understanding law firm financials: making the numbers work
TRANSCRIPT
Understanding Law Firm Financials: Making the Numbers Work
Joshua Lenon – Clio Colin Cameron - Profits for Partners
Agenda
• Ethics of Law Firm Finances (10 minutes) • Financial Measurement Tools for Law Firms
(10 minutes) • Key Performance Indicators (30) • Questions (10 minutes)
Instructors
Joshua Lenon • Lawyer, admitted in New York • Lawyer-in-Residence for Clio
Colin Cameron, CA • Chartered Accountant • Former Chief Operating
Officer of Clark Wilson LLP • Profits for Partner
ETHICS OF LAW FIRM FINANCES
Source:(The(Lawyer,(01/17/2014(
Source:(Business(Insider,(06/24/2012(
Source:(Globe(and(Mail,(02/07/2014(
How you run your law firm affects your clients.
Lawyers have been having difficulties with finances since
the Boer War in 1901.
Source:(RighCng(Wrongs:(The(Missouri(Bar(Client(Security(Fund,((Precedent,(Winter(2011(
Model Rules of Professional Conduct
• Rule 1.1 – Competence • Rule 1.3 – Diligence • Rule 1.5 – Fees • Rule 1.15 – Safekeeping Property • Rule 5.4 – Professional Independence
Rule 1.1 – Competence
A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.
Emerging Tech Proficiency
“It should now be a matter of professional competence for attorneys to take the time to investigate social networking sites.” Griffin v. Maryland, Case No. 1132, Court of Special Appeals Maryland, May 27, 2010,
Self-Interest & Competency
“…there is little meaningful distinction between a lawyer who inadvertently fails to act and one who for selfish reasons decides not to act.” Beets v. Scott, 65 F.3d 1258 (C.A.5 (Tex.), 1995)
Rule 1.1 – Competence
Competent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem, and use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation.
Rule 1.3 – Diligence
A lawyer shall act with reasonable diligence and promptness in representing a client. [1] A lawyer should pursue a matter on behalf of a client despite opposition, obstruction or personal inconvenience to the lawyer… [2] A lawyer's work load must be controlled so that each matter can be handled competently.
Rule 1.5 – Fees
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses
(3) the fee customarily charged in the locality for similar legal services;
Rule 1.5 – Fees
[5] An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest. … However, it is proper to define the extent of services in light of the client's ability to pay. … A lawyer should not exploit a fee arrangement based primarily on hourly charges by using wasteful procedures.
Rule 1.15 – Safekeeping Property
(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property.
Rule 5.4 – Professional Independence
(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:
(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.
Ethical Conclusion
Lawyers are responsible for preparing their practices’
finances to be ready to handle a reasonable workload.
FINANCIAL MEASUREMENT TOOLS FOR LAW FIRMS
Practice Management Tools
Full Accounting Suites
Legal Accounting
hIp://gocl.io/legaccweb(
Understanding Law Firm Financials - Making the Numbers Work Clio Webinar – May 28, 2014
Speaker: Colin Cameron President, Profits for Partners,
Management Consulting Inc.
May 28, 2014
Today’s Agenda
• Trends in the legal industry • White papers on Realization Rates and Alternative Billing • The 5 Levers of Profitability • Key profitability metrics • Strategies for increasing profitability
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5 Major Trends Impacting Law Firms Today
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Realization rates are dropping
Clients demanding discounts
Alternative billing
Focus on efficiency
Rise of NewLaw business models
How is Profitability Calculated?
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The 5 Profitability Levers
• Utilization = Billable hours / # of Lawyers • Standard Hourly Rate • Billing Realization Rate = Billings / Value of
Time Recorded at Standard Rate • Margin = Net Income / Billings • Leverage = # of Associates / # of Partners
- David Maister, “Managing the Professional Services Firm”
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Utilization
• The “Pipeline”
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Utilization
• Utilization = Billable hours / # of Lawyers e.g. 120 billable hours / 1 lawyer = 120 hours • Utilization rate = Billable hours recorded /
Available time e.g. 6 billable hours / 8 available hours = 75%
• # of files opened • # of new clients
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Track Time for Alternative Billing?
