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Is Your Law firm Headed for a Fiscal Cliff?

By on December 9, 2012

Is your business headed for a fiscal cliff, most corporate CEO’s have a pretty good measurements to help guide them from falling off the edge. However, law firms are somewhat strange and operate quite differently from the Fortune 500 companies.

Here is a short check list to help a firm see a potential fiscal cliff before falling off:

  1. Don’t let current financials fool you. Law firm financial statements don’t always provide a true view of profitability, they are cash based. They try and match up cash collected today from work done long ago, along with today’s expenses. This cash may have resulted from clients and partners who are no longer even associated with the firm. Pretend you are recognizing revenue and costs based upon the accrual method of accounting, compare that to your cash basis results. This can be a simple calculation, just take the historic realization value of the hours worked this month and subtract all of your true costs for the same for the month (not just what you paid) and this should give you a comparison. Is your firm healthy?
  2. Closely examine forward looking indicators.  In a law firm, forward looking indicators include:
    1. Review total hours recorded this month or quarter and the value of those hours at their potentially billed and collected value;
      do not calculate any of this at standard rates.
    2. Can you project out a backlog; does your firm have enough work to become 90% utilized over the next 3-6 months?
    3. How satisfied are your clients, are you winning the client swapping battle? How dependent are you on key clients in any one
      sector of your business.
    4. What is the economic climate in your client’s market place? How will this affect your future work and your ability to raise
      rates?
  3. Worry about the mix. The business mix of law firms equate to the product mix of a corporation. It can be critical. Compare your current and forecasted mix with historical values. Do this by type of law, in other words are you getting more business in transactional litigation with lower rates while your patent litigation is slumping. Take a close look at your associate to partner mix, are you actually forcing work down to the lowest practical level?
  4. Look at the trends. All the measurements we are discussing here must be looked at from a trending point of view. Most law firm financial reports are “point-in-time” snapshots, what does the trend look like? Keep on-going trends spreadsheets for hours, effective rates, cash, write-off’s and expenses. It would be helpful to keep these by practice group and branch office. These trends will help you look forward, instead of just backwards.
  5. Culture, Lateral Partners and Acquisitions. We have all seen the demise of law firms over the last few years and there are many things we can learn from this experience. Many of the firms that have imploded were a result of either falling off a fiscal cliff or culture issues. Let’s talk about the culture issues, is your firm playing on the lateral partner “merry-go-round”, whereby you lose a partner but
    gain one from another firm? There is a huge financial and cultural risk associated with growing by lateral partners. The larger a firm becomes, the more the culture fractures especially if the growth comes through acquisitions. A fractured culture can quickly turn on a firm and once a group leaves, it can be like a cash-run on a bank … deadly.

Pay attention to the list above and you’ll have a better chance of seeing and avoiding a fiscal cliff in your business.

 

 

 

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Categories: Best Practices, Financial Management

Your 50% Bonus is About to Fall Off a Fiscal Cliff

By on December 6, 2012

Your 50% Bonus Depreciation on capital equipment will disappear as of December 31, 2012. In addition, no one exactly knows at this point how normal depreciation will be effected in 2013. So now might be the time to buy, buy, buy!

How does all this depreciation work and why should you care?

Most businesses, including law firms, buy capital equipment and software an on-going basis. The timing of these purchases can be critical from a tax savings point of view. Most businesses would like to be able to just “write-off” the entire purchase of equipment and software as an “expense” in the purchase year, just dream-on, you can’t. Although at one time there was a loop-hole commonly called the “Hummer Deduction”, whereby “businesses” were buying SUV’s and writing them off in the same year. That’s all changed and instead you normally must depreciate the purchases over a period of time depending on the item, for example 3-5 years.

Two key events changed how depreciation works through the end of this year. The Tax Relief Act of 2010 and the Jobs Act of 2010 made changes to the IRS Code Section 179. These revisions to Section 179 allowed for a 50% “Bonus Depreciation” on qualified assets placed in service during 2012.

