm, through appropriately designated personnel, should be available to assist each partner in achieving his/her goals, and There must be regular and frequent follow-up on progress made, since it will be understood that success will redound to the partner’s financial benefit (and likewise to the partner’s detriment if the effort is less than enthusiastic).

The firm must obtain each partner’s willingness to “buy-in” to the process and to the fact that practice development is an integral factor in the compensation scenario. To this end, the firm, as with all segments of the plan, must agree on the “weight” given to practice development.

Management matters:

It is sensible for the firm to budget management hours for specific tasks, i.e., managing partner, department chair, etc., so as to be able to assess the time which it intends to contribute to management holistically; and assess the effectiveness of the administration of the functions assigned.

If the management task assigned and ultimately evaluated results in heightened efficiency, cultural betterment and/or increased profitability, the firm should consider rewarding the responsible partner(s) with incentivized compensation. Partners are sometimes less than willing to agree upon the attribution of success to leadership, instead focusing on the fact that it results from cumulative effort, e.g., their own. Further, leadership can is not as easy to replace as retained. Therefore, the firm must be prepared to deal with rewards for success. To the extent that it does not do so and proposes nonetheless to retain its leadership, current management will be disincentivized to continue its efforts, since meeting other criteria of the compensation plan will undoubtedly lead to more dollars for others.

Communications:

Firms should consider, in the establishment of a compensation plan, the wisdom of providing each partner the opportunity to discuss his/her proposed compensation with the Executive Committee/Compensation Committee after the proposal has been distributed firm wide. After all, it is a potential disincentivization for a partner to have no chance to address their own concerns, disagreement with the assessment made of their contribution. The final decision by the firm might not take place until all such discussions, within a defined time frame, have been had.

The managing partner of a 47-attorney, growth-oriented Upstate New York firm recently wrote to ask whether it makes economic sense for his firm to acquire, as a lateral hire, a senior attorney with a foreclosure practice.

Managing Partner's Question:

The managing partner expressed uncertainty about the feasibility of this acquisition for financial and cultural reasons. However, several of his partners who endorse the acquisition believe that any additional fees are a good thing, as long as the direct labor and incremental costs are covered.

According to the limited information provided by the managing partner, this Philadelphia firm:

(1) Has a general practice with expertise in corporate, business and insurance defense litigation, real estate, and labor and employment law;

(2) Has a lawyer complement of 27 partners and 20 associates;

(3) Expects partners to produce a minimum of 1,650 billed and collected hours and associates to produce a minimum of 1,800 billed and collected hours; and

(4) Has an overhead percentage of 42 percent (the percentage of revenue paid as compensation to all attorneys is 58 percent).

The prospective lateral hire, the firm estimated, would generate approximately 100 foreclosures per year, yielding approximately $125,000 to $200,000 in additional fees per year, based upon anticipated hourly rates.

He would earn approximately $120,000 annually, based upon the idea of splitting fees 50-50 between himself and the firm.

Joel's Response:

The following is the letter I wrote in response to the managing partner's question:

There is some quite interesting math going on here. First, a 50-50 split should yield no more than $100,000 in compensation, assuming fees reach the upper end of the projected range. In addition, assuming your firm will have some responsibility for payroll taxes and some benefits, it should project an additional 20 percent above the $120,000 salary.

Overhead to operate the foreclosure practice is another issue to be considered. I have rarely encountered a profitable foreclosure practice that does not rely heavily on secretarial support, given the paper intensive nature of this work. I believe that the files will require a substantial portion of a secretary's time. Also, I am fairly confident there will be additional marginal costs incurred, including a professional liability insurance premium, bar dues, CLE costs, some marketing costs, furniture and equipment, photocopying, telephone usage, postage fees, etc.

Regarding your partners, who have the attitude that any additional fees are a good thing as long as the direct labor and incremental costs are covered, this is an attitude of many attorneys who are not familiar with the economics of operating a law firm. There is nothing wrong with such an attitude. However, it is hardly the basis, long-term, for building a profitable law practice without having the attributes described above, including highly leveraged, low operating costs, and a significant volume of foreclosure work. Further, there is real danger in evaluating this practice on an incremental cost basis. Lots of less-than-profitable practices would appear profitable when there is no allocation of general overhead.

