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Best Practice Tips

  • April 20, 2011 | Practice News
    Best Practice: Law firm financial statements
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I was just elected by my other partners to serve as managing partner of our 17 attorney firm. We are based in Nashville, Tenn. I do not have an accounting background and I have questions about our financial statements:
    1. Why does the income statement not reflect all disbursements for the month? For example it does not reflect partner draws, client advances, or payments on the firm line of credit?
    2. I have only been receiving the income statement. Should I been receiving other financial statements?
    A. Getting a handle on the financial aspects of your firm will be your most important role - whether you have a firm administrator or not. You should also be receiving a balance sheet which reflects the firm's financial position as of a particular point in time. The income statement only reflects income and expense accounts and reports net income for a reported period of time. The income statement is different that a statement of cash flows which reports cash flows during the period. Partner draws, client advances, and line of credit payments are not expense accounts (they are asset, liability, and capital accounts respectively).  Consequently, they will not be reported on the income statement. These accounts will be reported on the balance sheet. Other than reviewing the balance sheet for activity in accounts such as discussed above the balance sheet (without adjustment) has limited use. Its purpose is to reflect the firm's financial position as of a point in time.
  • April 13, 2011 | Practice News
    Best Practice: Balancing the law firm trust account
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I am the managing partner with a 14 attorney firm in Chicago. We recently hired a new accounting manager/bookkeeper. While she has worked in a few other law firms these firms did not require her to manage a high volume trust account. Our firm has a high volume of transactions that flow through the firm's trust account. We have had problems in the past with prior bookkeepers and outside accountants that did not balance/manage our trust accounts properly. What suggestions do you have or resources do you suggest? A. Failure to properly manage, balance, and reconcile the firm trust account can be a major problem for law firms - from professional responsibility, accounting, and tax aspects. From a bookkeeping standpoint - failure to maintain a trust account sub-ledger for each client that has money in the trust account and insuring that all of the sub-ledgers balance and reconcile back to the trust account bank statement in the biggest problem that I see. You must do more than simply maintaining a checkbook journal register - you must have a sub-ledger for each client. If the firm reflects the trust bank account on it's balance sheet there should be either a contra asset account or a liability account reflecting the same amount reflected in the cash account. The total of all of the sub-ledgers should also equal the number in each of these two general ledger accounts. All should reconcile back to the trust account bank statement.
  • April 6, 2011 | Practice News
    Best Practice: Law firm succession – Transitioning and grooming the next generation
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I have a general practice firm in Southern Missouri. I am the sole owner and I am 64 years old. There are three associates in the firm and four staff members. I have recently been giving some thought to my future, what to do with the practice, and how to salvage any sweat equity or value from the practice when I am ready to retire. The problem is that I love my work and really want to work forever. Suggestions? A. Succession and exit questions are a hot topic in law firms of all sizes today. I find that in small firms it is not unusual for partners and owners to want to work as long as they can. In fact, in approximately 75%-80% of the firms that I am working with this is the case. Many attorneys enjoy their work and obtain great fulfillment from the work that they do. The key is to start early and develop a transition strategy and plan. In your situation since you, health permitting, want to practice as long as you can, a sale of your practice is not really your best option. I would think that you need to focus on grooming your associates and gradually, over a phased basis, transitioning interests to them. Get a feel for the value of the practice, put together a firm financial profile and a quality proposal, dress up your financials, and sit down with you associates and discuss your ideas and plans with them. Determine their state of readiness.
  • March 30, 2011 | Practice News
    Best Practice: Marketing a personal injury plaintiff practice
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I am a partner in a five attorney PI plaintiff law firm in Central Kentucky. We have three partners and two associates in the firm. We are first generation. Our practice is focused 100% on PI plaintiff cases. While we focus on all types and sizes of PI cases we are not a high volume advertising PI practice. Our practice has been built upon our successes and referrals from past clients and other lawyers. We have never done much in the way of other forms of marketing and advertising other than a small yellow page ad and a Martindale Hubbell listing. We are finding it harder to obtain a sufficient quantity of quality cases as a result of increased competition from the advertising PI firms, statutory changes, tight fisted insurance company claim managers, etc. We believe that we may need to being doing more to market our practice. What are your suggestions? A. We are hearing similar stories from our PI plaintiff law firm clients across the U.S. Case counts are down, quality of cases are not what they used to be, competition is fierce, and cases are getting harder to settle. The strategy is different from a firm that wants to build a high volume practice (build a factory) from a firm that desires to build a reputation-based practice. In essence you need to determine whether you want to build a high volume practice (a factory) or continue with a high quality reputation-based practice. Assuming that you want to continue your reputation-based practice here are a few suggestions:
  • March 23, 2011 | Practice News
    Best Practice: What to look for when considering joining or merging with another law firm
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I am a solo practitioner in Southern Missouri. I have been in practice for 20 years. I have a very successful practice with an excellent client base. I have three paralegals that I am able to keep busy. I have recently been thinking about whether I should consider joining another law firm. What should I be thinking about and what should I be looking for? A. I believe that the key question is - can a law firm offer its lawyers a measure of value independent of the skills, talents, and contributions of its partners? The answer can only be answered by recalling the advantages that the best law firms have over sole practitioners or groups of lawyers who share overhead and nothing more.
  • March 16, 2011 | Practice News
    Best Practice: Does partner compensation make a difference in motivation and actual performance?
