Running A Law Firm As A Business

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Many lawyers are urged to run their firms more like a business.  But what does that mean?  It can be confusing to know given the variety of scenarios in which business owners and executives justify a decision by saying “It’s just business.”

Maximizing behavior is often justified on the grounds that it’s needed to run a business.  For example, CEOs of pharmaceutical companies that have dramatically increased the prices of life-saving drugs have defended themselves by arguing that they “have a business to run.”  Likewise, the managing partner of a law firm could pay a paralegal $15 an hour and bill clients $125 an hour for the paralegal’s time and chalk up the difference to “running a business.”

In my experience advising law firms on business issues, I have rarely come across this kind of maximizing behavior.  Lawyers who struggle to run a firm as a business are dealing with a different set of problems.  They aren’t trying to identify the fullest extent to which a certain matter can be made profitable.  Rather, they are more likely not to know how profitable they are or how different practice areas differ in their profitability.  Their problem is akin to the restaurant owner who doesn’t know how much she pays for the food that is served on the $25.00 entrée.

Too many lawyers don’t know basic information about their firms, including how much money they brought in that month and how profitable they were (or not).  Likewise, they often don’t know how much money is in their operating bank account or whether that balance has increased or decreased over the last quarter.  By contrast, lawyers invariably do know how many billable hours they have billed.  This is understandable given that law firms tend to set hourly targets for hours worked more commonly than they set specific targets for revenues generated.  This is a perverse practice to the extent it causes lawyers to ignore critical issues such as cash flows and profitability.

At its heart, the admonition for lawyers to run their firm’s like a business is the desire for them to pay attention to business fundamentals.  In today’s competitive environment law firms’ continued existence depends on the ability to sustain profitability.  Nothing about paying attention to cash flow, avoiding clients who are unlikely to pay, or taking prudent steps to collect from delinquent clients, will cause a law firm to gouge their clients.  There is a critical difference between maximizing profits in a predatory manner and ensuring that the firm can serve its clients, employees, and other constituents.

So the next time you are urged to run your law firm more like a business, please take heed.

How to Avoid A Shot Gun Law Firm Business Divorce

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Many law firms are under economic stress.  One of the manifestations of that stress is an increasing number of partner divorces.  Most commonly, the law firm partners go to work for different law firms or start their separate, individual firms.  In these circumstances, much of the divorce process involves negotiating who will take what client or case.

In the last year or so, however, I’ve seen and increasing number of law firm partners choose to leave the law entirely.  Sometimes this decision is announced to fellow partners abruptly, and the remaining partner or partners have a few days to decide how to move forward.  This is the equivalent of a shot gun divorce.  It’s rife with stress and the potential to damage the firm severely or even destroy it.  The good news is that the firm generally does survive and the remaining partner(s) emerge with a renewed level of energy and commitment to continue the firm’s growth.

When I’ve discussed the break up with the remaining partners, they inevitably say that they should have seen it coming.  In one example, the departing partner worked substantially fewer hours in the last few months before they announced that they were giving up the partnership.  In another more extreme example, the departing partner uncharacteristically didn’t provide time sheets for the two months preceding his announcement.  In other words, the departing partner exhibited signs that suggested that they were reducing their commitment to the firm.  The announcement of the decision to leave was abrupt, but the process of checking out emotionally was not.

Thus, if you want to avoid the drama and stress that comes from a shot gun law firm business divorce, you need to look for signs that a partner is no longer acting as a partner or has materially reduced their commitment to the firm.  Sometimes it becomes clear that a partnership was formed with someone who isn’t cut out to be a partner.  Increasingly, however, even lawyers who have been successful and productive law firm partners are raising the white flag.

It is therefore critical for law firms to establish procedures that allow all partners to discuss their future plans with the firm.  This can feel like discussing a taboo subject.  And some law firm leaders are concerned that raising this issue will cause certain partners to think about leaving when they otherwise would not have considered their future plans.  This is an example of lawyers being good at issue spotting.  Is it possible that the firm will cause a partner to leave who otherwise would have stayed?  It’s possible.  But in today’s fast-changing market for legal services, only the foolish lawyer assumes that everything will stay the same.  The risks associated with having a partner pull the pug abruptly are sufficiently severe to warrant trying to avoid a shotgun business divorce.

