♫ You load sixteen tons, what do ya get?
Another day older and deeper in debt..♫
Words and music by Merle Travis, recorded by Tennessee Ernie Ford.
One of San Francisco’s premier grand old law firms voted to dissolve today, according to The San Francisco Chronicle.
It survived wars, earthquakes, the Depression and social changes but was unable to survive the effects of a 3% drop in revenue in 2007. The firm is reported to have had an “unusual” financial structure that may have contributed to its downfall. It was a partnership of professional corporations. It is reported that in order to avoid double taxation, it distributed all of its earnings at years end. This left it financing its current operations by way of a line of credit, at least until cash flows caught up to the debt (known as being ‘out of the bank’ according to Heller Ehrman partner Stephen Ferruolo).
This raises several issues for law firms, particularly as we enter a period of financial instability and recession. Law firms are classically under capitalized but this particular financial structure resulted in the firm using debt to finance, at times, the firm’s operating capital. Structuring your business for tax advantages is fine so long as it doesn’t result in any distortions of the fundamental business foundations of a firm. In this case it appears that the desire to minimize tax overruled prudent financial management and capitalization principles (namely the debt/equity ratio).
A highly-leveraged firm is vulnerable to shocks. In Heller Ehrman’s case the triggering event appears to have been the loss of some large litigation cases that led to a 3% decline in revenues for 2007. As a result, key partners left the firm (the article doesn’t say so but reading between the lines, these departing partners must have been major revenue generating partners who saw their bonuses and/or draws reduced as a consequence). Once these key partners left, an inevitable chain reaction was started which resulted in a diminishing number of equity partners carrying a large debt load. Eventually the firm collapsed under the weight of its debt without the infusion of new equity and new equity partners.
After trying to find a merger partner and failing, the remaining partners must have found the last days to have been crushing – working like crazy only to find they are a day older and still deeply in debt to the bank. The dissolution must have been the only alternative left…
Hat tip to Pete Roberts for drawing this to my attention!
♫ I’ve been taking care of business, it’s all mine
Taking care of business and working overtime…♫
Words and music by: Randy Bachman.
LawPro Magazine (August 2008) has just hit the streets. In this latest issue celebrating the 10th anniversary of PracticePro, the risk management, claims prevention and law practice management initiative for LawPro, the wholly-owned insurance company providing professional liability insurance to the lawyers of the Law Society of Upper Canada, my friend, colleague and director of PracticePro Dan Pinnington took an innovative approach to this issue of LawPro. Along with articles looking at the increasing amount of attempted fraud against lawyers and such, Dan invited your humble scribe to contribute to a collaborative series of articles by such luminaries as Simon Chester, Connie Crosby, Dominic Jaar, Richard Potter QC and Steve Matthews. These articles all dealt with the central question: “What are the 10 Critical Issues facing the Legal Profession.”
This was a wonderful collaboration and I thoroughly enjoyed the opportunity to be a contributor. Of course to see what everyone wrote, you will have to visit the article on the web which can be found here.
I wish to say thanks! to my fellow contributors and I hope we can do this all again…(I rather suspect while we were taking care of business we were all also working overtime…)…
♫ Start a little conversation now, it’s alright, just take five, just take five…♫
Music by Paul Desmond, lyrics by Dave and Iola Brubeck, recorded by the Dave Brubeck Quartet.
I have been a fan of OnPoint Law Corporation’s “Take Five Newsletter” for some time. This free monthly resource summarizes 5 key cases from the British Columbia Court of Appeal in a clean, easy to read email. The latest version (August 2008) dealt with the Robertson v Slater Vecchio case regarding firewalls when lawyers transfer between firms and the implementation of the Law Society’s conflict guidelines in this regard.
Hats off to Sarah Picciotto and the rest of her legal research team at OnPoint Law Corporation! She is at the forefront of lawyers using off-site contract services in a cost-effective manner. You can subscribe to the Take Five newsletter by sending an email to: spicciotto@onpointlaw.com. It’s alright – just take five!
