October 23, 2012

Ask Bill

Q. Bill, I’m thinking of regearing my solo practice to concentrate on personal injury cases. I know you worked in this area for years so I’m hoping you can advise me, especially on the finances side. How is managing a contingency fee-based practice different?

A. Managing a law practice where your fees are based on a percentage of what you recover for your clients is far more challenging than managing a practice based on more traditional fee arrangements. The crux of the challenge is that you never know how much money will come in the door during a given month. Cash flow will depend on whether cases settle “on schedule” or whether your jury trials or arbitration hearings turn out successfully and don’t get appealed. To add to the challenge, even though your cash flow may be down, you have to continue funding cases by paying for investigations, depositions, expert witnesses and other costs. In addition, your monthly office expenses will continue to come due regardless of your income.

Lawyers who build their practices on hourly fees or flat fees, or some combination of both, can generally count on a more predictable cash flow. They’re not so subject to enduring the “feast or famine” that plagues those who make their living on contingency fees.

Some lawyers find that having a partnership where one lawyer handles contingency matters and the other takes cases with more predictable cash flow is the answer. I know personal injury lawyers who have teamed up with partners who handle everything from criminal and traffic cases to family law, probate and bankruptcy. What I don’t see a lot is a plaintiff’s lawyer practicing with a business or tax lawyer. The more common partnerships are between lawyers who both have courtroom responsibilities involving different areas of the law.

But back to the challenges of managing a contingency fee-based practice. I have written two editions of a book titled How to Build and Manage a Personal Injury Practice (published by the ABA) and am currently wrapping up the third edition. In writing it, I reached out to successful personal injury lawyers for their advice and will share some of it here.

Keep Your Overhead Low
One lawyer has offered this observation about avoiding high office expenses: “Overhead is what kills many PI lawyers. Big is bad. The biggest, baddest PI lawyers in town usually are very lean and do not have a lot of staff and overhead. Being lean allows you to take some chances on bigger cases without risking your practice.” That’s good advice, and it’s just as true as it was when I started practicing 30 years ago. Except that everything is a lot more expensive now. While there are some anomalies caused by the recent recession, office space overall is expensive and employees are expensive. A skilled legal assistant can earn as much or more than a recent law school graduate. However, the good news is that it is easier to be lean today than it was a decade ago. Some lawyers actually take lean to the extreme and set up virtual offices and only meet with clients when it is necessary. That option, of course, wasn’t available without high-speed Internet, smartphones and case management tools that you can access from anywhere.

Does going lean mean working without a secretary or legal assistant? That will depend on how many cases you have, how many suits are filed and how many cases are heading to court. Having a lot of cases requires spending a lot of time on them. That may be more than you can handle alone. But for when you’re just starting up the practice and don’t have a lot of cases, I would recommend putting off the hiring of a legal assistant. If you have a case that requires more time than you can devote to it, consider hiring someone on a contract to work exclusively on that case.

Don’t Throw Good Money After Bad
Another attorney gave me this piece of advice: “Spend your time and money where it will produce the best results.” I’ve often said that an important difference with contingency fee-based practices, compared to the billable hour, is that in an hourly fee practice clients often look over the attorney’s shoulder to make sure that he or she doesn’t do a lot of work that isn’t “absolutely necessary.” Of course, that’s because extra work will increase the bill.

In a contingency fee case, on the other hand, the client has no such motivation and typically wants the lawyer to spend as much of his or her time and money as is necessary on the case. Since most lawyers advance costs for their clients’ cases and, as a practical matter, clients often do not have the means (or inclination) to repay the lawyer if the case goes bad, the lawyer will ultimately end up writing off the costs if the case isn’t successful. (Ethics rules require the lawyer to attempt to collect any amounts advanced, but that is for another column.)

The problem for PI lawyers is that while some cases require more work and more expenses than others, depending primarily on the amount of expert witness time involved, a lawyer could easily spend a lot of time and a lot of money on virtually every case. And when you take on a case, you often don’t know much about the facts and the temptation is to “pull out all the stops” to hire engineers, accident reconstruction experts, vocational experts and accountants—not to mention that medical doctors and chiropractors have learned that one way to get a lawyer “out of their hair” is to charge a fortune for their assistance. Given that harsh reality, if you want to open a PI practice without getting killed by the overhead and the costs that you are going to have to advance for your clients, you will need to be judicious in deciding how much time and money you can commit to each case and still have reserves available for the case that absolutely requires that commitment.

Another PI attorney who answered my call for advice suggested that even though lawyers spend a lot of time and money working up a case, they are often misdirecting their scarce resources. His suggestion was that before you hire all the exotic trial experts, you should invest more up front to order records from every doctor the client has ever seen in the past and make sure that the client’s current problems truly relate to the current case and can’t be better explained by injuries and illnesses that drove him or her to doctors long before the accident that you were hired to deal with.

Put Together a Nest Egg
Clearly everyone should have a nest egg, but in a contingency-fee practice especially, the need may be more immediate or compelling than you think. Another of my colleagues, someone who works with lawyers every day in her job, strongly advises that you have adequate capital to weather the ups and downs of the cash flow challenges. “Lack of capital,” she observes, among other things, “puts pressure on the lawyer to settle cases for less than they are worth, which is unfair to the client as well as to the lawyer.”

So the bottom line: Whether you get that nest egg by borrowing from a bank, borrowing from a rich uncle or working nights at another job, you need to have some money to carry you through a couple of bad months.

In summary, I don’t know of any other profession where you take on a case, spend your own money to bring the case to resolution with little expectation of getting your money back if the case is unsuccessful, and then get paid for your time only if the case is successful. But a lot of lawyers have done it and found success, and even enjoyment, in the process.

Have questions about your career, your practice, your computer or anything else? Send them to Bill Gibson at kwg@gibsonmediation.com.