• Yes! • Most hourly billing metrics still apply • Time and billing system features available • For costing and pricing purposes • Profitability analysis
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Rates
• Effective Rate = Billings / Billed hours e.g. $20,000 billings / 120 billed hours = $166.66 effective rate • Firm effective rate • Small rate increases produce big bottom line gains • Partner effective rate • Client effective rate
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Focus on Value
• Need to decide value before you set price • Compete on value, not price • Ron Baker’s ideas • Value = Client “Profit” – Price • 51 Practical Ways to Add Value
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Colin Cameron – Profits For Partners
How do you define Value?
• Quantitative factors • Qualitative factors • Ask client how they define value • Client decides value, not lawyer * • Client satisfaction • Efficiency • Effectiveness
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The Economics of Alternative Billing
• A 20% discount with 40% profit margin = 50% cut in profit
• Leverage still works • Need to get more efficient • Realization is key to profitability
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Colin Cameron – Profits For Partners
Realization
• $20,000 billings / $24,000 value of time billed at standard charge-out rate = 83.3%
Billing Realization Rate
• $18,000 cash in / $20,000 billings = 90%
Collection Realization Rate
• $18,000 cash in / $24,000 value of time billed at standard charge-out rates = $75%
Overall Realization Rate
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Realization - Strategies
• Upgrade your clients • Run realization reports for all clients • Focus on cash in as a % of prebill • Use an 80% realization cut-off • Aim for 95% realization
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flickr.com/photos/gageskidmore/5440002785
Margin
• Margin = Net Income / Billings e.g. $80,000 net income / $200,000 billings = 40% margin • Net profit margin % • Overhead per lawyer • Overhead as a % of revenues • Compare expenses to legal industry surveys
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Focus on increasing productivity as well as reducing costs to increase margin
Margin
• WIP Turnover = WIP / Average billings per month or day • A/R Turnover = A/R / Average Billings per month or day • Lock-up = WIP Turnover + A/R Turnover • Run reports monthly by Partner • Aim for 105 days/3.5 months or less
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flickr.com/photos/revstan/48501 93874/
Margin - Strategies
• Drive cash flow and reduce bad debt expense • File opening approval system • Monthly billing • Bill and collect everything on quarters • Quarterly income distributions
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Margin Strategies - Reduce Costs
• Virtual firms • Outsourcing staffing • Contract lawyers • Automate for efficiency • NewLaw business models cut O/H by 50%
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The Power of Leverage
• Leverage = # of Associates / # of Partners e.g. 7 associates / 3 partners = 2.3 leverage • Leverage can have the biggest impact on profitability • Consider two-tier partnership • Increase profitability by levering work to
nonequity partners and associates • Work smarter, not harder
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Colin Cameron – Profits For Partners
The reverse pyramid
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Leverage
• Upright the reverse pyramid!
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Associate to partner ratio • aim for 1:1 or higher
Associates and nonequity partners to equity partner • aim for 2:1+
Lawyers and other professionals per equity partner ratio • aim for 3:1+
Associate hours / Partner hours • aim for 1:1+
Paralegal hours / Partner hours
Leverage
• Revenue per Equity Partner (entire practice) • Profit Per Partner Hour – PPPH • Work/Life balance • See articles in Law Firm Profitability group on LinkedIn for ideas on increasing profitability
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Profit Per Partner (PPP) Formula
PPP = Utilization x Standard hourly rate x Billing realization rate x Margin x (Leverage + 1) PPP = 120 hours utilization x $200 standard hourly rate x 83.3% billing realization rate x 40% margin x (2.3 leverage + 1) = $26,667 PPP
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The 80/20 Rule for Client Profits
• Studies show that 80%+ of the firm’s profits are produced by just 20% of your clients
• Focus on key metrics for these top 20% clients • Review bottom 20% of clients that may have negative profitability
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Summary
! Client selection is #1 ! Focus on value, not price ! Reduce costs as a % of revenues ! The power of leverage ! Update your business model ! Focus on key metrics that fit your firm’s
strategic plan
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Colin Cameron – Profits For Partners
Thank You!
• Questions or comments?
▫ Colin Cameron | President ▫ Profits for Partners, Management Consulting Inc. ▫ www.profitsforpartners.com (website) ▫ www.lawprofitability.com (blog) ▫ [email protected] ▫ 604.512.8104 © 2014 Profits for Partners, Management Consulting Inc.
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Colin Cameron – Profits For Partners
QUESTIONS