♫ Two o’clock in the mornin’,
I’m sleepin’
and something wakes me but I don’t know what it is.
[Computer goes:] “You’ve got mail.”… ♫
Words and music by J. Shin.
In Quebec City at the Canadian Bar Association’s Canadian Legal Conference, I had the opportunity to present on two sessions:
- 90 Tips in 90 Minutes with Richard Ferguson, Pascale Daigneault, Dominic Jaar and moderated by Dan Pinnington, and
The PowerPoints, in Adobe Acrobat format, can be downloaded by following the links above. My thanks to Dan and my co-presenters for making the presentations effortless and to the audience who not only came to listen, but became active participants in the presentations. As a result I very much enjoyed the entire experience as well as the time in Quebec City.
Hopefully we provided many tips to assist in running a law practice better and dealing with the avalanche of emails that we all seem to get these days! And hopefully we have learned to turn off that beep that says ‘You’ve Got Mail!”
♫ Must I forever be a beggar
Whose golden dreams would not come true
Or will I go from rags to riches
My fate is up to you.. ♫
Words and music by R. Adler & J. Ross, recorded by Elvis Presley.
History teaches us that men and nations behave wisely once they have exhausted all other alternatives, according to Abba Eban. By reviewing the alternatives that others have exhausted before us, the hope is that we can then learn from their wise advice. Here then, are further tips in the history of legal financial management:
- Establish an adequate credit policy
Always, always take trust deposits (advance fee retainers) and never work once your advance fee retainer is exhausted. Have a client engagement letter that clearly sets forth that a client’s trust balance must be in the black at all times or a firm will cease work, will seek to be removed as counsel of record and will return files back to clients (always check on the ethics of withdrawal in your jurisdiction in any particular circumstance for non-payment of your fee). Do not make exceptions. Have your practice management system set up to warn you well in advance of the exhaustion of retainers so that you can write to the client and tell them of what must be done and by when on their part in order that you continue with the file on your part.
- Become comfortable discussing fees with clients
Quick question: What should always be found at a birthday party and never on a legal file? Answer: A surprise. Clients do not like surprises, especially if they relate to the size of an account. This can be avoided by telling the client at the first meeting what you charge, how you charge and when you charge and what you expect from the client. Do not be afraid of scaring off the client – a client who is unwilling to face the cost of a legal procedure at the outset is not likely to change their mind at the end of the file. Better to put your time into marketing and attracting the type and class of client that will pay your accounts than putting that time into a file on which you are not going to get paid.
- Track your time
The first step in determining whether you were profitable on a sale of a service is being able to determine the costs of services delivered. To do that, you need accurate costing mechanisms that can include both direct and allocated (or fixed) costs. Direct costs are your time, and any direct disbursements incurred for the file (court reporter fees, filing fees etc). Allocated costs are the file’s share of the office overhead – staff salaries, rent, insurance fees, electricity rates etc. Since the biggest direct cost is the time that you put into the file, you cannot determine what a file cost you to produce unless you can track the time you put into the file – billable, non-billable, written-off etc. Why is this important? When it comes time to distribute funds among partners, not knowing the true costs of the files worked on can lead to gross inequities. For example, let us look at two files, each of which generated $100,000 in revenue (after disbursements). File A took three years and involved 400 hours of legal time (at $250/hr = $100,000) + hundreds of hours of staff time. File B took six months and 100 hours of legal time (at $250/hr = $25,000) and the same amount of staff time. Which file was more profitable? Not only was B more profitable, you could argue that File A resulted in a net loss to the firm since the total of legal and staff costs exceeded revenues. Yet, in most eat-what-you-kill systems, each file would be treated equally when it comes to determining partner compensation! Financial cost analysis can help you determine which files and practice areas yield the greatest return to the firm and which are black holes
- Use current and former clients as marketing tools
It is well understood that the best source of repeat and referral business is from existing satisfied clients. What is needed is a communication method to make past clients still feel like they are part of the firm and inform them of the services that can be rendered by every member of the firm. A newsletter – hardcopy or electronic, that provides updates on the firm and topical news on areas of law that are of interest to the readers – is a very good way to continue to foster the relationship. The readers will then have you and your services somewhere near the top of their minds and will be able to provide a quick recommendation when the need arises. There are of course, many other ways of marketing your services to your past and current clients. A good source of information and tips are: the Legal Marketing Canada Blog by Doug Jasinski, the Law Firm Web Strategy Blog by Steve Matthews and The Lawyer Coach Blog by Allison Wolf, who is the past-Chair of the Legal Marketing Association, Vancouver Chapter (*and of course, the LMA itself!).
