This article appeared in Accounting and Financial Planning for Law Firms, an ALM/Law Journal Newsletters publication covering all financial aspects of managing law firms, including: building a law firm budget; rates and rate arrangements with clients; coordinating benefits for law firm partners; and the newest strategies to grow your firm and your career.

We are now awash in predictions of an impending economic downturn. Economists are predicting that sometime in 2020, the current boom will end. A boom that after 10 long years has returned the AmLaw averages to their inflation-adjusted 2008 numbers.

Recalling that Will Rogers once remarked that economists have accurately predicted 10 of the last eight recessions, I wonder what law firm management is waiting for. Why wait for a downturn to improve professional and administrative operations, policies and procedures? When is the best time to identify, discuss and design performance improvement measures? When you have the time, the resources, and clear heads or are in the midst of a financial crisis when survival is the only thing on your mind?

This article focuses on what a firm can do now that will improve future firm economics regardless of what the future may hold. I have identified three areas that offer the great opportunity for improving a law firms' economics and better positioning them for whatever the future may bring.

They are:

1. Evaluate and Rank Professional and Administrative Staff.
2. Zero-Base Everything.
3. Banish the “WIABD” Mindset.

Let's explore each opportunity and how best to achieve the goal of improving professional and administrative operations.

Evaluate and Rank Professional and Administrative Staff

Law firms have significant numbers of administrative support staff. The individual who performs the annual performance reviews of these employees is dependent upon their role within the firm. Administrative assistants (secretaries) are usually reviewed by the attorneys for whom they work. Staff in other departments (accounting, human resources (HR), IT, etc.) are usually evaluated by their respective managers and reviewed by either the Chief Operations Officer (COO) or other member of the firm's management. Raises are usually set during the budgeting process (2%-3%) and most, if not all employees get what is called a “peanut butter raise” — money is spread around to all employees with little if any distinction among the staff.

The largest group of administrative staff (the administrative assistants) are usually evaluated by the attorneys they support on an evaluation form that is sent to the HR function. But, as I said, there is very little distinction made between the staff. In all our work in secretarial realignment engagements covering hundreds of secretaries, only a very few were ever rated less than stellar by the attorneys. We understand why this happens, but do not necessarily accept the results as an accurate reflection of secretarial performance.

To improve the review process, we suggest centering it into the HR function. Depending on the size of the firm, either the Chief Human Resources Officer (CHRO) or a deputy would be responsible for overseeing the annual process. Input from the attorneys and departmental leadership would still be gathered, but the HR function would provide an independent review of annual performance and prepare final evaluations. We also believe that the HR individual in charge of the process should provide the feedback to emphasize that the secretary works for the firm and not the attorneys.

Most importantly, we believe there should be a ranking of all employees into three or four categories (outstanding to marginal), with criteria for each category. Evaluative criteria for each category should include:

• Skills/work knowledge required for position;
• Team participation; and
• Commitment to firm culture and values.

Each of the identified categories would have a limit on membership (no more than 10% in the outstanding category, for instance) and a compensation increase associated with it. The exceptional group might receive a 5% increase (or a bonus if they are at the top of their compensation range) and the marginal group would receive no increase and a performance improvement plan. Successful, prompt completion of the performance improvement plan would be a requisite for continued employment.

The CHRO would work with the various other function heads to develop evaluative criteria for each administrative function. The criteria should support the skills identified in the individual position description for each employee. The criteria should also identify additional skills that the employee should develop in order to progress in their career.

Zero-Base Everything

Zero-base budgeting is a management concept developed in the 1960s at Texas Instruments. The concept involves matching annual expenses to outcomes to better associate the success achieved to the resources expended. Each year the budget begins at zero and each line in the budget is analyzed based upon the results achieved in the past year. Based upon that analysis, the budget line can be increased, reduced or held the same.

Personnel cost is the hardest budget line to evaluate under this concept. The natural response to the difficulty is to calculate increases by last year's amount plus a fixed percent. This approach results in no differentiation among the staff based on performance and everyone getting the same amount. As discussed above, flat, across-the-board salary increases harm morale and encourage top performers to look elsewhere while the firm retains below-average performers.

Zero-based budgeting should be applied to outside vendors (are you getting good service at a reasonable price?) and internal functions (does the IT Help Desk provide value relative to its cost?).

Some budget lines such as rent and utilities, are exempt from this approach, but most can — and will — benefit from an annual critical evaluation of worth vs. cost. The zero-based approach results in every expense item being evaluated every year and eliminates the continuation of practices that are costly and no longer required.

Records storage vendors have built an industry on small incremental increase in per box storage costs. Most firms have loosely defined retention storage requirements and getting attorneys to review old matter files for destruction or return to clients is extremely difficult. So the boxes stay and multiply. A recent client discovered files going back to the founding of the firm (some 50 years ago) in storage in the basement of their main office. Mixed in with the boxes of records were boxes full of office supplies, old newspapers, and other office detritus scooped up and boxed and sent to storage when a case closed. It took several months of hard work to sort things out, but the resultant savings on storage for this firm exceeded $100,000 per year.

Banish the 'WIABD' Mindset

The WIABD — or the “Way It's Always Been Done” — mindset is one that values how a firm has always done things to the exclusion of newer more effective methods. WIABD is not just a malady found in law firms; it is found in every industry and profession in America.

So let's talk about the revenue planning process that most law firms utilize in one form or another. The classic revenue projecting methodology multiplies the bill rate of every attorney times the budgeted number of billable hours.

Some firms will then apply overall utilization and realization rates to arrive at a gross revenue number. Other firms will project monthly billing numbers and apply historical collection patterns to arrive at the annual budgeted revenue amount. More sophisticated firms also include the projected results of the annual year-end collection effort.

Whatever variation a firm uses, the projected revenue number lacks one important factor: the linkage back to the partners who drive firm revenue. Few firms link partner business development efforts to the capacity of the firm to deliver those services. We believe that linkage is important and enables the partners to gauge their business development efforts throughout the year and link their efforts to the firm's strategy.

The way to build that link begins in the annual partner evaluation process. As part of the partner “contracting” process, we recommend that partners project for the coming year the amount of business they will develop. The estimates should be by client and, if possible, specific matters. The result will be a list of clients and projected fees.

In most cases, the projected fees will be far less than the time value of the partners and any associates/paralegals working with them. And that is the point! If the total value of the identified client work for the coming year is $1MM and the time value of partners and associates are $2mm, the resulting gap has to be filled with new business or work from other partners.

The identification of the gap between capacity and actual work will help partners focus their business development efforts and measure their success against those goals.

Law firm management is difficult and time consuming. The members of the law firm C Suite (COO, CFO, CHRO, and CTO) face daily demands on their time that greatly exceed the time that is available. As a result, peanut butter raises, ineffective review processes, last year's budget plus three percent, and WIABD procedures all become commonplace.

But however busy the C Suite officers are now, when a storm hits they will have far more on their plates and far less time to think through thoughtful responses to the crisis at hand. Better to do it now.

*****

Mark Santiago is a member of the newsletters Board of Editors of Accounting and Financial Planning for Law Firms and a certified Management Consultant (CMC). He is The Managing Partner of SB2 Consultants headquartered in New York City. Mr. Santiago has consulted to the legal profession for more than 35 years in the areas of financial performance improvement, compensation systems, merger/acquisition due diligence and integration and administrative support outsourcing. While a partner at Deloitte & Touche he led the two largest law firm administrative outsourcing projects in the United States. Mark is a frequent speaker and author and was the Chairman of the Am Law CFO conferences for 11 years. He was also one of the three originators of LegalTech in 1981 and a member of its Board of Advisors.