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Toss out the Book and Innovate

By on December 16, 2012

You already know the famous saying, “do the same old thing, the same old way and get the same old results”. This is never truer than during challenging economic times. The market is full of businesses just like yours and the customer needs to make a choice. Your same old message, based upon your same old business plan may no longer resonate and you’ll be at risk of losing out to the businesses that innovate. Innovation is clearly a method of differentiation.

Every CEO and business leader will claim that their business innovates; they will cite a few new initiatives in their annual plan. However there can be a huge gap between plans, efforts and actual results. I won’t use companies like Microsoft, Google and Apple to prove that innovation works, they might be outliers, although you might be amazed what “outliers” have in common by reading Malcolm Gladwell’s book on the subject.

Let’s instead look at Blinds.com, it started as Laura’s Draperies with Jay Steinfeld trying to sell blinds and shades door to door, a really tough gig. He built his first web site in 1993 and by 1996 was selling products over the web as NoBrainerBlinds.com. In 2004 Jay changed the name to Blinds.com and the business was growing. A defining moment came in 2007 when Jay introduced a real innovation, on-line videos explaining how to properly measure a window and then install a blind. Blinds.com now has a complete library covering dozens of “how to” video’s that make buying and using their products risk-free.

I could go on and on with innovation stories, even law firms have examples of innovations. Some are offering Project Management services to help align efforts and results with their clients. Other are offering self-help like Goodwin Procter, a Boston-based firm providing startup entrepreneurs and venture capitalists with free documents and tips on best practices on a site called Founders Workbench. Can you imagine that, free advice and forms.

Here are 5 ideas to keep in mind when deciding on innovation projects.

  1.  Get Away. The best way to come up with innovative ideas is to completely get away from your normal daily grind. Find a place to just goof off, clear you head and turn off the cell phones and email. Set-up a creative environment that allows people’s minds to ask why and why not.
  2. Plan on Failure, and Fail Early. Everything we do in business is to avoid failure, but innovation can’t exist without at least a tolerance for failure. Businesses can accept pilot project that are innovative and then structure the roll-out to test for failed concepts. Nobody should feel threatened for a failed innovation.
  3. Alignment. The best innovations are where the business aligns their core capabilities with the customers’ needs. What are your core strengths, what value can you provide your customer? In the case above, Goodwin aligned their expertise in helping emerging companies grow with an entrepreneur’s desire for self-prepared  documents.
  4. Ask Why and Why Not. Question everything, look at the client experience. When I think of Heinz ketchup I think of the bottle being upside down, makes it much easier to use. I’m not sure they invented this concept but someone there must have had a eureka moment. Turn things upside-down and see what happens.
  5. Leadership and Change. Make sure that you have CEO driven projects, or at least find a Vice President of Change in your business to help provide the leadership necessary to make innovation in your business an on-going process, not just an annual event.

When starting out, look for small “hits”, you don’t need a home-run in your first at-bat. These will come as you build a culture and track record for innovative ideas.

 

 

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Categories: AFA - alternative fee arrangement, Best Practices, Legal Marketing, Management, Productivity

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

Ways Management Can Gets Results Without Superstars

By on November 26, 2012

The dream of management is to build an entire superstar team of high achievers and then dominate the marketplace. Unfortunately, this rarely happens. Why ….. because superstars don’t always work well together and they tend to be hard to find and harder to keep.

Management can get the results they are looking to achieve by getting their “average” people to follow “superstar processes”.  If the processes are flawed or not well defined, then failure is probable. The American scientist and father of modern-day quality Edward Deming once said “A bad process will beat a good person every time.” Most of our businesses no longer rely on expert craftsmen, we instead rely on a mobile and family-centric “average” workforce.

Let’s take a look at major successful franchises like McDonalds, Subway and Pizza Hut, they become very profitable because they follow proven “superstar processes”. McDonalds instituted their Hamburg University in 1961 to insure process control. You might say that your business is much more complex than a fast food joint and many of your requirements can’t be put into structured processes. Really! Some of the most
complex tasks in the world are done by developing and closely following superstar
processes.  Check out my stories on the Checklist Manifesto, you’ll be amazed.

Your business, no matter what it is, can benefit by developing and implementing superstar processes for your average employees. As Fujio Cho, the former president of Toyota Motors, once said, “We get brilliant results from average people managing brilliant processes, while our competitors get average or worse results from brilliant people managing broken processes.”

Which type of business are you running?

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Categories: 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

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

Tax Time & Law Firm Temptations

By on April 8, 2012

Next week taxes are due for all law firms, since most firms are partnerships, these taxes are individually owed by the partners in the firm based on their share of the firm’s net income from 2011. With a soft economy there might be a big temptation to get creative in firm accounting to help boost 2011 net income.

Here are some considerations:

  1. Most law firms operate on a modified cash basis for accounting and there are almost no standards for “how modified” from a pure
    cash accounting method this accounting becomes. One key element, especially in larger firms that requires the use modified cash accounting is the payment in advance for litigation expenses on behalf of a client, these are deemed to be a loan to the clients because they are assumed to be recoverable, regardless of the outcome of the case.
  2. Taxes are calculated on a share of net income, not necessarily cash distributed. Therefore one consideration for partners is the
    payment of income tax without corresponding cash distributions. Therefore, partner paid in capital for the year is subject to tax, however there is no cash, in effect to cover it. Many partnerships do not distribute 100% of net income and instead reserve cash for partner capital accounts to help fund on-going investments and future pension needs.
  3. Most firms have bank lines of credit, this always a tricky situation as year-end approaches. The issue becomes, how muchof the cash from the line will be used to help fund year end distributions. A risky situation is when firms substantially draw into their bank lines to fund partner distributions. If firms choose to take this route how far into the following year does it take to zero out the line?
  4. Some firms will look to “capitalize” expenses instead of outright expensing them in the tax year. For example, fees for lateral hire recruiting expenses. By capitalizing these over say 3 years the firm takes a much lower expenses on the Income Statement and the net income looks much better. Keep in mind that this can come back to bit a firm in that there is no cash for this “improved income” since the bill for the recruiting fee is obviously paid.
  5. Firms may be tempted to do “extraordinary” things in December to prop-up net income. For example, delay paying expenses that are normally due or “early booking” client advance retainer payments prior to work being done. Again, since there are few standards for law firm accounting these might appear to be attractive options.
  6. Many law firms have outside auditors that more help protect the partners against liability claims than really perform audits.
    These auditors may actually just do reviews and not audits. The issue again is, to what standards will the auditors compare the firms practices.
  7. Some firms are more concerned with the annual reporting of Profits Per Equity Partner, than the actual cash health of the firm. This can be a risky ego trip when the PPEP look attractive but the firm has no cash.

 

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