Here are some general details regarding the “Bonus”:

  1. Let’s assume that your business had a profit in 2012 and will be paying taxes. There are other provisions for losses that are carried forward.
  2. Your equipment or software must be in place on or before December 31, 2012.
  3. You can either pay cash or finance your purchase.
  4. Small, medium and big businesses have different thresholds.
  5. Normally the Section 179 deduction is taken first, followed by the Bonus Depreciation calculation.
  6. “Off the Shelf” computer software qualifies.

Make sure your firm takes full advantage of the 50% Bonus Depreciation before it disappears at the end of 2012.

Please note: I am not a tax advisor nor qualified to discuss the accounting treatment of any purchases you might make. All of the information above is available on various web sites and specific advice should come from a qualified advisor.

In my next posting I’ll give you a check list to make sure your business isn’t going to fall off it’s own “fiscal cliff”.

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Categories: Financial Management, Management

2012 Year-end Survival Guide for Law Firms

By on November 11, 2012

Law firms are quite unique, as compared to most other businesses; they normally choose to operate on a cash basis. Income isn’t earned, from a tax point of view, until that cash actually comes in the door.  In addition, expenses can’t be deducted until they are actually paid. Cash-in, cash-out that’s how law firms work. Even though smart firms might keep unbilled, accounts receivables and accounts payable on their balance sheet (accrual accounting) it really doesn’t factor into revenue or taxable income. One benefit of cash accounting is that income tax is deferred on accounts receivable, which may or may not be collectible. Law firms on a cash basis can do much more yearend maneuvering to manage the tax consequences of either the corporation or partnership.

In a Slow Year – Ways to Increase Income

  • Of course, the best way to increase income is by billing more hours through November and collecting it all by December 31st. By this time of the year it’s a little late to expect work to be billed and collected.
  • Stop paying expenses probably has single biggest impact on income. Contact your vendors first so that they understand that November and December bills will be paid by mid-January.
  • Contact clients with large receivables, especially those that are old and risky and negotiate discounts for payment in December. Surprisingly, some companies have “use it or lose it” budgets and they just may want to get this liability off their books. Keep in mind that they operate on an accrual basis; it’s good to reduce liabilities for them.
  • Contact clients with large projects and see if you can get more upfront retainers, (not IOLTA payments). This additional cash will probably be calculated into taxable income.

In a Good Year – Ways to Keep Taxes Down

  • Just the reverse of a slow year, one excellent way to keep taxes down is to pay forward 2013 expenses in December 2012. This doesn’t mean going on a buying spree. Many vendors would gladly bill 2012 services and accept payment in early January. (Checks dated December 31st this year will reach them in early January).
  • One hidden expense that is sizeable in some firms is credit cards, go online and pay off all balances.
  • Make purchases in 2012 instead of 2013 for hardware and software that can be put into service pretty quickly. Only buy the items you were going to purchase in the upcoming year.
  • Contact some large clients and tell them you’ll delay November and December billings and instead bill them in early January for immediate  payment. This might benefit the client since they are accrual basis, and if they receive a bill in 2012, it impacts their financials.

Beware of Pitfalls

  • Beware of the false sense of security that  cash accounting provides. Many of the above suggestions have short term benefits with a potential longer term negative impact.
  • Drawing down the line of credit in a slow year-end, for any reason, is risky.

Best Practice

Manage the firm day to day on an accrual basis. Accrual reporting provides cleaner snapshot of the health of the firm. Sure, you’ll compensate
partners and pay taxes on a cash basis, but accrual will allow you to sleep at night knowing what tomorrow will look like.

Beware of drawing down a bank line for partner compensation

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Categories: Best Practices, Financial Management, Law firm billing, Management

Cover Letters on Client Bills – No Way

By on September 23, 2012

Law firms are under pressure to increase profitability and at the same time deal with stagnant revenue and increased costs. Improvements in productivity appear to be easier than rate increases in keeping a firm healthy.

I read with some disbelief a recent recommendation suggesting that attorneys send a personalized cover letters consisting of a paragraph or two with their monthly billing statements. The overall concept seemed understandable; just explain to the clients what you’ve done.

