Law firm finance is the theme for this edition of Law Practice Today. One would think that finance would be the most important of the four core areas of the ABA Law Practice Division, but in many respects it is the most forgotten.
Recently, Georgetown University’s Center for the Study of the Legal Profession and Thomson Reuters Peer Monitor published the 2016 Report on the State of the Legal Market which outlined trends impacting the legal market, as well as key issues that will influence the market, and consequently law firm finance, moving forward.
The 2016 Report notes that the law practice market has fundamentally changed since the Great Recession in 2008. The truth in Bob Dylan’s song from 1964 is ever more true for the law firm’s today—“The Times They Are a Changin.” The growth in demand for legal services has slowed. Business clients are increasing use of in-house counsel, as well as unregulated legal service providers. As I have reported in various ABA Law Practice Division publications, clients are demanding more cost efficiency and transparency in their law firms.
Law firms, large and small, are challenged to meet this new competition. So far, the vast majority of firms have been able to maintain financial stability by “cutting the fat,” decreasing the number of equity partners, aggressively managing expenses and ever so modestly increasing professional service rates. The economic pressure upon firms is not likely to dissipate anytime soon. Under the circumstances, the 2016 Report advises that “firms must actively embrace the need to change their basic operating models—to design and implement new approaches to staffing and legal work processes, to explore new opportunities for collaboration with other service providers, and to adopt and market innovative strategies for the pricing of their services.”
While the advice of the 2016 Report is on point, many firms would also be well advised to institute basic financial tools of law firm management that have been embedded within the ABA Law Practice Division since its inception, such as:
While law firm strategic planning is how a firm formulates its immediate and long-term goals and the means to achieve the same, many firms fail to address basic financial planning. The financial plan follows the strategic plan by delineating the investments, commitments, financial resources and bottom-line results that can be anticipated from the implementation of the strategic plan.
Budgeting is a significant element of the financial plan. The budget should include the projected revenues and expenses, and the assumptions underlying the budget should be carefully developed and understood.
Sound revenue estimates are probably the most important step in—law firms are labor-intensive (personnel and related expenses being the single-largest cost). In the absence of revenue estimates, hiring decisions are too often made without the necessary forethought and planning, which can render potentially adverse results.
An error that many law firms make in establishing their budget is to simply take last year’s expenses and add a set percentage. Just as with the development of a true strategic plan, a budget takes time to create, and requires the law firm management team to have an understanding and buy-in as to what is currently being spent, what goals the firm has for the year, and what should be spent to accomplish those goals.
The ABA Standing Committee on Lawyers’ Professional Liability recently released data on legal malpractice claims, reporting that nearly 16% of all claims are caused by lack of effective client communication. To avoid claims, lawyers should build their relationship with a client by having an understanding as to the goals and terms of the engagement and the responsibilities of both the attorney and the client—followed by a comprehensive engagement letter.
The engagement letter should address the consequences of the client’s failure to pay the legal fees invoiced in a timely manner. The time and effort taken to draft a detailed engagement letter to the client about their matter will repay the attorney many times over by establishing and maintaining a good relationship between lawyer and client, and increasing the likelihood of prompt payment.
Billing and collection are the lifeblood of the firm. Every billing attorney should present a monthly report to management about when the matters for which they are responsible are expected to be billed and when collection will occur. Billing attorneys with unbilled time in excess of $5,000 for any client matter should be reviewed by a member of the management team for unbilled time and accounts receivable. Management also should be reviewing monthly reports on unbilled time inventory, total accounts receivable and unbilled time and accounts receivable over 90 days. By distributing these reports to all attorneys in the firm, it enhances the peer pressure that can sometimes be the solution to firm billing and collection.
Law firm compensation systems should recognize lawyers who are prompt in billing and collecting. This can be accomplished through the firm’s profit-distribution system. While certain practice areas do not lend themselves to monthly billing—i.e., probate administration, contingent-fee litigation, and certain transactional matters, firms should recognize the time value of money in establishing hourly rates and fees.
No single financial policy, system or control can render the desired results in and of themselves. It is quality legal services rendering value to clients that produces the monetary reward that lawyers seek. Law firm financial planning and procedures can only help improve the monetary aspects realized.
The true measure of leadership in today’s law firm is the ability to maintain a delicate balance between the need to encourage each lawyer’s initiative, provide for work-life balance and collegiality, and plan and implement basic financial tools without which the very best practice can fail.
Once again, I am reminded of the words of my predecessor as chair of the division, Lewis F. Powell, Jr. who in 1962 noted in the preface to The Lawyer’s Handbook, the division’s first book, that “[t]he basic concept of freedom under law which underlies our entire structure of government, can only be sustained by a strong and independent bar. It is plainly in the public interest that the economic health of the legal profession be safeguarded.” Too often, lawyers do not spend the time nor effort to safeguard the economic health of their firms by instituting basic financial tools.
About the Author
Tom Bolt is the founder and managing attorney of BoltNagi PC in St. Thomas, U.S. Virgin Islands, and is the chair of the ABA Law Practice Division.