Practicing law is not just about client files and research, but also defining the value of your legal services. Too many lawyers let their businesses suffer, failing to understand the finances of their files. Learn how to measure your firm’s worth, so that your billing and accounts meet your needs and your client's expectations in this session on tracking legal account receivables. Join Colin Cameron, CA, Founder of Profits for Partners, Management Consulting Inc. and Joshua Lenon, Clio's Lawyer in Residence as they discuss: - How keeping your firm solvent is an ethical obligation - What financial measurement tools law firms are using - What key financial performance indicators are critical for your practice

1. Understanding Law Firm Financials:
Making the Numbers Work
Joshua Lenon – Clio
Colin Cameron - Profits for Partners

2. Agenda
• Ethics of Law Firm Finances (10 minutes)
• Financial Measurement Tools for Law Firms
(10 minutes)
• Key Performance Indicators (30)
• Questions (10 minutes)

3. Instructors
Joshua Lenon
• Lawyer, admitted in New York
• Lawyer-in-Residence for Clio
Colin Cameron, CA
• Chartered Accountant
• Former Chief Operating
Officer of Clark Wilson LLP
• Profits for Partner

4. ETHICS OF LAW FIRM FINANCES

5. Source:(The(Lawyer,(01/17/2014(

6. Source:(Business(Insider,(06/24/2012(

7. Source:(Globe(and(Mail,(02/07/2014(

9. How you run your law firm
affects your clients.

10. Lawyers have been having
difficulties with finances since
the Boer War in 1901.
Source:(RighCng(Wrongs:(The(Missouri(Bar(Client(Security(Fund,((
Precedent,(Winter(2011(

11. Model Rules of Professional Conduct
• Rule 1.1 – Competence
• Rule 1.3 – Diligence
• Rule 1.5 – Fees
• Rule 1.15 – Safekeeping Property
• Rule 5.4 – Professional Independence

12. Rule 1.1 – Competence
A lawyer shall provide competent
representation to a client. Competent
representation requires the legal knowledge,
skill, thoroughness and preparation
reasonably necessary for the representation.

13. Emerging Tech Proficiency
“It should now be a matter of professional
competence for attorneys to take the time to
investigate social networking sites.”
Griffin v. Maryland, Case No. 1132, Court of
Special Appeals Maryland, May 27, 2010,

14. Self-Interest & Competency
“…there is little meaningful distinction between a
lawyer who inadvertently fails to act and one who
for selfish reasons decides not to act.”
Beets v. Scott, 65 F.3d 1258 (C.A.5 (Tex.),
1995)

15. Rule 1.1 – Competence
Competent handling of a particular matter
includes inquiry into and analysis of the factual
and legal elements of the problem, and use of
methods and procedures meeting the
standards of competent practitioners. It also
includes adequate preparation.

16. Rule 1.3 – Diligence
A lawyer shall act with reasonable diligence
and promptness in representing a client.
[1] A lawyer should pursue a matter on behalf
of a client despite opposition, obstruction or
personal inconvenience to the lawyer…
[2] A lawyer's work load must be controlled so
that each matter can be handled competently.

17. Rule 1.5 – Fees
(a) A lawyer shall not make an agreement for,
charge, or collect an unreasonable fee or an
unreasonable amount for expenses
(3) the fee customarily charged in the locality for
similar legal services;

18. Rule 1.5 – Fees
[5] An agreement may not be made whose
terms might induce the lawyer improperly to
curtail services for the client or perform them
in a way contrary to the client's interest.
… However, it is proper to define the extent of
services in light of the client's ability to pay.
… A lawyer should not exploit a fee
arrangement based primarily on hourly
charges by using wasteful procedures.

19. Rule 1.15 – Safekeeping Property
(a) A lawyer shall hold property of clients or
third persons that is in a lawyer's possession in
connection with a representation separate
from the lawyer's own property.

20. Rule 5.4 – Professional
Independence
(d) A lawyer shall not practice with or in the
form of a professional corporation or
association authorized to practice law for a
profit, if:
(3) a nonlawyer has the right to direct or control
the professional judgment of a lawyer.

22. Ethical Conclusion
Lawyers are responsible for
preparing their practices’
finances to be ready to handle
a reasonable workload.

23. FINANCIAL MEASUREMENT
TOOLS FOR LAW FIRMS

24. Practice Management Tools

25. Full Accounting Suites

26. Legal Accounting
hIp://gocl.io/legaccweb(

27. Understanding Law Firm Financials -
Making the Numbers Work
Clio Webinar – May 28, 2014
Speaker: Colin Cameron
President, Profits for Partners,
Management Consulting Inc.
May 28, 2014

28. Today’s Agenda
• Trends in the legal industry
• White papers on Realization Rates
and Alternative Billing
• The 5 Levers of Profitability
• Key profitability metrics
• Strategies for increasing
profitability
28

29. 5 Major Trends Impacting Law Firms
Today
29
Realization
rates are
dropping
Clients
demanding
discounts
Alternative
billing
Focus on
efficiency
Rise of NewLaw business
models

30. How is Profitability Calculated?
30

31. The 5 Profitability Levers
• Utilization = Billable hours / # of Lawyers
• Standard Hourly Rate
• Billing Realization Rate = Billings / Value of
Time Recorded at Standard Rate
• Margin = Net Income / Billings
• Leverage = # of Associates / # of Partners
- David Maister, “Managing the
Professional Services Firm”
31

