Transcript Your Law Firm Marketing Program: Delivering ROI

Understanding the Business of Law
LMA Annual Conference
Denver, Colorado
March 10, 2010
Contact information
Stephen M. (Pete) Peterson
Maxfield Peterson P.C.
Law Firm Business Institute
[email protected]
T 970 245 3600
M 303 981 1118
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This morning’s discussion

The law firm business model

Basics of law firm profitability

The marketing budget

Marketing and the organizational structure

Special bonus material (time permitting)
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© 2010 Law Firm Business Institute
“Law is a very mature profession
and a very immature industry.”
-Peter Kalis, K&L Gates
Challenging times for the profession

Business model
 Alternative fees
 Compensation structures
 Leadership and succession
 Cost containment
 War for talent
 Free agency partners
 Law firm failures
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Challenging times for the profession
(cont.)
Are the problems we face really
created
by the economy?
 Before the recession, were clients
happy about

– A pricing system modeled on time and
materials
• With 5-8% average annual pricing
increases
– Value of first year associates
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Challenging times for the profession
(cont.)

Before the recession, were clients
happy about
– Lawyers who think everything is highend product/service
– Lawyers who define what service
means
– Media reports of high PPP
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Poster child for the AMLAW 200
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What is meant by the law firm
business model?
Law firm business model
Hours
 Quantity of which can’t reach the sky

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Hours sound barrier
Activity
Case I
Case II
Case III
Total Hours Per Year
Necessary
- Sleep (365x8)
- Eat (365x3)
8,760
4,745
8,760
4,745
8,760
4,745
2,500
1,515
4.2 (9)
3,000
1,015
2.8 (6)
3,500
515
1.4 (3)
- Bodily (365x1)
- Errands (365x1)
Work
Discretionary
Hours Per Day (weeks)
- Exercise
- Hobbies
- Family
- Illness
- Romance
- Vacation
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Created by Carl A. Leonard
Law firm business model (cont.)
God (or other high authority) given
annual rate increases
 Leverage model
 High and built-in level of associate
attrition; 60 and 4
 Lockstep compensation models
 “It’s the way we do things around
here.”

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Brave new world?

First year programs
– Significantly lower hour requirements
– Firm programs/tracks
– Practice specific curriculums
– Apprentice and shadowing components

Merit based compensation models
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Brave new world? (cont.)

Impact
– Change in recruiting (particularly
summer programs)
– Lower salary and salary freezes
– No automatic salary increases
– More performance based bonuses
– Reduction in benefits
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© 2010 Law Firm Business Institute
Law Firm Economics 101

Firm profitability is determined by
how well a firm manages the RULES:
– Revenue
– Utilization
– Leverage
– Expenses
– Speed
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Illustration of RULES
Finance/Marketing/Strategy

Financial trends drive tactics and strategy
– What is driving our business?
– Which clients, practice groups and services
are profitable?

Strategic initiatives use financial metrics
for:
–
–
–
–
Growth options
Pricing; alternative fee arrangements
Admitting partners
Marketing endeavors
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© 2010 Law Firm Business Institute
Realization--turning worked
values to cash
Time value at standard billing rates
Fees actually billed
Fees ultimately collected
-Billing realization
-Net realization
= $90/$100
= $80/$100
= $100
= $ 90
= $ 80
= 90%
= 80%
High profit firms achieve overall realization of
96% or better.
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© 2010 Law Firm Business Institute
Realization and the bottom line

Increasing realization from 90% to 96%
for firm with $50 million in revenue
– Yields $3,000,000 to the bottom line
– Assuming 50 partners; increases per
partner income by $60,000

Normally, no expenses incurred for
increasing realization
– Hygiene issues
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© 2010 Law Firm Business Institute
Typical law firm collection cycle
$60,000
In thousands.
$50,000
This Collection Cycle Impacts Marketing Endeavors
$40,000
After 6 months, a dollar is worth 57 cents;
after a year, maybe 15 cents.
$30,000
$20,000
$10,000
j
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m
a
m
j
j
a
s
o
n
d
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Simple discounting and write-offs

Discounting is costly
– For example, a 10% discount for a firm
with a 40% profit margin actually costs
25% in terms of loss to the bottom line.

Cost of replacing the value of services
written off or discounted
– A $40,000 write-off needs $100,000 in new
fees to replace lost income
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© 2010 Law Firm Business Institute
Utilization—A measure of overall
productivity and capacity
Average
Hours
Partners
Utilization
Percentage
110%
Actual
160
Budget
145
Associates
139
150
93%
Paralegals
100
120
83%
What can we infer from this report?
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What is leverage?

Term used by firms to define the
characteristics and resources of the
professional staff
– Ratio of associates to partners
– Ratio of paralegals to attorneys

All things being equal, average partner
income increases as leverage increases
 Increasing leverage requires a change in the
way partners work
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Expenses
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Typical cost structure
Largest costs
• People
• Occupancy
• Followed by
• Marketing
• Technology
Other
People
Occu.
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Finally, Speed
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Speed in billing and collecting
Work-inProgress
Annual fee revenue
Days in Year
Revenue per day
Period end balance
Days invested
Goal
Excess investment
Accounts
Receivable
$25,000,000
$25,000,000
365
365
$68,500
$68,500
$4,375,000
$7,292,000
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106
45 days
70 days
$1,301,500
$2,466,000
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Profit improvement illustration
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Sample firm profile
Annual revenue of $22,500,000
 Average hours of 1,650
 Average rate of $225
 Realization of 87%
 60 attorneys
 Leverage 1:1
 Profit margin of 30%

