Starting and Operating a Successful Law Firm
The firm should value each attorney’s practice. It’s about
more than money, though. Each attorney’s practice
should be compatible with the firm’s goals, structure and
culture. The better the fit, the more rewarding the work
will be for the attorney and the more revenue will be generated for the firm. The same could be said for valuing
each employee’s contribution to the success of the firm.
THE VALUE OF MENTORS
Successful law firms incorporate the use of mentors,
whether formally or informally, into their support structure. Implementing such a program is especially helpful
to new attorneys who are still finding their way, as well as
attorneys in mid-career who may be seeking more from
their practice.
Mentors are simply more experienced, high performing
professionals. A mentor can be someone involved in law
in some other capacity or even someone who is not even
an attorney. Mentors provide unbiased perspective and
advice on the attorney’s career path and choices. They
can also open doors that can lead to future referral and
job opportunities. Encourage young attorneys to actively
seek mentors’ feedback and constructive criticism.
Good mentors can also help navigate complicated firm
politics. They can offer introductions to fellow lawyers
and potential clients that can help develop the lawyer’s
growing practice. A mentor will readily share his or her
protégé’s achievements and successes with colleagues
and clients inside and outside the firm.
For such a mentorship program to be effective, senior
attorneys need to actively participate and support it. The
firm should encourage their involvement.
TEAMWORK, LEADERSHIP AND COMMUNICATION
The firm culture is as important to success as the client
list, winning cases and profits. All of the employees—
equity partners, associates, paralegals and support
staff—should share a common purpose that extends
beyond the business plan, goals and strategies. It’s the
underlying “feel” of the firm that is hard for outsiders to
describe. Firm culture contributes not only to the success
of the larger company, but also to the success of each
individual employee.
Smaller firms have an easier time developing and defining their culture because the entire staff likely is in
one location. It’s more difficult for large firms that are
separated by geography or that have been built through
mergers. Their interaction may be somewhat limited by
office or practice area.
Communications across the firm can overcome gaps,
though. Successful firms’ leaders facilitate ongoing
communication. Otherwise, the firm runs the risk that
individual or department agendas are out of sync with
others and the firm as a whole.
The first element of any communication effort is the firm
leadership’s agreement to abide by it. Even so, all members of the firm must be part of the communication process and feel that their input is valued. Equity partners
would do well to remember that they aren’t the only ones
with valid ideas about how to improve the firm.
Leaders must balance the immediate and practical needs
of profitability and client work with the necessity of providing adequate and appropriate information to each level
of employees across the firm. Uncertainty is a motivation
killer that good communications and camaraderie can
overcome. Communication improves employees’ morale
and their positive feelings about their jobs and the firm.
The shared work ethic and commitment to clients and the
firm is invaluable.
Clients can also sense when teamwork and camaraderie
is present. Everyone is cooperating for their benefit,
providing accurate work and quality service. Clients
ultimately develop their understanding of a firm by how
everyone—lawyers and staff—conducts themselves.
Keeping staff at all levels up-to-date in the operational
and financial and aspects of the firm allows them to
understand their specific role in serving clients.
WHEN MEETINGS MAKE SENSE
Most employees would agree that the last thing they need
is another meeting. Successful firms understand that
regular and frequent staff communication is important.
Staff, however, often lack a venue in which to discuss
concerns, since much of the communication is from the
top down.
Starting and Operating a Successful Law Firm
Sharing information needs to be more than jotting a
memo or sending an email. Technology does make it
possible to absorb the content of a meeting without actually being there, but many organizations have found that
interpersonal contact among people makes a real difference. Successful law firms hold regularly scheduled staff
meetings in the form of productive discussions.
Where possible, holding an effective all-firm meeting or
retreat is an ideal way to facilitate communication. Admittedly, some firms are just too large to accommodate such
an event. In those cases, consider meetings for various
sectors of the firm. Retreats bring everyone together to
generate ideas, raise questions and find solutions. They
also promote a shared sense of purpose, create momentum and develop consensus around ways to move the
firm forward.
Properly planned, a retreat can achieve more in a day
or two than could be accomplished over several months
of individual meetings. Separating the firm’s leadership
from their daily tasks allows them to clear their heads
and contemplate what they want to accomplish, how they
can better assist clients and generate more revenue, and
what needs to be done to achieve those goals.
Many firms find it difficult to justify the expense of a
retreat in today’s economy. Realize that there is a cost
associated with poor communication and employees
who put their self-interest above the firm’s. A failure to
nurture camaraderie and communication across the firm
can result in employees who are not attuned to the firm’s
overall business plan and goals. Client service likely will
suffer, leading to a decline in revenue and profitability.
Starting and Operating a Successful Law Firm:
A systematic approach and attention to detail
may help grow your business.
