The 10 Most Common Mistakes Law Firms Make

Whether your firm is humming along at a profitable pace or has already hit some rocky spots, it undoubtedly can still improve in some areas. Here are 10 of the most common mistakes law firms make in managing their practices.

1. Improper timekeeping

Many firms use their time and billing system strictly as an invoicing system. But a good time and billing system should also be used as a management tool that enables the firm to compare what is actually billed with the dollars produced (time available to be billed or billable). Many firms don’t have a clear understanding of what “billable time” means, so they don’t track it effectively.

Billable time is the time an attorney spends on behalf of a client. This time should all be recorded on a timesheet, regardless of whether you intend to bill the client for it directly on an hourly basis or indirectly on a basis other than hourly, such as fixed fee or contingent fee.

When lawyers bill on a nonhourly basis, they often don’t bother recording their billable hours. This is a problem for two reasons:

• The firm can’t measure the billable hours produced by the attorney. When measuring productivity, an hour spent on behalf of a client that will be billed hourly is just as valuable as one that will be billed indirectly.
• The firm can’t compare actual billing with the value of the hours spent on behalf of the client for its fixed fee and contingent fee cases. This comparison is the only way that a law firm can determine the profitability of various types of cases.

2. Failure to survey client satisfaction

A dismally low percentage of firms survey their clients. Why are firms so reluctant to conduct client surveys? You guessed it -- fear. Fear of stirring things up. Fear of getting bad grades. And fear of being held accountable for how clients are treated. Firms can’t afford to be fearful.

All firms should periodically send a survey to their clients, asking for feedback on the overall quality of service provided (see page 4 for tips on how to do this effectively). On average, 70% to 80% of a firm’s new business comes from present clients, in the form of either expanded services or referrals. So it makes sense to focus your marketing efforts on the best source of new business -- your present client base. A client survey is the first step in these efforts. You can learn what your clients think about your service quality, and then take steps to improve it. Remember, quality is ultimately measured by clients’ perceptions of the firm’s performance, not your own.

3. Too much emphasis on billable hours

Lawyers put too much emphasis on billable hours, to the detriment of worthwhile goals that will increase the long-term profitability of the firm such as marketing, firm management, and training and development of associates.

The result of this over-emphasis on billable hours is work cultures that reduce professional contributions to a simple hours derby, causing attorneys to overwork files or perform associate-level work and sacrifice personal fulfillment outside of work.

4. Little attention given to realization

Let’s define terms again. Realization is the percentage of billable time that is actually billed. Here is a simple example: Attorney A has 2,200 billable hours but only 1,400 billed hours. Attorney B has 1,800 billable hours but 1,700 billed hours. Many firms focus on the billable time, but the only time that matters is time that is actually billed.

Many firms do not know what their realization is or have a system in place for computing it. A 1% or 2% increase in realization can have a significant impact on the bottom line. Unrealized hours also reduce the bottom line indirectly by taking time away from other valuable activities such as marketing and managing.

5. Marketing is neglected

More firms are realizing that unless they become organized about practice development, business will be slow in evolving. However, new partners often receive no marketing training and don’t know where to begin. If they don’t have natural marketing abilities, they may avoid it altogether. If you are “too busy,” you need to delegate work so you have time to market. Call clients, prospects and referral sources to make appointments for breakfast and lunch meetings. Then, as many times a week as possible, spend breakfast and lunch with these people.

Many attorneys think that unless they are a rainmaker, they are failures as marketers. Today, firms need to rely on more than one person for practice development. In most cases, it’s better to have many people who generate a little mist than to rely on one rainmaker. A good marketing motto is: “You can’t not try.”

6. Law firms don’t hold annual partner retreats

Almost without fail, truly successful firms convene annual partner retreats. A retreat is an opportunity for partners to escape the distractions of the office and spend time together talking about themselves and the firm. Partners can look at the firm and ask themselves whether they like what they see and what they would like to see five to 10 years from now. This includes looking at the firm’s problems and how to resolve them, and devising goals for improving the firm.

Firms don’t need to go halfway across the country to an expensive resort for their retreats. Most retreats are convened in a small meeting room at a nearby hotel, without spouses or golf. And retreats need not be, and usually aren’t, confrontational and anxiety-producing.

7. Failure to do strategic planning

Strategic planning sounds like a technique invented in a Harvard Business School test laboratory that only applies to large firms. But nothing could be further from the truth. Strategic planning is really very simple. It is the process of reviewing where a firm is now, where the partners want to be and how to make their vision a reality. If you take the time to sit down and decide what kind of firm you want to be, what it will take to make it happen and who will do it -- and put it all in writing -- you will be much more successful than if you didn’t have a plan in place.

8. Management not taken seriously

Sound management can affect the success of a law firm more than any other function. Good management establishes a structure to allow successful performance, mainly by empowering managing partners and legal administrators. Good management also holds partners accountable for their performance by such methods as partner compensation, performance evaluations, goal setting, and creating incentives and rewards for excellence.

Successful management studies productivity and profitability, exploiting strengths and curbing negative trends, and establishes systems for ensuring quality work practices. Good managers create an environment in which people can succeed and achieve their goals. This includes providing them with adequate support systems.

9. Inadequate partner compensation systems

How a firm’s income is distributed among its partners -- the partner compensation system -- is the most sensitive aspect of law firm management. Partners are afraid to offend each other, and they have difficulty conducting candid discussions regarding the value of the relative contributions made by each partner. But not discussing the pros and cons of the various compensation options can result in opting for an easy out by relying on a system just because it has always been done that way and never been challenged.

Your firm may be resigned to the unevenness of your system when you could benefit from another style. For example, you may be using a seniority-based system, paying more to those with greater seniority. But this system can turn off younger partners. It can also encourage longer-term partners to coast. Law firms need a system that motivates partners to push themselves and that pays more for those who perform well. A good compensation system won’t produce widely varying results from year to year.

10. Not understanding each partner’s role

To create an environment in which collegiality, accountability and profitability go hand-in-hand, lay the foundation as early as possible. Clarify everyone’s expectations of each other. Specifically, clarify the direction of the firm to get everyone pulling together and make sure everyone knows their roles.

Recognize and accept that people produce at different levels; not all partners are created equal. If partners understand this, there will be less anxiety over compensation.

Partners should delegate a certain amount of decision-making authority to a centralized management structure. Understand that everyone needs a long rope. Collegiality is hard to maintain when partners feel everything they do is being watched.

How many of these mistakes is your firm making? Many firms can’t solve these problems because of political pressures or personalities in the firm. An outside person may be ideal to help you with these issues. Call us for a consultation.

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