Great financial practices are the key to the success of any law firm in many ways. One of my personal favorite sayings is that it is easy to figure out how to split profits when the numbers are great, but it becomes a nightmare when the numbers are not so great.
I joined the American Bar Association immediately out of law school primarily because I wanted to learn the business of law. I received Law Practice Magazine (as it was called then) and read everything I could about the business of law. I was the beneficiary of great information from the Law Practice Division and its hallmark publication. I learned the details of every aspect of the business and financial side of law from the day I started.
I started my practice in a very small law firm where mentoring was nonexistent, and I had to learn myself. I was grateful to find the resources offered through the Law Practice Division.
Whether a law firm is small or large, training lawyers about finances should start from day one. A great associate will be a greater associate if he or she understands billing. Good billing starts with capturing all your time, writing a great description of how the time was utilized and understanding how that time entry will convert into revenue. It’s important to understand realization rates.
While I am a great advocate of alternative fees, including flat fees, the fact is that a profitable flat fee requires that our revenue exceed our costs. A significant share of our costs is our time. If someone does not track their time, it is more difficult to be clear about when you are winning and losing on flat fees.
Law firms must focus on financial management on a regular basis. Everyone at the firm should be educated in effective billing and collection processes. Everyone should understand expenses and overhead. To the extent alternative fee arrangements are designed (and they should be), a process to track profitability should be part of the design.
Law firms should regularly review production reports with associates and paralegals as well as partners. In an era where retention is important, educating an associate about how they can improve their realization and increase compensation may result in the associate being less likely to jump at another offer because he or she doesn’t understand how compensation works in law firms.
Another important aspect of law firm finance involves effective use of technology. First, technology can automate many of the financial processes of a law firm. Second, technology can help provide law firms hard data to analyze. Without data, lawyers make assumptions about their most profitable practice areas. Rather than making assumptions, use data to determine financial health (or illness) and revise accordingly.
Review write-offs of time and time held in work in process with regularity and hold attorneys accountable to bill and collect. Of course, it is difficult to justify ourselves in .1 increments of time but if you become really good at what you do, value your skill set and bill for it.
I once shared a client early in my practice with an accountant. My client said: “Joe is really expensive.” I repeated the comment to Joe. Joe asked me: “Did he complain about my work?” I said “No, actually, he said you do great work.” Joe looked at me and said: “Mary, do good work, value your time, bill for it.” If the worst thing that someone says about you is that you are expensive, you are doing a lot right.