Balancing everything that contributes to the success of a
law firm is not easy. It’s time consuming, requires significant financial support and human resources, and is hard
work. Make the effort, and your law firm will be rewarded
with satisfied clients, growing profitability and dedicated
employees committed to the success of the firm.
ADDITIONAL RESOURCES
To obtain information on how PNC can help your firm’s
cash flow, visit pnc.com/attorneys. You’ll also find a full
suite of resources, including white papers and podcasts,
to help you manage your firm.
REFERENCES
1 “2013 Report on the State of the Legal Market.” Georgetown
Law Center for the Study of the Legal Profession. 2013 Thomson Reuters. http://www.law.georgetown.edu/continuinglegal-education/executive-education/upload/2013-report.pdf
2 “How Today’s Consumers Really Search for an Attorney.”
Lexis-Nexis® Martindale-Hubbell®. 2012 LexisNexis. http://lawyerist.com/lawyerist/wp-content/uploads/2012/11/How_Todays_Consumers_Really_Search_for_an_Attorney_102312.pdf
3 Harris, Mark. “Law Firms and Overcharging: The System
Itself Is Rotten.” Forbes. April 3, 2013. http://www.forbes.com/
sites/forbesleadershipforum/2013/04/03/law-firms-and-overcharging-the-system-itself-is-rotten/
4 “2012 Law Graduate Employment Data.” American Bar Association Section of Legal Education and Admissions to the Bar.
http://www.americanbar.org/content/dam/aba/administrative/legal_education_and_admissions_to_the_bar/reports/
law_grad_employment_data.authcheckdam.pdf
5 Andriotis, Annamaria. “10 Things Law Schools Won’t
Tell You.” Smart Money. June 6, 2012. http://www.smartmoney.com/plan/careers/10-things-law-schools-wont-tellyou-1338933018704/
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Running a successful law firm has never been a simple
proposition. Practice areas change focus or shift in
importance to the firm’s bottom line. Some clients
are struggling to pay their bills—including attorney
fees—while others are closing their doors entirely.
Profitability suffers as a result.
Successful law firms share key traits. They have clarity about their chosen
practice areas. They recruit, hire and retain quality attorneys and support staff.
Their client service is top-notch. Their strong financial position enables them
to equitably reward their staff and invest in the firm’s future.
Bringing those traits to life consistently is the key to success. Whether a firm is
a solo practice, a mid-level regional firm or multi-national enterprise, it takes
purposeful planning, adequate resources and consistent effort in numerous
areas to be successful.
SETTING GOALS AND CREATING A BUSINESS PLAN
Developing a well-written business plan with both long- and short-term
goals allows the firm’s employees to identify and confirm objectives
and adjust them as conditions change. Goals typically address client
development, changes in practice areas, geographic expansion or
contraction, financial issues, staffing levels and the mechanics of how the
practice operates. The planning process is also an opportunity to develop
strategies, priorities, policies and procedures, as well as timelines, budgets,
and roles and responsibilities within the firm.
Every employee should have the opportunity to participate in some part of
the planning process. Success is more easily achieved when all employees
refer regularly to the business plan and work in sync. Identified and
unidentified variables will arise during this process, so expect large and
small adjustments over time.
It’s also becoming common for successful firms to reward partners and
associates for long-term practice-building activities and team results, as
well as individual performance. Once the plan is complete, tie attorney and
support staff production, billing and career goals to the firm’s goals.
As the process moves up the management levels, gaining consensus among
equity partners and other senior managers can be difficult. Even so, don’t put
off undertaking a formal planning process. Without that, the firm may lack
agreement on critical issues that drive profitability.
BB PDF 0513-0112-145469
Prepared for PNC by Smart Cookie Business Writing
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Developing a wellwritten business plan
with both long- and
short-term goals
allows the firm’s
employees to identify
and confirm objectives
and adjust them as
conditions change.
Starting and Operating a Successful Law Firm
MANAGEMENT STRUCTURE AND CHANGING MARKET
CONDITIONS
It takes more than good attorneys to make a successful
law firm. Today it requires attention to the structure and
operations of the firm, as well as effective leadership
from the principals.
Typically, a partnership or shareholder agreement
should outline the general firm structure, including the
role of a managing partner, an executive committee and
other leadership positions. However, in light of current
economic conditions, it might be prudent to challenge
traditional organizational models as well as the longheld ideas, beliefs and values that underlie them.