The idea of sending a personalized cover letter with each bill does nothing more than slow up the billing process, cost the firm cash flow and may allow the attorney to think that he/she is actually communicating with the client. The fact is, anything important the attorney needs to communicate to the client probably can’t be put in a general cover letter that passes through the accounts payable department in any case. In an efficient mid-size or larger law firm we want the accounting department to get good, clean bills out to clients for payment as soon as possible. Delays don’t benefit anyone, including the client. Can you imagine a billing attorney, who might be billing a few hundred matters (or more) each month generating cover letters for matters where he/she possible didn’t even do any work? Remember, we are hopefully using our billing attorneys to better manage projects and push work down to the lowest practical and competent level.

The client billing process, in many firms is based on a slow, painful monthly schedule. Why … because it’s always been that way and adding a cover letter to the front of a bill is not a step in the right direction. The firm might be better off setting up a policy that says a billing attorney must call a client, on every final bill after a matter has closed or any bill over $xxxx dollars to explain it personally to the client.

In summary, cover letters on bills really don’t serve the intended purpose and only delay the firm’s cash flow.

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Categories: Best Practices, Financial Management, Law firm billing, Management, Productivity, The Legal Market

Lower Law Firm Expenses by DRIFT

By on September 18, 2012

I read with interest The Am Law Daily post discussing how law firms were dealing with rising expenses.  Law firms are looking for ways to improve profitability, especially during tough times. One sure way to lower costs is by “doing it right the first time” (DIRFT).

This philosophy is best understood through the work being done by Philip Crosby Associates. Crosby’s initial book (no longer in print) “Quality is Free” kicked off his process in 1970 during a time when US industry was trying to understand the management styles in Japan. People such as Edward Deming were explaining the differences in Japanese cultures and how they related to industry.  The Crosby quality process fits service organizations like law firms as much as it does a manufacturer. Let’s take a quick look at his concepts.

According to Crosby here are the Four Absolutes of Quality Management:

  1. Quality is defined as conformance to requirements, not as ‘goodness’ or ‘elegance’.
  2. The system for causing quality is prevention, not appraisal.
  3. The performance standard must be Zero Defects, not “that’s close enough”.
  4. The measurement of quality is the Price of Nonconformance, not indices.

In general, quality is the starting point based on specific requirements. Once the service is delivered it is too late to add quality. The standard is Zero Defects; the thought of AQL (acceptable quality levels) is completely unacceptable. A law firm that
delivered documents on time, 95% of the time has failed, attorneys that come close to hitting their requirements have failed.

So, what’s the benefit of adopting the Crosby quality program, quite simply, it is cost savings, client satisfaction and employee empowerment. If you don’t believe in the program you can take a quick self-test and try to measure the real price of non-conformance (PONC) within any business. The potential price of not “do it right the first time”.

For example:

  • Resending and reprocessing
  • Expediting, overnight shipments, overtime hours
  • Disruption to other schedules, rescheduling
  • Client complaints
  • Non-billable services
  • Missed filings, filing for extensions
  • A lost client, no new matters
  • A claim of misconduct, added insurance costs

Law firms can reduce their costs and improve profitability and client satisfaction all at the same time by “do it right the first time”. I can assure you that if you don’t do it right the first time, you do it right after the second, third, forth ….. time.

 

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Categories: Best Practices, Financial Management, Management, Productivity, The Legal Market

Human Factors in Developing Software

By on June 17, 2012

I read with great interest the brief comments on software User Interface “UI” in the June 15th 3 Geeks story,  UX Matters … A LOT, and Jeff Brandt’s comments on PinHawk Law Technology Daily Digest.

The issue is that all the people reading this story and most of our friends in the legal community use software every day, and much of the time it is a frustrating experience. So, what is the problem? Many software developers are feature-function oriented. You absolutely need these developers, however, most aren’t skilled in the Human Factors element of software development. They attempt to focus on functionality, not end-users. Therefore, you can almost picture the screens; they have hundreds of options, little consideration for workflow or user friendliness. They do not take into consideration that some users are power users with everyday chores, vs. casual simple task users. It’s normally one-size fits all. The result is low adoption rates, frustration and a high cost of training with missed expectations.

As most of you know, I joined Aderant last October when they acquired RainMaker Software. I’m amazed at the way software is developed at Aderant, specifically the Aderant Expert product. The Expert product has 6 Human Factor engineers working with the normal software architects and feature/function developers. I can tell you from my personal experience in developing software for many years without a Human Factors team; these people can do great things.