Law firm partnership agreements are not supposed to be like contracts for indentured servants.  There is nothing inherently wrong with law firm partners deciding that they have had enough and want to do something else with their lives.  That is why law firms should make it easier for partners to discuss that they are considering leaving the firm.

When Law Firm Staff Ignores Junior Lawyers

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When I was a second-year associate at the Los Angeles office of Skadden Arps, I shared a secretary with one of the most prominent partners at the firm.  I was warned that my work would be ignored because secretaries would focus all of their efforts to serve the partner.  Fortunately in my particular case the predictions were overblown and I had a workable arrangement with the secretary.

I didn’t realize at the time that the relationship between junior lawyers and staff is a recurring problem at many law firms.  Sometimes the problem is that the junior lawyers have never managed anyone before, don’t realize how little they know, and are condescending to the staff.  Sometimes the staff is contemptuous of the junior lawyers and feels that they don’t have to pay attention to their work.  As a consultant to law firms, I came across a situation in which a secretary told a mid-level associate that she didn’t have the authority to tell her what to do because “she didn’t pay her salary.”

Tensions, disagreements, and other problems between junior lawyers and staff can arise in many ways.  And many firms try to fix this problem by focusing on the conduct of the junior attorney or staff member.  The firm sees these problems as HR issues that may require some form of employee discipline.

Too many law firms fail to realize the solution to these problems is often in the hands of the same person-the law firm partner.  Thus, a dysfunctional relationship between staff and young associates is often a symptom of a problem of law firm leadership.  The answer to the claim that only the senior partner pays the salary of the secretary is that the partner doesn’t pay the salary of any staff members.  Clients pay those salaries and every other expense generated by the firm.  And partners are uniquely positioned to teach both junior lawyers and staff members the importance of working collaboratively.

Too often, however, the conduct of partners undermines the ability of the junior lawyers to get the support they need.  When, for example, senior lawyers give staff members last-minute assignments, the collateral damage often includes that the work generated by the junior lawyer is ignored.  And in some firms this dynamic is exacerbated when senior lawyers use staff members to handle their personal errands.  Moreover, associates who have been the victims of bad treatment at the hands of partners can perpetuate the problem when they grow up and become partners.  It’s a familiar pattern. Victims of bad management and weak leadership are more likely to be bad managers and leaders themselves.

Leadership involves self-sacrifice in the service of a larger shared goal.  Too many law firm partners view how they interact with staff members as a private matter.  They don’t perceive that they set the tone about how to act and provide both positive and negative examples to both other lawyers and staff members about what is expected of them.  Until more partners become better leaders, we should expect problems between junior lawyers and staff members to persist.

When Lawyers Should Have Free Meetings With Clients

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Lawyers who bill by the hour are understandably reluctant to work for free.  In particular, lawyers tend to shy away from having client meetings and then not billing them for it.  Too often lawyers wait until the client has expressed anger or threatened to end the representation before finally agreeing to have a free meeting.  There is a better approach to deciding when lawyers should voluntarily have free meetings with clients.

Specifically, free meetings are appropriate when the primary purpose of the meeting involves reviewing the status of the relationship or the status of a project or matter.  When the meeting is from the lawyer’s perspective about “how are we doing?” or “how did we do?” the law firm should consider offering to have the meeting for free.  Here are a few examples;

  • The representation proceeded in a way substantially different than what the law firm or client expected.  This could be because the costs and duration were unusually long, a court ruled in an unexpected way, or the opposing party raised unexpected issues or used unorthodox tactics.  A free meeting can be a good way to take stock and reaffirm the representation.
  • The matter ended in a favorable way.  Transactional lawyers sometimes stage closing dinners to mark the end of the deal.  Other lawyers can learn from this practice.  Lawyers don’t have to pay for a formal meal, but do mark the favorable result with the client.
  • The law firm discovers something about the client that is not directly related to the subject matter of the representation.  For example, a firm that is retained to handle litigation discovers that their client is using incompatible computer systems or that there are substantial problems with the quality and competence of certain employees or departments.