In short, to achieve maximum efficiency, profitability
and talent retention, firm leadership must be prepared
to acknowledge and adapt to changes in the profession. The Center for the Study of the Legal Profession
at the Georgetown University Law Center and Thomson
Reuters Peer Monitor identify two fundamental shifts in
their 2013 Report on the State of the Legal Market:
First, there has been a shift from the seller’s market that
traditionally dominated the legal industry to a buyer’s
market that will likely remain the prevailing model for the
foreseeable future. What this means is that all of the critical decisions related to the structure and delivery of legal
services – including judgments about scheduling, staffing,
scope of work, level of effort, pricing, etc. – are now being
made primarily by clients and not by their outside lawyers…
The second critical shift in the legal market in the last four
years has been the dramatic increase in competition among
firms. In the pre-recession world, when the demand for legal services was growing at a healthy clip of some 4 percent
a year, most firms could grow and prosper simply by capturing a reasonable share of the new business being generated.
Since 2008, however, the reality has changed. In a period of
shrinking or sluggish demand growth, the only way (short
of a merger) for a firm to capture market share is to take it
from another firm, a circumstance that inevitably results in
a ratcheting up of competition in the market.1
To survive and thrive in this new market, the Report
suggests that firms will need to sharpen their strategic
focus: “In a significantly more competitive environment,
it will be critical for firms to understand their unique
strengths and to identify what differentiates them from
their competitors.”
MANAGING CLIENT DEVELOPMENT AND SERVICE
While each attorney has his or her own practice area,
management should understand the industries and
markets all of them serve, as well as how the firm fits
into those markets. Who are the firm’s clients? What’s
needed to acquire and retain more like them? Why do
clients choose the firm? What revenue stream does each
lawyer produce?
A firm may choose to assist many clients or a select few.
Clients may be individuals, small businesses, corporations or not-for-profit agencies. They may be all of those
entities or some combination. The firm may take on
clients directly or through referring attorneys.
In each case, client service is of utmost importance. Be
knowledgeable about clients’ businesses and industries.
Provide quality work as cost-effectively as possible. Be
proactive, responsive and prompt. When clients trust
and genuinely like the firm’s attorneys and support staff,
they are likely to generate repeat business.
Social media marketing can be a particularly effective
way to connect and engage with potential clients online.
A recent survey of 4,000 adult internet users conducted
by The Research Intelligence Group (TRiG) in March 2012
found that 76% of consumers seeking an attorney used
an online resource at some point in the process.2
Lawyers who blog and participate in legal advice forums
are building expertise, creating goodwill and generating more business for their firms. These activities also
broaden the reach of traditional marketing efforts such
as advertising and networking.
Successful firms also know their limitations. Some
clients will be better served elsewhere. Know when to
make a referral or when to decline business from potential clients who raise red flags.
ORGANIZING FINANCIAL RESOURCES AND BILLING
Ensuring the firm’s financial resources are adequate to
execute the business plan is critical. Financially thriving
firms are well positioned to withstand difficulties, act on
business opportunities and provide monetary rewards to
attorneys and staff.
Successful firms accurately anticipate their financial
requirements through budgeting, financial forecasting
and profit planning. All should complement the business
plan, but beyond that, various methods are available.
The firm must grow the revenue each lawyer brings
in, either by increasing billable hours or by generating
new business. Otherwise, the equity partners’ income
will suffer.
Billable hours are by far the most common billing method. However, as author and Axiom Chief Executive Mark
Harris points out in an article titled, “Law Firms and
Overcharging: The System Itself Is Rotten,” this incentive
structure is problematic.
In addition to billable hours, assess other revealing
statistics. For example, review each practice area’s
profitability. Also analyze the clients. Some may
generate income, while others generate write-offs.
Take advantage of the data within the financial management system to evaluate other factors that can impact
profitability.
“The legal industry must rid itself of its vestigial attachment to hourly billing and pyramid incentives, and its
aversion to technology investment. Law firms, which
benefit from deep client relationships and access to
great talent, should be completely rethinking their business models to mimic the best-of-breed companies that
have evolved in almost every other professional services industry. This will require financial sacrifice on the
part of many law firm leaders, so why would they do it?
Simple. Because the alternative is worse.”3
CONTROLLING EXPENSES AND MANAGING
CASH FLOW
Obviously, expenses are tied to revenue. Financial
reports should include income statements compared
to budget for the month and year-to-date. Provide
mid-level supervisors regular and focused reports
for their areas, and produce reports that show expenses
in various account ranges and employee groups. A single
budget item may be broken out across several accounts.
Fortunately, as a result of client requests and poor economic conditions, more law firms are offering alternative payment options. A flat-fee structure is increasingly
common, particularly for certain types of legal work.
This kind of flexibility and creativity in the fee structure
can add to the bottom line. Billable hours and billable
rates often are set according to the groups performing
the work, such as partners, associates and paralegals.
Also, measure total compensation costs, the total number of personnel over the same time period, the average
compensation by employee category, the cost-perlawyer in operating expenses and how these numbers
compare to the industry average.
Review the amount of time that lapses between when
charges are incurred and the date payment is received.
