Why Law Firm Partners Resist Projecting Revenues

There are two fairly obvious benefits to projecting revenues. One is cash flow; the second is work flow. Knowing how much money you expect to generate in the next 30, 60, or 90 days helps identify potential cash flow problems. That in turn can act as an early-warning system for a firm’s collections efforts. Likewise, revenue projections will help identify whether one lawyer, team, or department is likely to be overloaded while other lawyers don’t have enough to do. And that information can help a law firm allocate work more rationally.

Despite these benefits, a surprising number of law firm partners struggle to project revenues. Many aren’t used to being asked, and those for whom this is a new requirement often object to doing so. They let their perfectionist tendencies get in the way. They will confuse an inability to project revenues precisely with not being able to project them at all.

In addition, some partners see the process of projecting revenues as a threat to their autonomy. Their unspoken logic seems to be this, “you should trust me to handle my work, and asking me to project what will happen in the matters I am handling is none of your business.”

Partners are right to suspect that revenue projections are a potential threat to autonomy. This is especially true for the folks whose future performance isn’t likely to meet their projections. And that’s the primary reason to resist partner objections and require partners to project revenues.

It’s a matter of accountability. Business owners should be held accountable for the financial results of their activities. All things being even, those who generate more and predict more accurately should be recognized and rewarded for doing so. And business owners wouldn’t be doing their jobs if they weren’t sufficiently aware of their case load to make certain educated short term guesses.

And that is the unfortunate situation that applies to many law firms. The partners—even many equity partners—don’t take on the full responsibility of being business owners. They are partners in name only. And in the dynamic and unforgiving climate facing more and more law firms, that’s a recipe for financial disaster.

This is a particularly important subject to address this time of year.  If you want to start 2016 on a sounder financial footing, you should have a good sense of what revenues will be generated during the first quarter. For many firms, January and February are their worst months for collections. So it is doubly important to project first quarter revenues accurately. And if you want do project revenues systematically, the beginning of November is a good time to begin the process of asking partners to project revenues.

What’s Wrong with Law Firm Marketing Budgets

How much would you spend to promote a service that generated a $500,000 profit?

There isn’t one single correct answer, but so long as you didn’t have more lucrative options, it certainly wouldn’t be irrational to spend $100k in marketing to generate such a profit.

Too many aspects of law firm marketing and budgeting aren’t evaluated in terms of their projected or actual returns. Instead, law firms create preferred and forbidden zones of marketing that often have no relation to the returns they generate.  A partner wants to take someone out to lunch or dinner? No problem, that expense will be approved. The firm has been sending its lawyers to bar association events for years?  That sponsorship will often be renewed whether or not that event has generated a decent lead since the turn of the century. There is a seemingly unwritten rule that certain kinds of marketing are just what lawyers or law firm do.

This approach to budgeting is especially pernicious when applied to the marketing budgets that some firms allocate to individual partners. I have encountered numerous firms with 50 or more attorneys that allocate marketing budgets to partners in dysfunctional ways. One firm rewarded partners who had larger books of business; they received larger marketing budgets. Numerous firms enacted policies that allocated the same amount to partners, often between $5,000 and $10,000 a year. And like many government budgets, partners needed to exhaust that budget before year end or risk getting a reduced allocation the following year.

Together, these policies cause firms to misallocate and under investment in marketing, especially for projects and clients that have higher than average returns. A partner who can only spend $5,000 on marketing in a year will be deterred from going after a very big fish, whatever that term means for that particular firm.  And given that it generally doesn’t take ten times as many marketing dollars to bring in a case that generates ten times the revenues, this creates exactly the wrong incentives.

If firms want to increase their ability to grow rapidly, they need to make strategic choices to invest in marketing decisions that have the potential of generating high returns. And like a well-balanced investment portfolio, law firm marketing budgets should be diversified. They shouldn’t just replicate low-risk strategies that have been used before. Nor should firms solely rely on speculative strategies that might hit a homerun.

I can tell you from personal experience that it can be a challenge for law firm leaders to try to measure ROI on marketing expenditures. The very act of asking this question can be perceived as threatening. But there is a reason why ROI is a universally accepted concept in the business world. It has its drawbacks, but law firms would greatly benefit by evaluating marketing budgets on a ROI basis.

A Law Firm’s Best Friend Can Be Its Banker

When did you last talk to your banker? Do you even know them by name or are they one of countless vice presidents who work for Bank of America, Wells Fargo, or other enormous financial institution?

Your banker needs to understand your business well enough so that they can move quickly to help you if the need arises. And like any important relationship, it needs to be cultivated. If you haven’t spoken to your banker in years, don’t expect them to rush to loan your firm money or extend or increase a line of credit just because you feel panicked over cash flow. If you want to grow your firm strategically and cushion it from disaster in tough times, you need to have a solid banking relationship.