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Hypothetical illustration of RULES
improvement
Application
$ Increase in
Avg. PPP
% Profit
Increase
R-Increase realization by 2%
$15,000
6.7%
R-Increase rates by 2.5%
$18,750
8.3%
U-Increase associate hours by 3 hours/week
$23,400
10.4%
L-De-equitize 2 partners
$7,150
0%
E-Decrease selected expenses by 4%
$2,000
.9%
S-Decrease days invested in WIP and AR by 10 days
$20,500
9.1%
Total improvement
$86,800
35.4%
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Sample reports
Obtaining financial knowledge

Profitability reports
– Clients/matters
– Practice areas
– Industry segments

Leaders use profitability reports for
– Strategic planning purposes
– Assisting in decisions to reject unprofitable work
– Staffing decisions (admitting partners, changing
leverage)
– Holding attorneys accountable for matter management
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Practice group realization
Group
Billed Collected
Nano
92.4%
89.1% 82.3%
Corporate
96.2%
90.1% 86.7%
Tax
97.3%
93.0% 90.5%
Bankruptcy 98.0%
94.3% 92.4%
Litigation
91.8% 87.7%
95.5%
Net
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© 2010 Law Firm Business Institute
Cross-selling activity
Imported
Exported
Corp
R/E
Lit
Total Import Percent
Corp
$ 38 $ 2 $
6 $ 46
$
8
17%
R/E
$
1 $ 19
$
7
37%
Lit
$ 10 $ 2 $ 25 $ 37
$ 12
12%
$102
$ 27
26%
6 $ 12 $
Total
Export
$ 16 $ 4 $
7 $ 27
Percent.
42% 33% 28% 26%
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© 2010 Law Firm Business Institute
Client Fee Segmentation Report
(partial listing)
Statistic:
Gross fees
Number of clients
Fees from top 200 clients
Average fees from top 200
Amount
$100,000,000
5,000
$76,000,000
$380,000
Average fee collection for firm
$20,000
Number clients under average
750
Total fees under average
$450,000
Use similar information to cull unprofitable and small clients.
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Marketing budget
What’s better; managing the
money or managing the things that
produce the money?
Major components

Staffing
– Usually part of firm-wide support
budget
Practice group*
 Industry teams*
 Client teams*

*(why did I put this asterisk here?)
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© 2010 Law Firm Business Institute
Major components (cont.)

Institutional
–
–
–
–
Advertising
Website
Newsletters
Database
development
– Client events
– Charitable

Continued
–
–
–
–
–
–
–
Branding
Box seats…..
Bangles/n/notions
Alumni events
Law firm networks
Biz development
R&D
– CONTINGENCIES
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© 2010 Law Firm Business Institute
Management—historical model
Partnership
Managing Partner
Compensation Committee
Budget Committee
Technology Committee
Marketing Committee
Human Resources
Library
Administrator
Facilities
Record Management
Finance
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© 2010 Law Firm Business Institute
Management—new model
Management Committee
Managing Partner
Executive Director
(Firm Practice)
Finance
Human Resources
Information Technology
Marketing
Knowledge Management
Facilities
Exception-seeing more direct
reporting to the MP.
Records Management
(Firm Operations)
Practice Group
Practice Group
Practice Group
Practice Group
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© 2010 Law Firm Business Institute
Know ROI
Will be helpful in championing your
annual budget and strategic initiatives
“Half the money I spend on advertising is
wasted; the trouble is I don’t know which
half.”
John Wannamaker
Founder
Macys Department Store
Why Focus on ROI?
Project selection/Identify firm's
highest value needs
 Goal setting
 Resource allocation decisions;
ability to say "No"
 Quantify marketing's contribution to
the firm

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© 2010 Law Firm Business Institute
Return on Investment
Businesses use ROI in multiple ways
 Effective deployment and use of
assets (cash)
 Judging specific requests for

• Technology outlays
• Marketing initiatives
• Generally speaking, requests are approved
for projects offering highest return
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© 2010 Law Firm Business Institute
Return on Investment (cont.)

Law firms
– Have difficulty assessing
– Results of marketing strategies/initiatives are
not often captured on new matter forms
– Making it difficult to accurately measure ROI
from source activities
•
•
•
•
Seminars
Referrals
Personal relationships
More (articles, e-commerce, public relations…)
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© 2010 Law Firm Business Institute
Uses of ROI

Forecasting
– Forecast returns on future activities
• Requires adequate historical information on
activities that resulted in new business-examples
– Responses to invitations
– Attendee to invite ratio
– Number of new leads
– Number of leads resulting in new business
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© 2010 Law Firm Business Institute
Determining the investment

Costs to consider
– Hard costs
• Example—seminar costs (printing, advertising,
catering, facilities, etc.)
– Other expenses
•
•
•
•
Allocation of marketing department expenses
Attorney time for preparing and attending event
Is data readily available?
Caveat—analysis paralysis
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How do you determine the return?

Return is normally profit that
resulted from the initiative
– Profit, not gross fees or billables
Return can also mean increased
awareness in the marketplace
 Data gathering

– Necessary to measure frequency of
results
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© 2010 Law Firm Business Institute
Allow marketing initiatives to run
its course for acceptable period
Year 1
Event cost;
other
Fees from
new client
Profit
Margin
Profit
Year 2
Total
$48,000
$-
$48,000
$35,000
$200,000
$235,000
40%
40%
40%
$14,000
$80,000
$94,000
-71%
n/m
96%
ROI
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Closing thought for firms

Always remember that you’re unique.
Just like everyone else.

Questions/comments
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