Your firm is contemplating adding the lateral attorney (full time) when the prospect of generating additional fees is only $125,000 to $200,000. At a presumed billed-and-collected 1,650 hours, the effective hourly rate would range from $75-$120 per hour. Logically, why would your firm consider hiring an experienced lawyer (whom you are considering paying approximately $120,000 per year) when the economics are so poor? Are you thinking that additional work or higher-paying work may also follow as a result of being retained by this new client? Please explain this to me.

You indicated in your letter that the percentage of revenue that is paid as compensation for all of your attorneys is 58 percent, which at first glance, appeared to be too high for a Philadelphia-based firm. Then, I looked more closely at how you described this calculation. “Compensation includes wages, retirement and health insurance (the typical stuff)." You also mentioned that it includes travel and entertainment. Additionally, it further includes ‘et cetera’ (it would be nice to know what is included here). Suffice it to say, these calculations are a bit too overly generalized for my liking.

Based upon the information that you provided, I don't understand the attraction your partners have about acquiring this foreclosure practice. I certainly understand the notion of not wanting to look a gift horse in the mouth with a six-figure volume of incremental fees from a new client. However, rarely have I seen a profitable foreclosure practice exist in a firm that has your type of practice and leverage factor (ratio of associates and nonlawyers to partners). Most profitable foreclosure practices rely on significant leverage utilizing nonlawyers and technology in conjunction with relatively low operating costs. Based upon the description of your firm in your letter, I'm not convinced that your firm operates under this economic model for doing business. As indicated above, your firm's billable hourly expectations are 1,650 billed and collected hours for partners and 1,800 billed and collected hours for associates. This is another indication of not requiring a high volume practice.

In order to develop a profitable foreclosure practice, there needs to be a significant volume of work being generated. Based upon your estimate of 100 foreclosures generating $125,000 to $200,000 in incremental fees annually, it means that an average file generates less than $2,000. If that is so, I would expect that a lawyer could spend very little time handling the file if the work is expected to generate a profit. Like most commodity work, the cost to complete the work must be low to generate any profit. Overall, the practice cannot be expected to generate any meaningful profit without a substantial volume. The profit margin on this work is slim, at best.

Based upon my understanding of the facts, I see little rationale for adding this foreclosure practice to be serviced by a full-time lateral hire who would be paid $120,000. I do not see how this practice could generate a level of profit that would be worth the investment. It is not a good business practice to evaluate the financial contribution of a practice area simply on an incremental cost basis. At some point, your firm should compare the profitability of each of its areas of practice, and I suspect the foreclosure work would end up being one of the least profitable practices, given the current facts.

Hopefully, my above comments about the feasibility of acquiring the proposed foreclosure practice will assist you in persuading your partners to pass on this foreclosure acquisition. Please let me know what the partners decide to do.

Post script:

The managing partner called my office to inform me that after extensive discussions, the overwhelming number of partners decided not to acquire this foreclosure practice.

No partner likes to receive a complaint from a client. However, what is far worse is when a partner does not receive a complaint when a client feels aggrieved because of a firm's actions/inactions and [the client] does not complain.

Economic and competitive changes which have occurred during the last several years have caused law firms to reassess their marketing strategies in order to continue to obtain additional work from existing clients and to attract business from new clients.

For most law firms, obtaining new work from existing clients is the most productive method for insuring that clients are satisfied with the service provided by a law firm. One of the worst things that can happen to a firm is for a dissatisfied client to leave quietly while they are dissatisfied.

The damage that this client may inflict upon a firm by talking to other people about their bad experience is a lot worse than if they are willing to let the partners know about their dissatisfaction.

Many law firms have retained the author's management consulting firm to develop and conduct client surveys to obtain feedback about clients' satisfaction or dissatisfaction with the attorneys and staff who served them, the timeliness, responsiveness and value of work performed, the need for additional services, the need for greater cost or quality control, the need for greater lawyer specialization and whether they would use the firm again and refer the firm to friends and associates. To conduct client surveys, we interview senior operating and staff executives of the firm's clients to obtain their perceptions about how efficiently and effectively they (the firm's clients) are being served and the extent to which partners in law firms understand the business objectives of their clients.

Information obtained from client surveys may be the most important marketing activity a law firm can undertake. Most firms that initiate client surveys have found their clients to be impressed that the firm cares about their opinions. Also, as the result of surveys, law firms may detect certain misunderstandings which, if not clarified, could fester and result in dissatisfied clients.

