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INCREASING PROFITS

8 signs your firm needs an operations analysis

An operational analysis is an in-depth analysis of the firms’s operations, or, put simply, getting somebody from outside to take a look at the inside.

Most firms do that when they are facing problems, particularly financial problems, but it is better to do it before problems occur.

Here is what the job entails, starting with the signs that it’s time to get the review rolling.

When it’s time to take a look

An analysis covers eight main areas. It is when any one of those areas starts to fail that it is time to start analyzing. The areas are these:

1 Profitability

First is the firm’s overall profitability. A generally recognized benchmark for profitability has long been 50%, or that 50% of the firm’s total revenues should go to partner payouts.

The 50% varies according to the type of practice, and firms experience peaks and valleys that waver from it, but that’s a general benchmark, and when the overall profits sink below that, the partners aren’t making enough money and a review is in order.

The outside consultant looks at all the firm’s historical financial information, usually for the past seven years, and analyzes areas such as the profit and loss statements, billing and productivity records, accounts receivable, and attorney earnings.

The review also analyzes elements such as the ratio of overhead to gross income, the profit per partner and per associate, billable hour comparisons among partners and associates, the actual dollar amount each attorney brings in, individual and overall collection rates, and partner billings and take-outs to see if the partners are taking more than their fair share.

2 Management and governance

The partners doing the managing are also fulltime practising lawyers whose talents and interests are in practicing law, not in managing the firm. As such, they can get sorely off track in their management work.

Sometimes they manage to the extreme and want to participate in every administrative decision, from buying a new copier down to what kind of doughnuts to keep in the break room. In one firm the minutes of the partner meetings actually showed discussions on whether to renew a staffer’s notary licence.

When partners are spending time on the minutia instead of on the growth and well-being of the firm, the firm’s priorities are not in order and the firm is in need of help.

3 Partner and associate productivity

The review also looks at whether individual partners and associates are less productive than others in their peer group.

That’s an important element to study, because when productivity falls, the attorney becomes a cost and not a profit for the firm. Yet the solution is not always to oust that person. In many cases the poor productivity is a sign that the firm is not using its attorneys’ time to its advantage.

4 Partner compensation

Compensation is an issue that almost always needs review, specifically to see that it rewards what the firm wants to produce. It especially needs review if there’s a general attitude among the partners of “why do that if we don’t get paid for it?”

Every compensation system should be designed to motivate a certain type of behavior. If the firm wants the partners to bring in new business for example, the compensation system has to be set so as to reward that. Or if the firm has all the business it can handle and wants the partners to be productive and get it done, the system has to be up to reward excess work.

5 Marketing

If there are a few attorneys sitting around twiddling their thumbs for lack of enough work, what needs analysis is the firm’s marketing program—or lack of one.

The same is true if the firm isn’t generating enough clients. Most dangerous is the situation where a firm relies on a limited number of clients, because losing just one of them can significantly damage the financial picture.

Every firm needs an ongoing practice development program, which means marketing goals, and if there isn’t one, it is time to bring someone in to set one up.

6 Office administration

This area focuses on how the office’s administrative work is managed.

In addition, the review determines whether the staff are being used efficiently and whether the office has proper staff policies and procedures in place.

7 Dealing with senior partners

The senior partners are yet another issue, specifically, when it is appropriate for them to retire or change their status with the firm. And along with that is the issue of succession planning, or how to pass down the business they handle.

That is a delicate issue in a review because as people get older they tend to be less aware of their own limitation. Yet no firm can afford to keep status quo when a senior partner becomes non-productive and starts making mistakes.

8 Planning for the future

Strategic planning is another area that gets covered in an operational analysis. Mainly, that’s a matter of planning where the firm will be in the next five years, which includes questions such as whether it will add new practice areas, hire new associates, bring in laterals and look at mergers with other firms.

If the partners can’t agree on the plan, it’s time to bring in an outsider.

Here’s what to expect

A review should show the firm what it is doing right and what it is doing wrong and also how it measures up to the rest of the legal world.

It should also provide viable suggestions for improving operations so the firm can serve its clients better and thereby become more profitable. That’s often best done by an outsider because that person sees the forest whereas the partners and administrator are out of necessity focusing on managing the trees. Similarly the outsider is objective whereas the firm is subjective.

As to where to find a consultant search under phrases such as “law firm” consultant and “law firm retreats” and get referrals from other firms.

Look for someone who has experience not just with other firms but firms of the same size and the same practice areas. The consultant should provide same-size and same-practice references–and the firm should check them.

The consultant should have a plan for conducting the analysis.

And the consultant should relate well to the partners and have a resume strong enough to win their respect so they will follow the recommendations. Otherwise the review will be a waste of money.

As to cost, the consultant may charge by the hour or may quote a flat fee for the job.

Most offices prefer the flat fee so they know up front what the cost will be. Also, with the flat fee, both consultant and partners focus on the job instead of the hours.

A complete analysis usually takes about six months although it is possible to ask the consultant to complete it sooner.


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