- Establish your own financial nest egg
There are ways to ensure your financial future – today. Set up at least one financial institution to automatically pull and invest money from your checking account every month. It will take perhaps a few hours in total to establish and then you’ll be investing, in good times and bad, without doing any work at all. You can set up instructions on how those funds are to be invested – in stocks, mutual funds, term deposits – but the important fact is to start planning for your retirement – now. Once the account is established – take an interest in it and check it daily – to find out how you are doing. Measure your return against stated goals – determine if you are being well served by your financial advisor. Remember that you may lose in the short term – but over the long haul you will be adding to your financial stability and resilience.
- Don’t use the Lottery as a partnership retirement plan
One of the major issues facing smaller firms is dealing with the introduction of new partners and the funding of the buyout of existing but aging partners. Not having a succession plan in place that compensates the aging partner over time by establishing a retirement fund leads to the firm being unable to attract new partners – as any interested new partners who are on the upswing are most likely unwilling to contribute their billings to fund the exit of a diminishing partner. Furthermore, the lack of any retirement planning results in partners staying on in practice simply to maintain a cash flow and not for any compelling business reasons.
- Don’t forget how to Smile!
How do you greet your clients? Recall that attitudes are contagious – does your reflect that you are busy, happy and looking for more? Clients desire lawyers that are successful – and look for lawyers that act that way. Being glum about the stock market or your finances and the state of the economy etc may reflect the way you feel, but it may not be the best client development and retention tool. It also may not be a great way to approach your finances and your financial planning. Being cautiously optimistic allows you to keep your cynical side on alert while also exuding an air of confidence and competence to those around you. It may also be beneficial to reflect that notwithstanding the downturn out there, our predecessors have faced worse (the ’29 crash was much more personally devastating and longer lasting).
Ambrose Bierce, never known as an optimist, said that history was: “An account, mostly false, of events, mostly unimportant, which are brought about by rulers, mostly knaves, and soldiers, mostly fools.” However, Johan Huizinga said that: “History is the interpretation of the significance that the past has for us.” Whether we are an optimist or a pessimist, our fate, whether rags or riches, lies in our hands.
(this post is based on a column originally published in PracticeTalk in the Canadian Bar Association – BC Branch’s newsletter BarTalk)
♫ The bells are ringing
The song they’re singing
The sound is bringing the people ’round
They hear the instructions
They follow directions…♫
Words and music by John Flansburgh and John Linnell, recorded by They Might be Giants
Tip from Thomas M. R. Irwin, a lawyer in North Saanich, BC, Canada:
Dear Dave:
Just a note of thanks for your feedback and info about an office move. On December 20 I closed my office in “downtown” Sidney and moved it to my home office in North Saanich (10 minutes away). My wife Gillian (who is my conveyancer) and I have been delighted with the move. Yes clients can actually find us at the end of a rural road and they actually seem to enjoy the extra 10 minute drive in the country to come and see us. I am enjoying making house calls to see elderly clients who used to walk over to my office in Sidney.
In your latest BarTalk acticle [editor’s note – I will add in the web link as soon as the BarTalk people take away the password requirement- sigh] about retirement you talked about the change in firm financial models with more of us wanting to work part time – I have the answer – electronic commuting, the part timers don’t need a full time office space at the firm – they can set up home offices, schedule office appointments for specific days that they come into the firm office. Dictation and document work as you know can all be done online/email. The Firm may even be able to downsize because they don’t need as much office space.