Client surveys are usually conducted in one or more of the following ways: mail surveys, telephone interviews and personal meetings. The approach that law firms follow for surveying clients vary based upon the nature of the firm's practice, the number of clients to be surveyed, the relationship between the client and the firm and the firm's objectives to be obtained from the survey.

Planning the Survey:
Planning the client survey is a critical part of the survey process. An individual or committee should be responsible for administering the survey. This includes determining the information to be obtained, determining whether all or a representative number of clients will be surveyed, recommending the process and the individuals responsible for surveying clients, meeting a budget for the survey process, and tabulating the results, determining whether the survey results will be made known to all or selected members of the firm, the methods of responding to survey participants (if their identity is known) and, based upon the results, recommending corrective action to be taken.

Selecting Clients to be Surveyed:
All or a representative number of clients may be surveyed. Criteria for making this decision frequently include:
1. The amount of revenue produced by the client and area of practice.
2. The client's potential to grow significantly.
3. Whether the firm or the client have particular problems or concerns which may manifest itself in a decline in business, client complaints about the work performed, the attitudes of attorneys, fees and costs charged.
4. Whether the firm needs to obtain more information about the client and its current or future operations, as the result of expansion, reduction or other significant changes in the nature of the services required.
Sample Questions to be Asked
The questions to be asked should be brief and to the point. They should be easily understood by the clients. Mail surveys may include multiple choice, fill-in-the-blank and/or short narrative responses. Telephone interviews must be structured so that the questions asked will provide the desired answers. The following are representative of the kinds of questions the law firm may ask:
1. The client's opinion of the firm and services provided.
2. The client's level of satisfaction (or dissatisfaction) with the breadth and depth of the attorneys' understanding of the substantive nature of the work they are called upon to provide by the clients' executives.
3. The client's level of satisfaction (or dissatisfaction) with the breadth and depth of the attorneys' understanding of the industry in which the client's businesses are involved.
4. Which other law firms has the client employed during the last five years in (the city in which the law firm is based)? Other cities?
5. What kinds of work does the client currently refer to other law firms in the city in which the firm is based? Other cities?
6. If attorneys at (our firm) possessed the expertise in the substantive areas of work currently referred to other law firms that your firm has employed (in the city in which our firm is based), would you refer this work to our firm? If no, why not?
7. What types of legal services does the client anticipate will be needed during the next two years? How effectively do you believe our attorneys are equipped to satisfy the client's legal needs?
8. To what extent does the client believe our attorneys could "add value" to their company, i.e., conducting educational workshops attended by the client's executives? Bringing to the attention of executives recent legal developments affecting the industry and business in which the client is involved, without being asked to do this, as opposed to only performing the specific legal work that has been assigned?
9. For each of the kinds of substantive work the client refers to our firm, to what extent has the client been satisfied (concerned or dissatisfied) with the following (when responding to this question, please compare the services obtained from our firm to the services provided by other firms:
a. The quality of the firm's legal work?
b. The professional and personal compatibility of our attorneys assigned to work on the company's files?
c. The timeliness of the performance of our work?
d. How cost-effectively our firm staffs the client's work withies attorneys and paralegals?
e. The fees and expenses incurred for the quality of the work performed?
f. The extent to which the client's executives have been kept informed as to the progress of our work?
g. The responsiveness of our attorneys, paralegals and staff to the client's telephone, e-mail and written inquiries?
10. Is there anything that our attorneys may do which would cause the client to utilize their services more than they are currently? If so, what?
11. Whether the client feels that the firm has let him/her down. If so, how and when.
12. Whether the client would recommend the firm, or specific attorneys, to others, if asked.
13. Whether the client has a comprehensive understanding of the firm's capabilities.

Mail Surveys:
The mail survey is the least expensive and frequently the fastest way of obtaining information from a large number of clients. To make the process especially meaningful, questions may vary depending upon the work performed. Firms produce color coded questionnaires for different clients and/or areas of practice. Personalized letters are sent in cases involving relatively few clients. Where there are many clients, a general letter is usually sent and is addressed "Dear Client." A postage paid return envelop is enclosed in the personal and general letters. The letter accompanying the survey is usually signed by the lawyer responsible for the client or the practice area.

To encourage responses, the return envelope should be addressed to the firm, rather than to the lawyer who signed the letter. Some firms have the response directed to its marketing director, others address the response to the firm's administrator.