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. We are a 21 attorney firm in San Francisco. Recently we have been considering overhauling our partner compensation in order to foster leadership and more of a team environment. Currently many of our partners are operating and functioning as if they are in separate law firms rather than part of a firm. What are your thoughts? A. With thinner profit margins, firms can no longer carry unproductive partners. Law firms are demanding more from their partners and asking everyone to think outside the box to help the firm innovate for the future and obtain/retain a competitive advantage. This has renewed discussion and debate on the topic of partner compensation and in particular whether compensation can make a difference in motivation, actual performance, and contribution. We are receiving many more inquiries from firms looking to overhaul and redesign their partner compensation systems. Based upon these inquiries we believe that many firms are expecting miracles from their compensation systems and are asking and expecting more than they will ever be able to accomplish. They are not just seeking to align pay with performance – but have far higher expectations.
  • March 10, 2011 | Practice News
    Best Practice: Optimal time to hire additional lawyers and staff?
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. We have 14 attorneys in our firm and we are located in Indianapolis. A couple of weeks ago in a partner meeting we discussed hiring an additional associate attorney or two. A couple of our partners are concerned whether we have ample work on day one to keep an associate busy. Is there an optimal time to hire additional lawyers? A. I believe that it is important for firms to remember that they are competing in two markets - a market for clients and a market for talent. Firms must be competitive in both areas and sometimes there is not direct alignment. In other words - you may identify an excellent attorney or staff candidate sooner than you may have wanted to hire someone. What then? Will it pay for itself? Many years ago when I worked in a law firm the managing partner came to me and said - "are you free for lunch today - I want us to interview a lawyer that is interested in a position with our firm." I responded - "I didn't know we were looking to hire anyone." The managing partner responded "I am always looking for good talent and am willing to made an investment when I see quality talent - my motto is hire and retain quality talent - and market harder if we must to generate the revenue to pay the overhead - the money will come." Obviously cash flow and financial concerns must be taken into considerations. However, many law firms are sometimes too cautious and timid when it comes to make investments - and investment in top notch talent is one of the best investments that law firms can make. Successful firms maintain surplus talent.
  • March 2, 2011 | Practice News
    Best Practice: What makes an effective managing partner or administrator?
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I was just elected as our firm's managing partner. I will still maintain a full client practice as well. We have a total of 14 attorneys, nine of which are partners. I will be the firm's first managing partner. Previously we all weighed in on every single decision. While I have been a practicing attorney for 20 years, I have no prior management experience in law firms or elsewhere. What skills will I need to develop to be effective in this job? A. Congratulations on your new role! Effective law firm managing partners:
    1. Ask - what needs to be done.
    2. Ask - what is right for the firm.
    3. Develop and implement action plans.
    4. Take responsibility for their decisions.
    5. Take responsibility to communicating.
    6. Focus on opportunities rather than problems.
    7. Run productive meetings.
    8. Think and say we rather than I.
    9. Are "Firm First" focused rather than Lone Rangers "Me First" focused.
    10. Know that you have to spend money to make money and encourages the firm to invest in the firm's future.
    The first two practices will provide you with the knowledge and insight about the firm that you will need. The next four will help you convert knowledge into action. The next four will ensure that the whole firm is responsible and accountable. Early on, as you transition into your managing partner role, you and the firm should formulate a constitution (governance plan) for the firm which outlines roles and decision-making rules for the partnership, your position, and other management or administrative positions in the firm.
  • February 23, 2011 | Practice News
    Best Practice: Times are tough – how are other small firms doing?
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I am a partner in an 8 attorney firm in the Chicago suburbs. Our firm has started having discussions about what we need to be doing differently. This is huge for us - one meeting a year is our typical meeting frequency and then only to discuss how we are going to cut the pie. How have other firms done during the recession? What are you seeing? A. In general small firms in the Midwest have fared pretty well during the recession. Last year some firms had the best year ever while others experienced flat or 10% revenue declines. Small firms that had the biggest problems were those that had issues before the recession or were in problem practice areas. Big law firms have had to face unique challenges. Small firms that have weathered the storm and fared the best were those that:
    • Were focused
    • Had a sense of where they were and where they were heading
    • Had a vision and a strategy
    • Had business and financial plans
    • Had goals and measured attainment
    • Fostered accountability from self and others
    • Were proactive
    • Worked the books and managed the RULES (Rate, Utilization, Leverage, Expense Control, Collection Speed)
    I believe that law firms that fail to focus their practices, set goals, measure accomplishments, and foster accountability will fall short and not meet their financial objectives.
  • February 17, 2011 | Practice News
    Best Practice: Starting a Virtual Online Practice
    Asked and Answered By John W. Olmstead, MBA, Ph.D, CMC Q. I am a partner with an 8 attorney firm in central Illinois. Last week I attended the Illinois State Bar Association web-cast that you and others presented on Building and Managing the Virtual Law Firm. I thought the program was excellent. I do have a couple of questions.
    1. I can see how such an approach might make sense for a solo - but why would a 8 attorney firm with a brick and mortar office that has been in practice for 20 years consider such a delivery model?
    2. How would we go about it?
    A. If your firm has a sufficient volume of work, does not have a need or desire to capture more commodity type legal work that it is either not doing at all now or is losing to lower priced competitors (law firms or content providers), or does not have a need or desire to extend its reach geographically a virtual delivery model make not make sense. However, if your strategic (business plan) requires you to extend your geographic reach or be competitive in a commodity practice area supplementing your brick and mortar practice with a virtual delivery model might warrant consideration. Also consider that the younger generation that is growing up using the internet to shop, bank, and pay taxes may appreciate and or expect such an option. As we mentioned during the session certain practice areas are more appropriate than others. I have some firms your size that are supplementing their brick and mortar practices with online delivery models just to service one practice area that they could not effectively deliver in the traditional manner.