The meeting can take the form of a formal review of a case or matter or a more casual get together over an adult beverage.  The venue doesn’t matter as much as the opportunity to talk to a client and receive honest and detailed feedback.  The feedback is often worth more than the sum total of the billable hours, especially when there is a potential for repeat business.

In my role as a consultant to law firms, I have seen that individual lawyers can be slow to advocate on behalf of staging a free meeting.  The lawyers representing the client may feel that a free meeting would be useful, but as individuals they don’t want to be the one who suggests such a meeting.  Perhaps they are motivated by a desire to meet a monthly billable hourly goal.  To avoid this dynamic, it can be useful for the fee agreement to include a free meeting as part of the representation.  This takes the decision out of the hands of the lawyers working on the case.

If a firm decides to have a free meeting, treat it as professionally as you would a paid meeting.  Your client should be advised that the meeting is free, but the meeting itself shouldn’t feel as if the lawyers treated it as a second-rate affair.

Sometimes more is less.  Free meetings are a good example. They can be a good way to cement client relationships that help grow a law practice.

The True Costs of Independent Contractor at Law Firms

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Law firms have traditionally hired employees as opposed to independent contractors.  In the past ten years, however, there has been an increasing trend to hire independent contractors for a whole range of work.  For example, staffing companies now routinely provide lawyers to law firms on a project basis. Historically these were likely to be document review projects for large law firms.  But now staffing companies will provide project-based attorneys for everything from M&A negotiations to patent trials.  The lawyers provided by the staffing companies are often treated as independent contractors of the firm.  This enables law firms to bolster their talent pool on an as-needed basis.

The increased use of independent contractors is also based on an assumption that they are cheaper for the law firm than employees.  From a tax perspective, the advantages of hiring independent contractors are clear; the law firm doesn’t have to pay social security and other federal employment taxes on their sums paid to the independent contractor. Much of the commentary associated with hiring independent contractors has focused on compliance issues.  Specifically, what do law firms need to do to protect themselves from a claim that they have misclassified the lawyers as independent contractors?

There is an additional consideration to hiring independent contractors that doesn’t get the attention it deserves.  Independent contractors are more likely to have divided loyalties because they often serve multiple clients simultaneously.  Moreover, they often look at the economic benefits of assignments differently than employees do.  Employees generally value the perceived security that comes from collecting a pay check, and they usually have all of their economic eggs in one basket; the basket belonging to the employer.  By contrast, independent contractors are more likely to stop working on law firm projects or workless diligently on them if they receive a better more lucrative project from another source.  For example, solo practitioners who devote some of their time to project work for other firms may quit abruptly if their own practice begins to generate more work.

Thus, there is some reason to believe that, all things being equal, employees might be more diligent, motivated, and reliable than independent contractors.  This is a generalization and of course in a specific situation your mileage may vary.  Law firms should therefore make strategic decisions about the kinds of client projects that would benefit from the use of independent contractors.  .

What has your experience been using lawyers as independent contracts, especially on projects that are not document reviews?

The Myth of Feeling Indispensable

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Many lawyers and law firms have a difficult time scaling their practices.  Too often lawyers are the bottleneck in the decision-making process. I used to think that this was largely a function of not being trained to delegate, combined with not fully understanding the financial benefits associated with leveraging time.

Those factors are still relevant, but there seems to be a deeper reason why lawyers are reluctant to delegate. They pride themselves on their abilities and delegating most of the the work on a representation to others would prove that their legal skills aren’t necessary. Too many lawyers suffer from the myth of feeling indispensable. Sometimes as a consultant to lawyers and law firms it falls to me to disabuse lawyers of this feeling.