Take a look at the average monthly billing amount. This
metric can be used to encourage revenue-generating
employees to bill monthly, regardless of the amount.
Also take a look at the number of months of work-inprogress billings, as well as the number of months the
firm has in accounts receivable.
Determine how close the realized billing rates are to the
budget expectations. Explaining variations, both positive
and negative, allows management to focus on whatever
billing issues bring the greatest benefit to the firm.
Assess the impact of rate changes, offering discretionary discounts or negotiating fixed-rate charges.
Note the firm’s ratio of non-equity employees to equity
partners. The ratio of net income to revenue is linked
to it. As the ratio declines, a greater percentage of net
income must go to partners to maintain or increase their
income. Having an appropriate number of non-equity associates working at the highest productivity can generate
more income for the equity partners.
All businesses need to manage their cash flow, and
law firms are no different. Cash flow management
is particularly important for those that work on a
contingency basis. Anticipated payments may not arrive
on schedule, leaving the firm in a lurch, particularly if
the company doesn’t qualify for new lines of credit.
Additionally, when a firm adds equity partners without
increasing its gross revenue, the individual partners’
income decreases.
Accurate and timely financial reports not only are necessary to track finances, but also alert managers to any
looming problems. Use the reports to identify expenses
that can be reduced or eliminated.
Once it’s been determined how quickly clients pay the
firm’s monthly invoices, modify the billing cycle if necessary. If the firm bills monthly—and most do—consider
shortening the cycle somewhat. Mail the invoices so they
are received before the end of the month or priorto the
first of the next month. To speed payments, consider
sending bills weekly or as work is completed.
It also may help to not pay the firm’s bills ahead of the
due dates, unless there is a significant advantage to, or
discount for doing so.
Actively manage past-due accounts and make regular
calls. Be businesslike and firm when discussing clients’
ability to pay the outstanding balance. Offer a payment
plan. Such conversations can lead to more income than if
no collection efforts are made. Consistent follow-up can
be the difference between payment and write-off.
Talk with the firm’s certified public accountant to ensure
the current corporate tax structure is still appropriate. It
impacts tax planning, tax calculation and the amount of
taxes paid. Identify all eligible tax deductions.
Before implementing any changes, review the firm’s
business plan to ensure the actions are in accord with
it—or adjust the plan to reflect the new needs.
RECRUITING AND HIRING ATTORNEYS
The recession has led to a contraction in the legal services employment market. According to the American
Bar Association, America’s law schools awarded more
than 46,000 law degrees in 2012.4
That number, the highest in history represents a 5.4%
increase over the year before. However, labor market
analysis firm Economic Modeling Specialists International estimates that there were only about 28,000 positions available for lawyers in the same timeframe.5 As a
result, law firms have the luxury of drawing from a large
pool of qualified candidates.
The job interview is critical to hiring the right people.
Those employed in human resources, or filling that
capacity in smaller firms, should thoroughly understand
the job requirements and necessary skills needed to
perform the duties of the job being recruited. Don’t
overlook the value of background and reference checks.
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Lawyers with successful practices pursue areas of the
law that fit their personalities, strengths and interests.
People excel at what they enjoy. Clients, colleagues and
the larger legal community quickly can tell the difference
between a content lawyer and a miserable one.
Assess each recruit’s skill set and ask for an honest
assessment of strengths, weaknesses and preferences.
Determine if that skill set is a good match for the firm, its
clients and culture. Take a pass on candidates who are
not a good fit. Hiring them only sets them up to fail, and
that doesn’t benefit the firm or clients.
Beyond the legal skills, assess the recruit’s people
skills, personality and work ethic. These intangible skills
go a long way in determining the candidate’s approach
to the legal field. Working in any law office requires hard
work and long hours. The sacrifice of personal time
often is an expectation by the firm. How a candidate
balances the demands of work and home directly
correlates not only to his or her practice development,
but also job satisfaction.
Look for candidates who are willing to build a strong
individual legal reputation. Remember, reputation
building is more than winning cases and generating
revenue. Law firms with strong reputations encourage
attorneys to give their personal time to professional
activities, community events and civic causes. Beyond
benefiting the greater good, these endeavors earn
goodwill for the individual and the firm.
Depending on their individual long-term goals and the
goals of the firm, lawyers may need to change or update
their professional skill sets. The firm should take into
consideration any additional resources, training, technology investments and staff additions needed to meet
those changing circumstances. When lawyers make a
significant adjustment to the services they offer, update
the business plan, and evaluate and address the advantages and disadvantages.
Make sure each attorney’s career path, financial goals
and work-life balance expectations fit the firm’s business
plan and culture. As lawyers develop their skills, it may
become apparent the fit isn’t as good as first thought.
Pay particular attention to new attorneys. As they gain
experience and enlarge their network, they may find
that the firm is no longer a good match for their abilities
and interests.