I think this is an excellent tip on how to downshift and move into a more flexible work schedule without the overhead of a full-time office constantly hanging over you. Courtesy of the Internet, more and more lawyers will be able to work at least part of the time from their home or other location, meeting the need to see clients at their places of business if necessary. In Tom’s case, the clients hear the instructions and follow directions to his home office!
♫ Money, it’s a gas.
Grab that cash with both hands and make a stash. ♫
Words and music by Roger Waters, recorded by Pink Floyd
I received a call this week from a lawyer that I helped some three years ago. She was now considering the next step in her career and was taking some time off. Yes, time off! And she called to say that this was possible as she had followed my advice on the financial side of running her practice and could afford to take a break and consider what she wanted to do for the rest of her life. The advice that I gave her was straightforward and I condensed it into a column. Here it is:
You have just finished looking thru your aged accounts receivable printout and even thru closed eyes you can see the total amount outstanding. Is it really that large? Don’t your clients like you and like your work? Why are they not paying their bills? You start thinking about how to take some action. You groan when you think that most businesses would simply turn over the collection of their delinquent accounts to their lawyer. Write yourself out of this one, Joan Wilder….
One of the hardest things in business is constantly having to ask people for money – at the outset of a file, during the ongoing work on the case, at the end and worst of all, after everything is over but the payment of the outstanding bill. Let us examine some suggestions to try to avoid the problem in the first place realizing that sooner or later, someone is going to slip thru the best of systems….
Organize: You will need a collection system and a method to start dealing with your receivables. You need to track a number of bits of information regarding your clients and their billings including: a listing of all clients with all contact information, all accounts rendered to them, all payment terms arranged, retainers taken, funds applied to the account, funds remaining in trust, interest charges accrued and balances outstanding and all attempts made to collect the account (letters, phone calls, personal visits, referrals to collection agents and the like).
Be Proactive: Prevent payment disputes and complaints before they happen by setting up a system to verify that invoices are accurate and services were delivered as promised (timeliness, results, satisfaction, within budget), before the bill goes out. If you anticipate any difficulties along any of these parameters – meet with the client in person and seek to resolve them – now rather than later. Age may improve cheese and wine but it does nothing for bad debts.
Take Plastic: Accept credit cards or debit cards. Both cards allow instant payment before the client has left the office. Any credit card fees outweigh the cost of not being paid on the account by transferring the credit risk entirely to the card company. Check your jurisdiction’s ethics rules on taking credit and debit cards. Some State Bars (such as Oklahoma) have brought in affinity programs with financial institutions that will establish a credit card facility that will allow you to direct the credit card payment into your general or trust account, to comply with your trust accounting rules. Otherwise you will have to deal with your local bank directly.
Get it in Writing: We all have file-opening forms and written client retainer agreements, right? Your file-opening sheet should seek to gather as much personal information as possible – home and work address and contact info (mobile, home, office telephone and fax numbers, email addresses), bank, employer, drivers license et cetera.. Your retainer agreement should set forth in no uncertain terms your payment policies, retainer replenishment, interest on outstanding accounts and payment terms. Make it clear that you will ethically seek to remove yourself from any file where the client fails to honour their payment terms. Have the clients sign this retainer agreement before they leave and provide a copy for their records. If the client is unable to fit within your standard payment options, have them sign a monthly payment schedule that you and the client can both agree upon.
Be on Top: Once your system is in place, you need to review the reports generated by your accounting system and take appropriate action. Someone in the office should be responsible for monitoring the system, sending out monthly statements and drawing all exceptions to your attention. Once a matter is in your hands, be decisive. While most people write letters on overdue accounts, this is probably the least-effective method of collection. Meet your creditor in person – and be forthright in the facts – that the account is overdue, that you have a signed retainer agreement and ask how they intend on paying the bill. If the answer is not satisfactory – cut your losses and exercise your right to get off the file (ethically, of course). If your client has a concern regarding the legal work, solve it now as it will only come back to haunt you. If the account is small or it is inconvenient to meet your client, call them (and document your meeting or telephone call in writing). Use collection letters only as a last resort.