Here are some examples that are based on my real-life consulting work:

A transactional lawyer who says that they couldn’t possibly delegate work to an associate midway through a deal.

A litigator who says that they and they alone should draft a brief because they know the underlying facts better than any of their colleagues.

An elder law attorney who insists on personally creating every pre-bill for every client.

In each of thse cases I pointed out that, if for some reason the lawyer in question became unavailable because of illness, the firm would in the matter of few days find a suitable replacement.

Lawyers dont want to hear that virtually all of them are replaceable. That’s understandable. What is more perplexing is how few lawyers see the financial potential of building a work-flow system that allows a firm to serve clients without them being directly involved in every detail of every case. When lawyers fail to delegate and see themselves as indispensable they create an artificial ceiling on how much revenue they can generate. That ceiling is set by the number of hours the lawyer can work.

If lawyers want to maximize profitability they should seek to leverage the work of other lawyers and staff members. They should strive to minimize the extent to which their involvement  is required on non-essential decisions. That might make some lawyers feel less special, but that’s ok.

 

 

Selecting Resilient Lawyers

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Many lawyers struggle to build a book of business because they are on average less resilient than entrepreneurs. Research has shown that as a group lawyers are dramatically less able to bounce back from negative events than most people. And law schools and law firms tend to go out of their way to find high-achieving folks who have experienced fewer setbacks than their classmates. The elite law schools esteem students who have never experienced anything but A’s and B’s and the B’ s are often a rarity. Moreover, good grades are often accompanied by praise and status, so many law school graduates enter the legal profession with little or no experience in dealing with bad news relating to their professional abilities or mental acumen.

Building a law practice, however, is a constant exercise of dealing with bad news. No one gets straight A’s or succeeds almost of all the time when creating a robust referral network. Most marketing and networking efforts are not successful, especially in the short term. And unlike school, running a business doesn’t have the finality of exams. It’s more of a continuous process, especially when it comes to retaining new clients. As Alec Baldwin’s character in Glengarry Glen Ross famously stated, “Always Be Closing.” This isn’t literally true. Successful lawyers don’t always have to be working. Some downtime is beneficial. Nonetheless the business aspects of law require the ability to deal with disappointment on an ongoing basis.

Some observers have suggested ways in which lawyers can be made more resilient. And that is a possibility. But a better and often overlooked approach is to select in the first instance lawyers for resiliency that is relevant to building a business.

This would be a much broader inquiry than just looking at grade point averages. For example, it would be refreshing if law firms found out whether a junior associate has any fundraising experience that involved overcoming the initial objections of a donor. Perhaps they were part of a fraternity, sorority, or club and were involved in recruiting members. Or perhaps law firms could would ask a lateral with a modest book of business about how much time passes before they typically conclude that it’s no longer worth following up with a potential client. In my experience for many lawyers that time frame is remarkably short, often measure in days. That’s because they either don’t know that the sales process routinely lasts for months if not years, don’t even track how long the sales process has lasted with a particular client, or even more importantly, lack the desire to overcome feelings of personal rejection.

There are many ways in which you can collect information about someone’s proclivity for being business-savvy resilient. As with many aspects of life, past performance is some indication of likely future results, so better to find someone with some demonstrated experience showing relevant kinds of resilience than trying to teach lawyers new tricks.

How to Evaluate a Lateral Partner Move

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Attorneys are changing law firms at an unprecedented rate. Many of those who are changing employers are of counsel, non-non-equity partners, and even associates with a relatively modest book of business. As a result, law firms need to evaluate a wider array of lawyers. Too often, neither the law firm nor the lawyer has a solid basis for evaluating whether it is advisable to change firms or bring someone on board as a lateral hire.

Here are ten observations and tips for evaluating the financial aspects of a potential lateral move.

1.  Most lateral moves have been disappointing financially relative to the initial expectation of the law firm.  Firms should therefore be skeptical when deciding whether to hire a lateral lawyer.