If you take a look at the recent rounds of Aderant Expert product introductions including Found Time, Time Management and Matter Planning you can clearly see the work done by the Human Factors team. For example, time entry sits on almost every attorney desktop, yet most systems have few features that actual attorneys ask for. Expert Time Management has an option to allow an attorney to see time entries in a spreadsheet format with the ability to quickly filter by project, client/matter or other options and edit or add from there. This just one example of many I could cite. The Human Factors team made this feature really cool. What does really cool mean, it means that users find screens very appealing, will more readily adapt to usage and become more productive. Expectations are met or exceeded.

The Human Factor team does the following:

  1. They work with the “product owner”, who is not a programmer, to collect and develop a set of end-user and technology requirements for a new product or major enhancement.
  2. They develop “wireframes” to portray the user interface experience and functionality before any code is written. Wireframes are screen designs without any real code behind them to show non-technical people (users) what the software will look like and how it operates before it is actually coded.
  3. The team has tremendous graphic artist’s skills to make sure the screens all look “cool”.
  4. The team then provides their wireframes to a client user group technology team where the users group discusses the screen designs and navigation, along with the functionality. This end-user visibility is a key differentiator.
  5. After discussions with the users group and approval, a final set of specifications for the product and how it will be tested are developed and approved, before any programming is actually started.
  6. The product is coded and returned to the teams again for final review before releasing for internal training.
  7. Once internal employees are comfortable it is then released to clients and the process starts all over again.

It might be difficult to explain Human Factors in software development, but it is really easy to see the difference.

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Categories: Best Practices, Financial Management, Technology, Uncategorized

Survey – Wide Disparity in Billing Efficiency Causes Cash Flow Issues

By on May 28, 2012

In a previous post I revealed the details on a study I conducted to see how successfully firms were able to get attorneys to get their time in from the prior month. The results were not bad, 74% reported they had attorney time posted no later than the 2nd business day of the month.

Now we’ll really separate the firms with a new survey that reveals how quickly firms can get edited pre-bills back from attorneys and bills out to clients.

 Question #1:
From the time you give attorneys pre-bills hope long before they are due back in business days?

  • 33% 1 – 3 Business days
  • 33% 4 – 7 Business days
  • 20% 8 – 14 Business days
  • 14% 15 Business days or longer

Note: One firm reported that the “billing assistants” bill all month long and there is no requirements; the busiest billing day is the last day of the month.

 Question #2:
When in an average month when are you done billing and the bills are sent, emailed or e-billed in business days?

  • 13% 1 – 4 Business days
  • 40% 5 – 10 Business days
  • 13% 11 – 15 Business days
  • 34% 16 Business days or longer

Note: Many firms reported that their billing routinely stretches into the next month and they are sending bills at the same time they are doing pre-bills for the next month.

 Here are some quotes:
Worst: “We are very rarely completely done with the bills prior to the pre-bills out for the following month.”
Best: “We give the Attorneys 24hrs to respond back with changes or corrections. The morning following the 24hr review period the invoices are created, stuffed and mailed out within 4-5 hrs.

Conclusions: There is a wide disparity between law firms regarding how efficiently they manage the billing process. My review showed it had little to do with size of firm, number of branch offices or type of law they practiced. For example, the “Best” firm above has over 200 timekeepers and many offices. They however are highly disciplined,
automated and structured. The law firms cash flow is directly related to getting bills in the hands of clients in the shortest period of time. There are ways to improve the billing process. You might want to review my 10 part series
on improving the billing process starting here.

 

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Categories: Best Practices, Financial Management, Law firm billing, Management, Productivity, Uncategorized

How to be a Happy Customer

By on May 28, 2012

It was interesting to read Monica’s Bay’s post from LegalTech West Coast, she recited a survey from 2010 showing that 77% of prospects regard customer service as their primary reason for choosing a vendor. I have no doubt that’s what buyers believe, how it is determined pre-sale is a little difficult to determine. All vendors have a list of happy clients, just ask them.

I’d like to talk about how to be a happy customer, one that probably also gets “good service” from their vendors. In my 30+ years in dealing with law firm technology, many times I could just spot a customer who was never going to get “good service” from any vendor. Why is that, let’s see what’s wrong.

