Successful Planning Is No Accident for Law Firms

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Many law firms struggle with the problem of getting lawyers to accept a firm-wide business plan. It's no secret that lawyers tend to be individualistic (and thus reluctant to give up personal control or direction), reactive (believing they must be flexible to accommodate variables that can't be anticipated) and short-term (focusing on the contract, case or negotiation they have today). These traits may combine to undermine and not support a successful planning process.

Nonetheless, planning is not an option if a firm wants to survive. Law is a business as well as a profession, and planning is the first responsibility of the business owners because it is the defining characteristic of the most successful companies.

A plan doesn't have to be complicated. It can be as fundamental as identifying the most important and desired business outcomes within a given time period, defining what is necessary to achieve those outcomes, and working toward them consistently.

Plans don't just happen – they must be built on a solid foundation, and be the object of solid effort to gain acceptance for them. What follows is a framework that any firm can use to institutionalize the planning process, and also consider the types of planning that any successful firm should do.

The Planning Foundation

Effective planning comes from the top. The primary rainmakers of the firm, the management and managing partner all must be in concert to shape and direct the plan. If the partners are not clear about the overall goals as well as specific objectives and strategies, then the planning process is bound to be sabotaged and of little use. The key element of any plan is that firm leadership abides by it. That said, all members of the firm – including associates, paralegals and staff – need to have input into the planning process.

In any firm, unless there is continuous open and candid communication among equity partners, and acceptance and buy-in for the plan chosen by the firm, sooner or later there will be a dissolution of the firm, whether by withdrawal of individual partners or wholesale departure and formal liquidation. The end result will be the same.

Communication is a continuous requirement to ensure that individual agendas do not subvert the plan. In divorce practice, lawyers frequently hear clients say that "we grew apart." This reflects failure to communicate openly and candidly as time passes. Law firms, small and large, are subject to the same need to combine the planning process with communication that is open, candid and frequent.

The Planning Mechanism

The firm (with designated partners and administrators working together) needs to create a planning mechanism that focuses on gathering relevant historical information and translating that into recommended future actions. This information will come from inside and outside the firm and should be focused on three fundamental areas: marketing, finance and (most often overlooked) disaster recovery.

Marketing information relevant for planning includes basic demographic information about your current client base (number, billings, scope of services, legal requirements) and background research about external marketing trends.

Financial information encompasses the annual financial statements and tax returns for the previous three to five years, billing and accounts receivable records, and bank statements showing funds in general and trust accounts.

Information for the disaster recovery plan can range from review of insurance policies and hard copy/electronic file security procedures, to creating a complete photo-documented inventory of your entire office with all its contents to prove losses.

Working with this information to formulate a comprehensive plan should be the task of a planning committee. Selected associates and staff (and particularly the firm administrator) should be members. Firm owners are sometimes reluctant for non-partners to access sensitive information, but the most perceptive non-partners already have an intuitive feel for the basics.

Once the marketing and financial plans are developed through discussion and analysis of current information against the partners' agreed-upon goals, an all-firm meeting or retreat is the ideal mechanism to secure approval. These literally get everyone together in the same room where concepts can be discussed, ideas and questions raised, and acceptance established. A physical show of hands can be a powerful validation of the firm's new direction.

The disaster recovery plan, by contrast, doesn't require a vote; it does, however require regular review and testing in which everyone in the firm (including lawyers with deadlines) should be required to participate.

The Marketing Plan

Since any firm depends on clients, getting them and keeping them is critical to its success. A marketing plan helps lawyers to see who these elusive people are and how to attract them. The marketing plan begins by creating a profile of the firm's ideal clients, so the focus can be on this target, not everyone. The firm can increase your revenue dramatically by focusing on demographics, occupation, location, financials and other characteristics of clients who will provide the desired work.

That said, the number one place to find these ideal clients is on the current client list. A statistical premise called the Pareto Principle holds that, over time, most results are produced by only a few causes, generally in a proportion of 80 to 20.

When applied to law firm marketing, this produces the conventional wisdom that 80 per cent of a typical firm's revenue is produced by 20 per cent of its clients – the large, heavy hitters. It follows logically that such clients should be the focus of the marketing plan. Every firm should know in exact detail what is done for its largest clients, how profitable that work is for the firm, and what opportunities exist to get more work.