Five Steps to Make a Banker an Ally

1.  Establish a relationship with a business bank that understands law firms.

A business bank is one that makes most of its money from collecting interest payments on bank loans and lines of credit. Avoid retail banks that make most of their money from checking account fees and lending money to consumers. Over the past five years more banks have established departments that specifically service law firms.  Find out what kind of experience your bank has working with law firms.

2.  Cultivate an ongoing relationship with at least two key people at your bank.

It seems that every other person at a bank is a vice president, so it can be a bit tricky to find out just how much authority your contact actually has. Make sure that your primary contact has enough juice within the bank to approve a loan or line of credit that is sufficiently large to make a material difference to your firm. To find out how much authority they have within the bank, ask who at the bank has the authority to approve lines of credits and loans, and what role does the person you are talking to have in that process. Likewise, bank employees move and transfer jobs, so it is best to know more than one influential person at the bank.

3.  Find out what your bank specifically needs to provide certain services.

For example, different banks require different amounts of documentation to approve a line of credit. All require business tax returns for 2-3 years and most also want to see personal tax returns from at least some partners. Moreover, banks have different guidelines when determining whether to lend a law firm money. Find out what your specific bank requires and what financial indicators they use BEFORE you need the money. This is a conversation you should have months and perhaps years before you intend to borrow the money.

4.  Make your banker aware of your business plans.

I recently worked with a firm that wanted to elevate someone new to the ranks of equity partner. Given the size of her ownership share in the firm, she needed to borrow more than $750,000 to buy into the partnership. But the firm’s bank didn’t provide loans to support partnership buy-ins because the bank considered such loans to be personal loans. Moreover, when I called other local banks, almost all said that they wouldn’t make such a loan unless it was part of having the firm’s overall banking relationship. In other words, if the law firm changed banks, as part of such a move the bank would be willing to include individualized loans to folks who became partners and needed to fund their partnership buy-in. This is a conversation the firm should have had with the bank well before it decided to offer the equity partnership.

5.  Be aware of the covenants you have made to the bank.

Financial institutions impose different reporting and financial performance requirements on borrowers. Some may require a law firm to remain profitable in order to maintain the loan or line of credit. Some business banks require a line of credit to be paid back in full with interest every 12 months before opening up a new line of credit. Likewise, understand the risks that individual partners face should the law firm default on the loan or line of credit. In the event of default, the bank may make all partners jointly and severally liable. These are the kinds of terms that can sometimes be negotiated when you establish a new banking relationship or when you seek to obtain financing. But once you sign on the line that is dotted, your contacts at the bank are unlikely to be able to change these requirements. So at a minimum, review your documentation and make sure you understand what you have promised the bank in terms of financial disclosures and profitability in order to maintain your loan or line of credit.

A good banking relationship is instrumental to the growth of a law firm. And in difficult times your banker can be the difference between the firm surviving or closing its doors. Too often, however, law firm leaders treat the banking relationship as an afterthought. Don’t make that mistake.

A Strategic Approach to Law Firm Cybersecurity

How much should law firms spend to ensure that their computer systems aren’t hacked, and that they maintain the confidentiality of their clients’ information?

A recent survey of AmLaw 200 firms suggests that they spend a little less than 2 percent of their revenues on cybersecurity.  This estimate is likely to overestimate their actual expenditures. If the 2 percent figure were accurate, it would be in the same ballpark as what large law firms spend on their annual market efforts.

The 2% figure comes from a survey that was conducted by a consulting firm, Chase Cost Management, in connection with a conference attended by Chief Information Officers of large law firms and others from the world of law tech. The survey was completed by a third of conference participants. As such, it isn’t a random sample, and the survey results aren’t scientific.

Nonetheless, the survey does raise two particularly interesting strategic issues for leaders of law firms. First, the survey results suggest that clients are pressuring law firms to spend more on cybersecurity. Thus, if your firm represents institutional clients, you should be prepared to face some questions from clients about your cybersecurity plans and infrastructure. Likewise, firms that handle especially sensitive data, such as client credit cards numbers or personal medical information, may need to be extra vigilant. Second, 75% of survey respondents indicated that that they had purchased some kind of cyber insurance. In my experience, mid-sized and boutique law firms are less likely to have paid for such insurance. Moreover, insurance is only one part of an effective cybersecurity plan.  Given that many cyberattacks take advantage of human error, training of law firm personnel is also critical.

Too often lawyers tend to bury IT issues and leave it to their IT departments or outsourced tech person to figure out.  Here, it would be a mistake to bury the budget for cybersecurity within the IT budget. Cybersecurity raises issues that go to the heart of a law firm’s professional responsibilities to its clients. The risks of malpractice and bad publicity are manifest.

Law firms should therefore take steps to ensure that adequate attention is paid to cybersecurity issues. And that means shining an organizational light on the subject. From a strategic planning perspective, law firms should create a separate line item on the operating budgets to report expenditures for cybersecurity. And that line item should include projected expenditures for insurance and training.

Different law firms face different risks. But it isn’t hard to foresee that even small and mid-sized firms will become targets. That is why law firms should take steps now to make cybersecurity a regular and specific part of their operating budgets.