2.  Lawyers who seek to make a lateral move tend to exaggerate their books of business and even more so how they expect that book to grow as a result of the move to a new firm.  This is not to say that lawyers are committing fraud regularly. In my experience consulting on this issue, I see that both the firm and the lawyer overestimate the benefit of moving firms.

3.  To counteract the tendency to be unduly optimistic, the law firm should ask for detailed and historical data about the revenues generated by the lawyer. Moreover, the firm should assume the actual results will be less favorable than the projections they receive.

4.  Revenue projections are especially suspect when they materially exceed the lawyer’s recent historical performance. In one egregious example, a lawyer whose billings had decreased for two straight years projected a 50% increase in the first year at the new firm. Could this happen? Yes, but no factor, including a significant reduction in the lawyer’s hourly rate, is likely to generate such a large increase in revenues.

5.  Just as lawyers tend to overstate the revenues they will generate, they tend to underestimate the costs associated with the move. This is especially true for estimated marketing costs. I have seen lawyers project increased revenues exceeding $100,000 while only incurring $1,000 in additional marketing costs.

6.  Law firms should require detailed marketing plans of lateral partner candidates. Those plans should identify the lawyer’s current clients by name as well the names and job titles of individuals they intend to contact to pitch business at the new firm. The marketing plan should also include the costs associated with acquiring such clients. Sometimes the lawyer has an unrealistic expectation of what the new firm will be willing to invest to promote their practice. For example, a bankruptcy lawyer expected that their new firm would spend $40,000 a year for the lawyer to attend a dozen or so industry-specific conferences. The firm was willing to spend about ten percent of that amount. This is a conversation that should have happened before the lawyer changed firms.

7.  Law firms should be especially wary of bringing on attorneys whose book of business is wrapped up in a single client.  Law firms rarely take into account the added risk associated with having a lawyer who has an undiversified portfolio of clients, and too often the compensation provided by the law firm doesn’t adequately take this risk into account.

8.  Law firms need to explore risks associated with client conflicts sooner in the process. Many firms focus on the issue of conflicts only after they have essentially decided to bring a lateral partner on board. This on occasion has led to embarrassing situations where the lawyer notifies their employer of their departure only to find out that they can’t immediately move to the new firm because of a client conflict.

9.  When evaluating potential risks associated with a lateral move, firms need to look at conflicts broadly—beyond the relationships that would violate the applicable ethical rules. For example, a firm that represented a company in a specific industry was in deep discussions with a lawyer who represented a company in that industry. The two companies were not legally adverse; they never had sued or did business with each other. In the context of a lateral hire, however, it would be prudent to know whether the leaders of the firm’s client would object to having the firm represent a competitor through the newly hired lateral. Again, the best time to have this conversation is before the law firm agrees to hire the lateral.  Sadly, this doesn’t happen nearly as often as it should.

10. Firms often underestimate the cash flow effects of hiring a new lateral. This is because the expenses pile up from the very first month, often in the form of salary, benefits, and some marketing-related costs. But the revenues that the lateral hire generates don’t hit the firm’s bottom line for several months. Thus, it is not unusual for the lateral hire to have a negative impact on cash flow for a few months or sometimes longer. Firms should therefore create a monthly profit and loss projection that shows the effect of bringing on the lateral hire. When they do, they often see that hiring lateral lawyers for their book of business is a riskier enterprise than most firms originally realized.

How to Keep Law Firm Rainmakers Happy

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Law firms that thrive take care of their rainmakers. And too many firms act as if compensation is the only issue that matters in this context. In the last decade originating partners (i.e., the partner that is primarily responsible for bringing in a client or who have the primary responsibility for maintaining the client relationship) are on average being paid more than they used to. But as a consultant to law firms I have seen firsthand that some managing partners and executive committees don’t fully recognize the kind of institutional support that rainmakers need beyond compensation issues.