Don't, however, fixate on these large clients to the exclusion of pursuing ideal targets. The loss of a large client is such a major risk as to justify one of the most important axioms of business: make sure no single client exceeds 10 per cent of total planned revenue. Too many firms focus on a very few, larger clients and are severely damaged when the fees from that client fail to continue – from dissatisfaction, change of billing attorney, merger, recession, or other unanticipated problems.

The Financial Plan

The financial plan must focus on profitability. The key is integrating how many hours the lawyers bill with how much money they collect. The goal is to have a high collected to billable ratio – well over 90 per cent.

Plan this realization on two levels: the billed-to-billable ratio (the percent of billable or booked hours billed), and the collected-to-billed ratio (percent of billed work collected). A good method for estimating it is the accounting measure of turnover ratio: accounts receivable balance divided by the result of billings per days in the billing period. The turnover ratio tells a lawyer to expect payment for billings X number of days after a client receives a statement. The average for law firms can be as much as 120 to 150 days.

Cash flow and receivables are the other key financial planning element because they integrate directly with individual lawyer performance. A good benchmark is to prepare a 12-month rolling plan for cash receipts and payments, such that as the current month concludes, the twelfth month is added into your plan, adjusting all the other months if needed based on new information.

Studies that a bill over 60 days past due can still be collected about 89 per cent of the time. However, that drops to a 67 per cent likelihood of collection after six months, and to a 45 per cent likelihood after one year. The financial plan should set definite benchmarks for the prompt collection of receivables.

The Disaster Recovery Plan

Planning for a disaster is one of the most overlooked yet most vital business planning endeavors. See Disaster Preparedness & Recovery Planning for Law Firms (LawBiz 2008).

"Disaster" can come in many unexpected forms, any of which can mean the demise of a business – including a law firm. The goal of disaster planning is more than disaster recovery – it's business survival. Before creating a disaster recovery plan, review each practice area in the firm separately. Ask how long it can afford to be "out of business" and what resources it would need to get up and running. Create the overall plan to take account of the risk scenarios of each practice area.

Don't forget staff functions. For example, accounting and technology are often the focus of disaster planning, but analysis should extend to word processing, client intake and conflict files, and personnel records.

Certain elements are essential to any disaster recovery plan, whether it is meant to cope with a major disaster or simply the day-to-day traumas that any firm can face. Start by conducting a firm risk assessment to review readiness and look for weakness, an effort that should include reviewing insurance policies to determine whether they cover natural disasters and crime in addition to general liability.

It's vital to create a comprehensive internal emergency communication system for lawyers, staff, clients, vendors, and the court, incorporating recorded hotline messages and out of area contact points. Plan for temporary space by contacting building managers and real estate agents in advance to for contingency arrangements on furnishings, computers and phones, and establish referral arrangements with another firm to carry on key practice matters. Back up all computer data, and store data backup as well as important records and documents offsite.

Finally, prepare a plan manual that creates a disaster recovery team and spells out who does what. This kind of disaster planning can ensure the firm's survival no matter what level and type of disaster takes place. Recovery is a matter of planning, not luck or hope. The firm that is prepared is the firm that will endure.

Measuring Progress

Implicit in the marketing, financial and disaster recovery plans is that they must have measurable goals. It is doubtful that serendipity and whim are the best paths to success. Set objectives and stick to them. Every law firm is a business, and a business that grows without a clear idea of overall goals and specific benchmarks to measure them will soon find itself floundering

Plans are meaningless if people are not held accountable for them. One forceful approach would be to determine compensation bonuses/rewards on the basis of plan development (a realistic and aggressive plan merits more compensation) and achievement of plan goals. Failure to achieve goals, however, should not be punished without consideration of the reasons for not achieving the goals: personal illness, change of business conditions of clients, hard work but unrealistic goals, and so on. Consider explanations, not excuses.

Good planning is not static; it is meant to be a guide against which to judge actions or outcomes. If a certain aspect of a plan is not working or needs some adjustment, change it. The beauty of a flexible plan is that it can be revised to better reflect the reality of changing situations to produce the desired outcome.

When approached the way we have outlined – as an ongoing process of communication, assessment and measurement – planning will become institutionalized in the life of the firm. And that makes for a more successful firm. As the most successful college basketball coach in history, John Wooden, at my alma mater was fond of proclaiming, "Failure to plan is planning to fail."