32. Utilization
• The “Pipeline”
32
flickr.com/photos/jkbrooks85/5588292846

33. Utilization
• Utilization = Billable hours / # of Lawyers
e.g. 120 billable hours / 1 lawyer = 120 hours
• Utilization rate = Billable hours recorded /
Available time e.g. 6 billable hours / 8 available
hours = 75%
• # of files opened
• # of new clients
33

34. Track Time for Alternative Billing?
• Yes!
• Most hourly billing metrics still apply
• Time and billing system features available
• For costing and pricing purposes
• Profitability analysis
34

35. Rates
• Effective Rate = Billings / Billed hours
e.g. $20,000 billings / 120 billed hours =
$166.66 effective rate
• Firm effective rate
• Small rate increases produce
big bottom line gains
• Partner effective rate
• Client effective rate
35

36. Focus on Value
• Need to decide value before you set price
• Compete on value, not price
• Ron Baker’s ideas
• Value = Client “Profit” – Price
• 51 Practical Ways to Add Value
36
Colin Cameron – Profits For Partners

37. How do you define Value?
• Quantitative factors
• Qualitative factors
• Ask client how they define value
• Client decides value, not lawyer *
• Client satisfaction
• Efficiency
• Effectiveness
37

38. The Economics of Alternative Billing
• A 20% discount with 40% profit margin = 50%
cut in profit
• Leverage still works
• Need to get more efficient
• Realization is key to profitability
38
Colin Cameron – Profits For Partners

39. Realization
• $20,000 billings / $24,000
value of time billed at standard
charge-out rate = 83.3%
Billing Realization
Rate
• $18,000 cash in / $20,000
billings = 90%
Collection
Realization Rate
• $18,000 cash in / $24,000 value
of time billed at standard charge-
out rates = $75%
Overall Realization
Rate
39

40. Realization - Strategies
• Upgrade your clients
• Run realization reports for all clients
• Focus on cash in as a % of prebill
• Use an 80% realization cut-off
• Aim for 95% realization
40
flickr.com/photos/gageskidmore/5440002785

41. Margin
• Margin = Net Income / Billings
e.g. $80,000 net income / $200,000 billings = 40% margin
• Net profit margin %
• Overhead per lawyer
• Overhead as a % of revenues
• Compare expenses to legal industry surveys
41
Focus on increasing productivity as well as reducing costs to increase margin

42. Margin
• WIP Turnover = WIP / Average
billings per month or day
• A/R Turnover = A/R / Average
Billings per month or day
• Lock-up = WIP Turnover +
A/R Turnover
• Run reports monthly by Partner
• Aim for 105 days/3.5 months
or less
42
flickr.com/photos/revstan/48501
93874/

43. Margin - Strategies
• Drive cash flow and
reduce bad debt expense
• File opening approval system
• Monthly billing
• Bill and collect everything
on quarters
• Quarterly income
distributions
43

44. Margin Strategies - Reduce Costs
• Virtual firms
• Outsourcing staffing
• Contract lawyers
• Automate for efficiency
• NewLaw business models
cut O/H by 50%
44

45. The Power of Leverage
• Leverage = # of Associates / # of Partners
e.g. 7 associates / 3 partners = 2.3 leverage
• Leverage can have the biggest impact on
profitability
• Consider two-tier partnership
• Increase profitability by levering work to
nonequity partners and associates
• Work smarter, not harder
45
Colin Cameron – Profits For Partners

46. The reverse pyramid
46

47. Leverage
• Upright the reverse pyramid!
47
Associate to partner ratio
• aim for 1:1 or higher
Associates and nonequity
partners to equity partner
• aim for 2:1+
Lawyers and other
professionals per equity partner
ratio
• aim for 3:1+
Associate hours / Partner hours
• aim for 1:1+
Paralegal hours / Partner hours

48. Leverage
• Revenue per Equity Partner (entire practice)
• Profit Per Partner Hour – PPPH
• Work/Life balance
• See articles in Law Firm Profitability group on
LinkedIn for ideas on increasing profitability
48

49. Profit Per Partner (PPP) Formula
PPP = Utilization x Standard hourly rate x
Billing realization rate x Margin x
(Leverage + 1)
PPP = 120 hours utilization x $200 standard
hourly rate x 83.3% billing realization rate
x 40% margin x (2.3 leverage + 1) =
$26,667 PPP
49

50. The 80/20 Rule for Client Profits
• Studies show that 80%+ of the firm’s profits are
produced by just 20% of your clients
• Focus on key metrics for these top 20% clients
• Review bottom 20% of clients that may have
negative profitability
50

51. Summary
! Client selection is #1
! Focus on value, not price
! Reduce costs as a % of revenues
! The power of leverage
! Update your business model
! Focus on key metrics that fit your firm’s
strategic plan
51
Colin Cameron – Profits For Partners

52. Thank You!
• Questions or comments?
▫ Colin Cameron | President
▫ Profits for Partners, Management Consulting Inc.
▫ www.profitsforpartners.com (website)
▫ www.lawprofitability.com (blog)
▫ colin@profitsforpartners.com
▫ 604.512.8104
© 2014 Profits for Partners,
Management Consulting Inc.
52
Colin Cameron – Profits For Partners

53. QUESTIONS

54. Thank You
Joshua Lenon
joshua@goclio.com
@JoshuaLenon
Linkedin.com/in/joshualenon