There are two recurring ways in which law firms fail to adequately support rainmakers. The first relates to ensuring that the firm has the systems and resources to serve the clients that the rainmaker attracts to the firm. I’ve spoken with rainmakers who are reluctant to bring in more work or approach significant potential clients with whom they have contacts because they are concerned that their firm wouldn’t serve those clients adequately. In extreme cases, the rainmaker has said that they feel that some of their partner-level colleagues are incompetent or that  there is a substantial risk of malpractice if they brought some kinds of work to the firm.

The second and more common complaint is that the firm repeatedly fails to address a recurring complaint made by the rainmaker. At one firm the complaint might be that the firm continues to impose the same administrative requirements on the rainmaker as it does on partners who have no or a much smaller book of business. At another firm, the complaint might be that the firm’s website is inadequate or that the quality of the support staff is sub-standard. The specific complaint varies from firm to firm and can vary over time, but the underlying sentiment is the same. Too many rainmakers feel that they aren’t being heard and the firm isn’t acting on their concerns.

As partners spend more time at a firm, it’s natural that they want to have more of say as to what happens at the firm. They don’t expect the firm will do everything they want. That’s not the nature of a partnership. But rainmakers, even young ones, are increasingly demanding a seat at the managerial table. And a good portion of the partner movement between law firms that we see today is driven by the fact that rainmakers don’t feel heard at their present firm.  Moreover, interviewing with other firms is a flattering process in which rainmakers have an opportunity to voice their views and ask questions about a range of issues relating to the future direction of the firm with which they are interviewing. The interview process often gives the rainmaker the kind of feedback and encouragement that they may not experience at their current firm.

In today’s competitive legal landscape, a firm’s success and even continued existence can depend on the ability of the managing partner and the firm’s executive committee to keep rainmakers happy. The repeated departure of rainmakers can cause a death spiral from which the firm cannot recover. This shouldn’t be news to anyone who cares about the future of law firms and the legal services industry. Nonetheless a distressingly large number of firms do a poor job of caring for, feeding, and nurturing their key rainmaking partners.

When Law Firms and Family Members Don’t Mix

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There are two scenarios in which law firm leaders mismanage how they interact with family members who are in a direct business relationship with the firm.  On is when a family member becomes a client of the firm on something other than the normal arrangement that the firm has with other clients.  The other is when the firm reaches out to a family member to provide a service to the firm on terms that are different from the firm’s normal relationship with vendors or employees.

In my experience consulting with law firms, small law firms often underestimate the risks associated with providing discounted services to family members.  This is particularly likely to be problematic when the family member seeks ongoing representation in litigation or in areas of law that are outside the lawyer’s primary expertise.  In one extreme case, a solo practitioner devoted one third of his time over the course of a year representing for free a family member in protracted litigation.  When I questioned the wisdom of this course of action, the lawyer said that “family comes first.”  And in this case the family member insisted on taking a case to trial—a case that the lawyer flatly admitted would have been settled on behalf of a paying client.

Working on the cheap for family members –or representing them at all—also poses a non-trivial risk of harming the client.  When lawyers work for free and personal dynamics make it hard to fire the client, there is a substantial risk that lawyers will lose their professional objectivity.

Law firm leaders also err by asking family members to provide services to the firm on special terms.  For example, an estate planning firm hired the sister in law of the firm’s managing partner to provide billing services to the firm.  The firm’s bills rarely went out on time.  When I discussed this problem with the managing partner, he said that he didn’t want to be confrontational for fear that his sister-in-law would complain to her sister and the managing partner would end up sleeping on the couch.  In another example, the head of a small but growing law firm that generated about 15% of its business from internet-based inquiries asked her sibling to add pages to the firm’s website.  The sibling was a web designer and graphic artist who possessed the necessary skills to help the law firm.  But he didn’t have the time.  Three months later the website had yet to be updated. Given how much business the website generated for the firm, this turned out to be fairly expensive “free” help.

However you value the importance of family relationships, at some point you have to decide whether you are running a business or a family concession.  A vast majority of the time the prudent course of action for both the law firm and the family member is to avoid working together on terms that are materially different from what you would do for a paying client in an arms-length negotiation.  That is often the best way to manage your business while simultaneously maintaining the quality of your family connection.