Follow-thru: Completed a file? Is the bill out yet? There is a proven relationship that the more time that passes between the completion of a file and the rendering of the final account, the less the motivation to pay the account. Accordingly make it a habit to get the bill out concurrently with finishing the file, then call the client to come in for a final meeting and present the bill in person. Discuss the bill and ask for payment- in full – now. After all, if they have no complaints about the bill they have no reason not to pay.
Make it Personal: When dealing with larger organizations, find out who is the appropriate person to receive the invoice. In larger entities, a bill can spend days or even weeks kicking around before it finds the right desk – and then it must fit within their payment cycle (usually larger organizations cuts cheques only 1-2 times a month). By addressing the bill correctly in the first place you can shorten the inherent delays. When dealing with any collection – don’t settle with talking to the bookkeeper – speak to the client.
Use Discounts and Shorten Payment Terms: Consider a 2% discount if paid within 7-10 days – this works to the benefit of both the payor and payee. Furthermore, there is nothing that says that payment terms must be 30 days – consider shortening your “due” period to 15 days after presentment (check your ethics rules on collections and in particular, for the minimum time period for which a legal invoice must be outstanding prior to any legal action for collection – you may find that you are prevented from suing a client for fees until 30 days after presentment or such).
Squeak: There is an old adage that the squeaky wheel gets the grease – or in our case, the money. While being cognizant of the rights of debtors, call your delinquent client as often as you can and stick to the facts (don’t badger or get emotional – remember you are trying to get something from them, not lecture them on their morals or ethics).
Draft Bills Carefully: Jay Foonberg in an article “How to Word Invoices that Clients are Happy to Pay” states that the most important thing in wording invoices is to list every single document you prepared or reviewed. His advice: list all forms your secretary prepared. Use words such as “further” and “continued” to avoid the impression that you are repeatedly charging for work you did once – vary your descriptions to provide a flow of work over time. Don’t bill for telephone calls – confirm the conversation in writing and bill for the confirmation. Show dates on which you provided service but not hours of service (unless your retainer agreement requires you to do this). Always read your invoices carefully before they are sent. Lastly, ask your clients how they want to be charged and where they want the bills to be sent – and follow this.
Don’t flog dead horses: Your time is money – if an account is truly noncollectable – write it off and go on to new matters. Resolve to learn something from the file – why did the debt become noncollectable? Is there something that you could or should have done at the beginning that would have changed the outcome? By learning from our mistakes we can avoid repeating them.
By keeping an interest in your cash flow, you can grab the cash and truly work smarter and not necessarily harder. And that buys you the opportunity to decide what is important enough to you to spend the rest of your life time pursuing…
(this is based on a column originally published in PracticeTalk in the Canadian Bar Association – BC Branch’s newsletter BarTalk)
The American Bar Association’s e-zine, Law Practice Today was kind enough to post A Business Plan and Budget: The foundation of a successful and profitable practice, co-written with my award-winning colleague, Dan Pinnington. This article speaks to the essentials of setting up a business plan and budget, to set your practice up on the right footing. These two documents start the process of taking your practice from a historical position (i.e. how did we do last month?) to a visionary one (where is it that we want to go? What milestones do we wish to reach? How do we know if we are meeting our goals?). The sports coaches tell us that we have to visualize ourselves completing a successful maneuver prior to acting. In a similar manner, the process of drafting your business plan and putting numbers into your budget spreadsheet takes you into a visioning mindset – where you contemplate your future and your place in it. You take charge of the future that you wish to have. Many – successful – firms that I have visited don’t draft a budget and are comfortable taking in whatever comes in the door. This is fine – if you are content in ‘going with the flow’. However, if you desire a practice where you are in charge, seeking and receiving the clients and files that you desire, then you have to take a proactive stance and scope out your future. Your budget and business plan is the starting point. A law firm budget in Excel format can be found at:
http://www.lawsociety.bc.ca/practice_support/articles/docs/Budget.xls