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Best Practice Tips

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a new partner in our law firm of six attorneys. I was an associate for seven years and was just made an equity partner and just received a copy of this month's income statement. The income statement shows the firm operating at a loss. I was startled and took a look at past years' statements as well. All are showing a small loss. Am I looking at these correctly? How can a firm operate at a loss for seven years in a row and still be in business. I would appreciate your comments.

A. My guess is that the firm is running all or a portion of equity partner compensation though as expense on the income statement. Other personal items may also be run through the firm as well. Check with the firm's bookkeeper or outside accountant to see if this is the case. If this is the case add the total paid to equity partners back to the net income or loss on the income statement. This will give a better picture of the actual "pie".

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Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing partner in an eight attorney general practice firm in Tulsa, Okla. A year and a half ago we hired our first legal administrator to run all business aspects of our practice. We decided that we wanted more than an office manager - we wanted an administrator to serve in the capacity of a COO. We hired an experienced administrator at a good salary, developed a well-conceived job description, and the work began. My partners and I are frustrated. We have to follow-up on projects and task assignments, do not see the leadership that we had hoped for, and have concerns that our administrator may not be up to the tasks. We just realized we have not had a performance review since he started. I would appreciate your suggestions.

A. Sounds like you did a good job clarifying the role and initially laying out your expectations. However, you cannot stop there. You have not conducted a performance review and I suspect that he has received little feedback regarding his performance. During the first year feedback needs to be ongoing with a mini review every 90 days and ongoing coaching and follow-up. You need to conduct a review with him ASAP, layout expectations and compare to actual performance, discuss gaps, and reach an agreement as to a plan with milestones and dates to resolve performance gaps. Then you will have a better picture as to whether your administrator was the right hire or not.

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Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing partner of an eight attorney general practice firm in Chicago's western suburbs. We have five partners and three associates. For years, it was just the five partners who started the firm together. In the last three years we added our associates. We are not making money from our associates and wondering what we need to be doing differently. One associate is logging 925 billable hours, one is logging 1,200 billable hours, and the other 1,400 billable hours. You thoughts are welcomed.

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing partner of a 25 attorney firm in Charleston, South Carolina. Our practice is limited to insurance defense. We have eight equity partners, four income partners, and five associates. Our firm is in second generation and virtually all of our clients were originated by first generation partners that are no longer here - they have since retired. Our compensation system focuses totally on working attorney dollars. I believe that we must begin to stress the importance of origination of new clients and factor that into the equation. I would appreciate your thoughts.

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Last week a firm advised that their law firm was splitting up via a dissolution and forming two new law firms. I outlined some of the steps that would need to be taken to dissolve the firm.

This week I will discuss some of the typical steps that will need to be taken to start the new law firms. Some of these steps include:

ESTABLISH NEW LEGAL ENTITY 

  1. File articles or other documents for entity formation. (LLC, LLP, PC, etc.) 
  2. Obtain FEIN Number
  3. Open new bank accounts
  4. Establish line of credit with bank
  5. Draft operating agreement/partnership/shareholder agreement
  6. Agree on approach to partner compensation
  7. Draft a business and marketing plan for the firm.
  8. Obtain any required business permits.
  9. Obtain office space, if moving, and negotiate lease - or negotiate new lease with landlord of present space.

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the managing partner in a 14-attorney firm in Seattle. Our partnership has voted to dissolve the firm effective the Sept. 1, 2015. Two new firms will be formed. Eight attorneys will be going to one firm and six to another firm. What steps do we need to think about in managing this project?

A. You actually have two projects to manage. The dissolution project and the new firm start-up project for the firm that you will be joining. The other firm will also have a new firm start-up project as well. I will address in this blog some of the dissolution steps and I will address some of the new firm start-up steps in next week's post.

Dissolution Steps

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I have a quick question on a recent column of yours that appeared on last week's blog and in an ISBA email.

You refer to the following:

“One to one and a half times the owner's average earnings for the past five years is typical." Does this mean the total firm revenues or the amount the owner attorney received as income? I thought I have seen that multiplier to be on total firm revenue.

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a senior associate in an eight-attorney elder law firm in Miami. There is one owner (founder) and seven associates including myself. The owner has approached me with a proposal to over time buy out his interests. I am the only senior associate in the firm and the only associate that he has approached concerning selling his interests. Specifically his proposal is as follows:

  1. Pay him $825,000 for the practice over five years.
  2. After five years I will own 100% of the shares.
  3. My compensation arrangement will remain the same (salary plus formula percentage incentive bonus based upon my responsible attorney collections) until I have acquired 100 percent interest of the firm.
  4. The owner wants to work in the firm indefinitely after his interest are acquired as an employee or Of Counsel.

I don't know how to respond to this proposal and would appreciate your thoughts? Is it fair? Does it make sense?

A. It makes sense for him. Seriously, you are going to need much more information than this proposal.To get started you need to ask for and review the following:

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a new law firm administrator for a 16-attorney firm in Chicago. This is my first law firm and after attending a few partner meetings I am concerned about how and where to start getting some ideas and projects implemented. I have a lot of ideas and would appreciate your suggestions.

A. Lack of focus and accountability is one of the major problems facing law firms. Many times, the problem is having too many ideas, alternatives and options. The result, often, is no decision or action at all. Ideas, recommendations, suggestions, etc., are of no value unless implemented.

Look for ways to insure that all time spent on management is spent wisely. At first identify a few (maybe three) management initiatives that you can move forward fairly quickly and get implemented. Then build upon these successes.

Don’t hide behind strategy, planning, and endless debate. Attorneys love to postpone implementation. Find ways to focus the firm and foster accountability from all.

  • Keep strategy and planning simple.
  • Undertake a few projects at a time that can be realistically accomplished.
  • Delegate tasks across the firm.
  • Build upon initial successes and move to more complex strategies, which will require more difficult degrees of change.
  • Adopt management structures that enable the firm to act decisively and quickly. Replace structures that do not support such a culture.

Don't attempt to initially, in the short term, take on management projects that the firm is unwilling or unable to implement.

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a partner in a three attorney litigation firm in Boston. Two of us are partners. We are in our fourth year in practice after leaving a very large firm. We are concerned that we could be doing better financially. We are haphazard in our record keeping, have no goals, and are not even sure what numbers matter. What are your thoughts are to the key number (metrics) for a small firm like ours?