Here is what I observed:

  1. Poor homework and missed expectations. Some firms just need a new system, their current one is old and a new one will surely handle their needs. They are unable to clearly articulate their exact needs, business problems, workflow, attorney needs etc. Therefore all the products they see look better than what they have.
    Since there is little in the way of differentiation, they choose the least expensive one. Of course, 6 months to a year later they are unhappy and the vendor is at fault. Lesson: Do your homework, don’t make a selection until you have identified your exact needs and assured yourself that the vendor can fulfill all known requirements. Demand to see the keystroke process to handle your requirements. It’s real easy to say yes, my product allows the user to change attorney fee allocations on a cash receipt, however when you go through the process you see that it’s not at all what you have in mind. Want to be happy, make sure your expectations are in-line with the product.
  2. Take responsibility and ownership. The moment you implement a new system, it’s “your” system. Take ownership of the product, get properly trained, no short-cuts. Unfortunately when firms go live on complex systems the immediate priority is to get the basics accomplished, this is completely nderstandable.
    However, 3-6 months later many firms are using the new system like their old system, meaning they are not taking advantage of the process re-engineering that might have justified the new purchase in the first place. I’ve been in countless meetings with clients where client #1 will say, how come the system can’t do “X”, and client #2 says, oh yes it can, we’ve been doing it for years. Lesson: Get trained, and stay trained. Talk to other users, use a User’s Group forum to find ways to improve your processes and solve problems. Go to conferences; hire the vendor or a consultant to examine your best practices. Remember it’s now Your system.
  3. It’s still all about people. Why do some people call the same help desk with similar questions and come away with completely different experiences? Many times it about just good old fashion people skills. I’ve experienced customers who have never had a nice thing to say on the phone, never said thank you and are ill prepared to even describe the issue they are calling about. Then you wonder why they don’t get “good service” from their vendor. Lesson: Form a good relationship with the help desk and management of the vendor, be polite and demanding at the same time. Do your best to explain the issue you are calling about, ask for a resolution timeframe. Some problems are minutes to fix, others aren’t even fixable anytime soon (hopefully the non-fixable ones have graceful work-rounds).

Many times happy customers what to be happy customers and know how to become happy customers. I can assure you that most vendors who are time-tested will do everything they can do to help YOU become a happy customer.

 

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Categories: Best Practices, Financial Management, Law firm billing, Management, Productivity

It Wasn’t About AFA’s

By on May 6, 2012

I recently hosted a, standing-room only client discussion at Aderant’s Momentum on AFA’s. The funny thing was that the discussion turned out to be not about AFA’s (Alternative Fee Arrangements) but about Project Management and Profitability Modeling. Sure, most of the firms in attendance were already providing their clients with AFA’s, one large UK firm even indicated that about 50% of their litigation was now fixed-fee work.

What firms wanted to hear about was how they could better manage projects and use matter planning tools to predict profitability. Many of the firms that contributed to the discussion were already rolling out matter planning tools, almost like “job costing” tools to their attorneys. One can note that some industries like construction have used job costing tools for years to bid on and then manage ever-more complex projects. Law firms can learn from these experiences while using similar tools.

Here are the key takeaways from this session:

  1. AFA’s are just a pricing model for services
  2. AFA’s require a commitment to project management, most importantly resource management
  3. Matter planning tools allow the firm to use past matters to help predict both the process and staffing levels for future projects.
  4. Managing attorney resources most often involves moving work down to the lowest practical levels within the team.
  5. Partners on the team who are doing associate level work will cause problems.
  6. Project Management will allow the team, and possibly the client to see actual dollars worked vs. budgeted. However, the key
    component normally difficult to determine is, estimate to complete.
  7. An AFA fixed fee should also mean “fixed scope” of work.
  8. Most participants indicated that in litigation, Most AFA fixed fee work was all done pre-trial. Once the case went to court, firms
    operated on a traditional hourly basis.
  9. AFA’s can be used as either loss-leaders, or marginally profitable, as a way of getting more profitable trial work.

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Categories: AFA - alternative fee arrangement, Best Practices, Financial Management, Law firm billing, Productivity
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