The functional value of mail surveys is limited for the following reasons:
1. The response rate is generally about fifty percent or lower.
2. The mail survey is impersonal and may not generate the good-will which the telephone or personal surveys often do.
3. The responses produce limited information because of the length of the questionnaire.
4. Mail surveys allow clients to remain anonymous.
5. Mail surveys have limited success in determining the clients' needs for future work or for identifying the firm's expertise and capabilities in other areas of practice.

Telephone Interview:
The telephone interview allows a relatively large number of clients to be surveyed, by services provided, attorney and other selected criteria. Interviews should not be expected to exceed fifteen minutes, unless the client is willing to devote the additional time. Telephone interviews may be conducted by the responsible attorney, another attorney in the practice area or a non-lawyer who is familiar with the work performed for the client. The major problems with telephone interviews are the inaccessibility of clients and their unwillingness to discuss their opinions about the attorney or firm over the telephone. Most firms which utilize telephone interviews, instruct attorneys to inform their clients about the survey call prior to the conclusion of the matter so that the call does not come as a surprise. Also, firms which have experienced particular success with telephone interviews inform their clients about the types of questions which will be asked during the survey. This allows the client to "think about" the responses in advance of the telephone conversation.

Personal Meetings:
A personal meeting is the most effective survey process since it enables the partner responsible for the client, or other partner, to visit with one or more client executives to learn how effectively the firm has been serving them. The meeting permits the partner to obtain additional information about how the law firm may better match its capabilities with the client's needs, and the suitability of the fit between the attorneys who work for the client and client's executives. During this meeting, the partner should reinforce the firm's commitment to that client and determine what the firm may do to refine or provide better or more effective legal service to that client. The partner should attempt to identify and remove perceived or actual barriers between the client and the firm in order to improve communications and services. Also, this meeting is an excellent opportunity for the partner to obtain insights about the client's needs and to recommend approaches about how the firm may assist the client's executives achieve their objectives.

Personal meetings may take 30 to 45 minutes or longer, depending upon the attorney's relationship with the client and issues to be discussed. During the meeting the partner should be sensitive to and respond to clients' non-verbal signals such as body language and facial expressions, as well as to their comments.

Personal meetings are costly. A partner has to visit the client's office to interview one or more executives. Some executives may be apprehensive to speak candidly with the attorneys, hence the value of having an objective third party conduct the survey such as a management consultant, who is experienced in preserving client/firm relationships.

Utilizing Survey Results:
Conducting client surveys involves a commitment on the part of the firm to follow-up on the responses. The firm should acknowledge each client response, if its identity is known. Specific responses should be given to those clients who have expressed some concern or have offered constructive suggestions. These responses should explain what the law firm plans to do to address the issues, or why it cannot. This may be done by letter, telephone call or personal interview.

Properly structured and implemented, client surveys can be beneficial for retaining and generating new business from existing clients. During the survey process, a partner may obtain important information about the needs, perceptions and plans of major clients as well as assess the level of satisfaction of these clients. Their problems and concerns may be identified and addressed and good-will be generated as clients appreciate the firm's interest in improving its services.

The particular survey approach utilized by a firm depends upon the information to be obtained. A firm with a great number of "casual" clients, i.e., real estate closings, personal injury, etc., may decide that a written questionnaire is most appropriate. A firm that services a number of continuing business clients on a wide variety of matters may utilize personal interviews. A firm that wishes to learn about the level of satisfaction of clients in a personalized practice area, re: matrimonial, estate planning and administration, etc., may utilize telephone surveys.

The author recently spoke with partners in one firm who were apprehensive about surveying clients because they did not want to "muddy the waters." These partners believe that if a client has a problem with an attorney or the firm, the client will make his or her dissatisfaction known. The author disagrees with this logic. In today's highly competitive legal market, attorneys must utilize every opportunity to insure their clients are satisfied. The survey process may be imperfect, however, every bit of information about what a law firm may do to better serve its clients is important and worthy of consideration. Further, the survey is a positive method for lawyers to "stay close" and reinforce (and possibly improve) their relationships with their clients. Rather than taking clients' complaints as personal attacks, partners should utilize them as the methodology for getting at the root-cause of the problem, making it better for the clients. Most importantly, if something is wrong, fix it!