When we first started working with law firms, the focus was most often on getting the largest settlement. That is not bad but should not be the only focus. As the law firms we worked with became larger, the overhead cost started to climb. Eventually, the law firm owners discovered that profit margins were shrinking. That is when we got called in. We found that there was no penalty for overhead because the rewards were still focused on settlements. I remember the first firm I visited there was a celebration for a million-dollar settlement. When I asked what the return-on-investment was for that case I got blank stares. Turns out, they lost money.
When we find a situation like this, our next step is to apply overhead cost evenly to all the cases to determine the efficiency of the case resolution, and the return-on-investment (ROI). That created an environment where attorneys took advantage of the system. They would justify using large amounts of resources, knowing that there was no penalty designed into the program. The overhead was evenly distributed.
There is a balance between a vast list of best business practices and the needs of a business. I believe that you should look at the culture, size, and complexity of the business to select the best set of practices to use. A small law firm with less than 20 staff, or less than 500 active cases, is much different than a firm with 750+ active cases and 25+ staff. Based on our experience, the dividing line is around these parameters.
When you look at the big picture, there is a need for more accountability, better teamwork, and more accurate tracking. The use of a profit center could provide all of that. There are several kinds of centers, profit, cost, and revenue. My experience tells me that a profit center is the best fit. This would allow for some combination of revenue and cost center elements. The first step would be to define and collect data on revenue, indirect cost, direct cost, staffing and payroll cost. We then look at the vision and mission statements to determine what is important to the Firm. With all that information we can define a balanced scorecard, profit centers, and an implementation plan.
The idea of a profit center has two primary features. The first is, the overhead would more closely match what was used. The second was that a team was more efficient than a single skill focus. These features can be further broken down like this:
- A profit center cost included all the payroll costs for the members, a portion of the burden cost, and the direct cost. You can debate expenses like the cost of a case management system, but most count this as a direct cost. The cost of QuickBooks could be considered as overhead or an indirect cost. The cost of legal staff (attorney’s, paralegals, etc.) are part of production but the cost of administrators or support staff are not. Other expenses, such as rent, utilities, business insurance and the cost of supplies that do not become a part of any products or services are overhead expenses, or in-direct.
- The team concept caused the workload to be distributed. There was some redundancy built-in as well. The typical increase in production expected due to a team was also a benefit.
- Increased productivity: A broader range of skills can be applied to case resolution. There is also a competitive element that I often see when a team is formed.
- Skills development: skills were shared. There was a team spirit that promoted the idea of each member of the team was part of the solution.
- Redundancy: team members tend to backup each other. Once the idea that the success of the team would be rewarded, this idea grows.
The first lesson learned was on the distribution of expenses. There was a point where the cost of distribution was prohibitive. Trying to keep track of how many sheets of paper or stables were used cost more in tracking than any benefit realized. So, the cost of payroll and benefits that were easy to track were passed on. The cost of supplies, rent, heat, and other burden was distributed by a formula. Over time we decided to distribute burden cost based on the number of cases. We eventually modified that by defining a case weight to better distribute. The decision to use cases as the distribution element instead of hours worked or people assigned was because that was easier to track. A focus on cases also better matched the mission of the business.
The downside, although not a big impact, was this forced a lawyer into a management role. This had the advantage of awareness but the disadvantage that this was not what lawyers were trained for. So far, the benefits have always outweighed the negative.
Another interesting observation based on the increased focus on accountability and business metrics. Over time we learned that the real benefit of profit center accountability and/or Firm metrics was in the trend and not in the number. We decided to use a rolling 12-month trend. This meant that we had to have at least two years of data to develop any meaningful trend lines.
The strategic plan for any of the Firms we worked with was a combination of values, vision, mission, business metrics, culture, and best business practices.
Did you find some neat ideas in this blog? What are the exciting ideas you came up with, and how are you implementing them? Let me know by contacting me at firstname.lastname@example.org.
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