The Law Practice MBA

The title to this article, “ The Law Practice MBA ,” is not intended to intimate or suggest that one needs an MBA to run a law office. Quite the contrary, it suggests that using some readily available empirical data, sound business decisions can be made for the law office. Very simply, we need to look at recent data to advise upcoming decisions.

While extrapolating yesterday’s data into the future cannot produce 100% accuracy in planning, that data will form the basis to make informed decisions that are based in fact, and greatly improve outcomes.

The reality is that many attorneys are confident in their abilities to practice law and in knowing when to research the law to find definitive answers, but tend not to run their law firms with the same disciplined approach. Instead, for example, with respect to hiring decisions, attorneys often say, “I hired him/her because I just knew he/she would be successful.” While hiring decisions cannot be quantified to minimize bad hires, there are many other very quantitative measurables that can and should be used by the management team at the law office.

Why measure anything? As stated above, it is best to obtain empirical evidence to make decisions going forward. In addition, it is certainly helpful to compare data month to month and year to year to identify trends in the law office. With respect to each of the “measurables” listed in this article, one needs to understand whether or not these are leading indicators, lagging indicators, or contemporaneous reflections of the status of the firm. The time it takes to generate good data and put it in a format that is easily understandable is challenging. However, if the firm is built and organized in a fashion where preparing management reports are done on a regular basis, the whole idea of gathering data and reporting it in an easily understandable format will become part of the culture of the firm. Either the financial team, or the office manager will be charged with the duty of gathering the data and presenting it to the management team in a usable format.

In terms of measurables, what areas should you take the time to measure?

• Financial
• Marketing
• Personnel/Human Resources
• Client complaints
• Pro bono

All of these categories will provide a view of the current economic state of the firm, as well as providing an empirically based extrapolation of the firm’s future. Note that other than the measurement of pro bono hours, the aforementioned measurables do not reflect the “soul” of the firm, i.e., the culture and core values of the firm.

Therefore, for purposes of running the business aspects of the firm, low or no emphasis should be placed on measuring conduct consistent with the firm’s culture and core values.

With respect to the financial measurables, consider the following:

• Daily and weekly bank deposits and a day to day comparison to the previous month
• Monthly financial statements (with adjustments in the monthly financial statements for cash basis or accrual basis)
• Number of new clients monthly (this is also a marketing based measurable)
• Gross billing monthly
• Collections monthly
• Year to year comparisons for:

1. Monthly billing
2. Monthly financials
3. Bill paying weekly
4. Revenue per client
5. Revenue per referral source
6. Uncollectable receivables
7. Accounts receivable aging reports

The financial data reflects real dollars coming into the firm, the timing and sources of that income, and failures to collect on receivables. As a practical matter, the most dreaded phone call an attorney has to make during his or her week is the call to the client to say “your bill is past due, and you need to pay it.” It sounds simple enough but the confrontational nature of the call, for some attorneys, stops them from making the call. The dynamic between the attorney and the client is based on your advocacy for them and the expectation that you are fighting for them. Making a collections call to a client does not conflict with the position that the attorney is advocating on behalf of the client but, for a myriad of reasons, do not hesitate to make this call; the client should expect that if they are not current in payments.

In this approach, you must understand the difference between a lagging indicator and a contemporaneous indicator. Waiting until the month ends to compile reports on the collections and the accounts receivable aging report for the month, and then reviewing those reports by the 10th of the following month, utilizes old news. That is a lagging indicator, and you cannot act quickly enough to start making the phone calls to correct the flaws of the previous month. If your retainer letters expect clients to pay within ten (10) days, give them a five (5) to ten (10) day grace period, and then begin sending emails or making personal phone calls to get paid. You need to establish with clients that your invoices are important and that they are expected to pay as agreed upon.

Your office manager should also be providing daily bank deposit reports and comparing the running total for the month with the previous month so that by the 15th or 20th of the month, you will know if you are having a good or bad collection month. These are contemporaneous indicators of how the month is progressing. If by the 15th of the month you are significantly behind on collections, you, and your team need to make more phone calls and send more emails to clients to collect your receivables. Do not manage the law office’s financial department in the rearview mirror by focusing solely on lagging indicators.

Leading financial indicators are new client sign-ups for the month, new client retainers received, and other aspects of how the future will look for the firm.

With respect to marketing initiatives, please consider measuring the following:

• Appointments per week, per practice group
• Number of in-bound telephone calls from new prospective clients
• Source of client call (referral source)
• New client sign-ups
• Connecting fees to a particular marketing effort
• Repeat work from existing clients
• Results from traditional marketing i.e., networking
• What marketing effort created the in-bound telephone call
• Number of new files opened for the month

As you can see, measuring new in-bound calls, new client sign-ups and new files opened for the month are leading indicators to determine how the firm will do in the near future. If there is a spike in new files opened in a month, you can be sure that the coming months will be fruitful. However, the inverse is true, if client sign-ups and new files opened for the month are declining, your marketing efforts are probably similarly declining or becoming less effective, and therefore the future will not look good for the firm. Take these indicators as intended, and act on them when the need for a change is evident.

The more directly you can connect your marketing efforts with new client sign-ups, the better you will be at directing firm resources at specific marketing events and strategies.

The next area that should be measured for the firm is personnel and human resources. While this is not intended to be a comprehensive list of items you should have in the human resources file of each employee, the measurable provide a way to control costs and analyze working time and days for the attorneys in your office. Consider measuring the following:

• Vacation days
• Personal/emergency/paid time off days
• Monthly payroll
• Overtime pay
• Bonuses paid to attorneys/employees for client origination
• Establish billing/revenue goals and performances/comparisons monthly
• Daily billing/weekly billing
• Utilization

The first several bullet points in the above list for personnel indicates the costs of personnel and how leakage becomes a factor in maintaining employees, for example, overtime pay and paid time off days. The second grouping is intended to focus on the attorneys that are the revenue generating employees of a law office. Remember, a law office uses, a business model of placing labor on a problem and solving the problem. The support staff supports the lawyers that solve the problem. If the lawyers are not utilizing their hours to bill clients, they are making inefficient use of their time, and time is the only inventory item that an attorney has to sell. Therefore, attorneys need to bill full days, and must be kept busy with a good queue of work in order to meet and exceed billing goals for the week, month and for the year. If the law firm has the appropriate compensation and bonus programs in place, attorneys will drive to outperform each other and to ultimately earn year-end bonuses.

Lastly, do not minimize measuring pro bono hours and client complaints. While pro bono hours will not generate revenue, they may be very important to the cultural fabric of your firm. Great pro bono work, should be celebrated and readily acknowledged on a regular basis in front of all employees.

Client complaints, while not a favorite topic to raise in front of a big group, need to be analyzed and given their appropriate weight. Some clients are never happy, and some clients complain for valid reasons. If the reoccurring theme of various clients’ complaints with one particular attorney is, for example, that such attorney does not return calls in a timely fashion, that complaint is probably valid; if it is repeated, it needs to be addressed immediately. No law firm can thrive if clients are not happy with the fundamental right of being informed about their case.

In conclusion, data about your law firm provides a basis for empirical decision making for the advancement of the firm. Do not minimize it, but instead, incorporate it into your culture so that meaningful data flows to and through your desk on a regular basis.

If you would like more information about this topic, author Kerry Lavelle can be reached at 847-705-7555 or klavelle@lavellelaw.com.