Category: Cash Flow – Finances
Some pundits have declared that the era of the customer is now upon us. In an announcement by Costco Wholesale Corp. and American Express Co., the 15 year relationship of exclusivity will come to an end in 2016. The economics appear to be clear. Costco wants/needs to bolster its sagging profits; AmEx believes it will not be earning “enough” to continue. Hence, the power of the buyer (Costco) to pick up its marbles and find another credit card company. Obviously , the buyer has options. AmEx will lose about eight percent of its gross revenue and its stock price has already suffered.
A similar situation occurred years ago between a large regional supermarket chain and an even larger (by revenue) national cheese supplier. The supplier believed it had a unique customer branded franchise and could force the supermarket to bend to its will. The supermarket gave the processor 48 hours to remove its product from the store cases and it was years before the manufacturer could reenter. The franchise was not so strong as the supplier believed.
In each case, and in most others, there is a breakdown in communication and relationship that far transcends the economics.
Law firms have felt similar pressures in the last several years. To say that law firm clients have reached new heights of power is a mis-characterization. Rather, a super sensitivity on the part of General Counsel to the needs of the corporate employer/client which signs his/her paycheck and a breakdown in the loyalties of organizations to their outside counsel fostered by a “take it for granted” attitude by outside counsel. The goal still is a “partnership” between the lawyer and the client. In the past, some lawyers have taken the client relationship for granted. Perhaps, the client will speak up more assertively today. There is more to loyalty than merely a technical command of the law.
John Claassen, in a “guest column” in the February 4, 2015 edition of the Los Angeles Daily Journal entitled “PROTECT THE VALUE OF HUMAN ASSETS,” quoted Bill Gates’ opposition to increasing the federal minimum wage as follows: “If you raise the minimum wage, you are encouraging labor substitution, and you’re going to go buy machinery and automate things.”
The tension between machinery and labor is an age old issue. This precedes the development of the cotton gin and other industrial revolution equipment. In a 1983 trip to China, I observed hundreds of laborers sweeping the streets with bamboo brooms; in my community, this work was then being done by street cleaners driving trucks. More territory could be covered, with greater effectiveness and less labor. China understood that, in 1983, if they automated this task, they would have an even higher unemployment rate, risking such dissatisfaction which might cause an overthrow of the then current government.
Owners and employers in a private enterprise economy are always seeking greater efficiency and profits. They make the choice between labor and technology based on many factors, only one of which is return on investment. To say that increased mandated compensation such as a minimum wage would promote automation is no doubt true; however, it was also true in the 1930s, the 1800s, the 1700s and likely will be true in the future. It is true in every industry and profession.
Society in the past has focused on the well-being of its populace, not just the numbers. This includes healthcare, minimum wages, regulations of civility toward one another and other aspects of human endeavor. We value human assets. We value new technology and research and development. New technology and increased efficiency improves our life and increases the well-being of all our citizens. We encourage the growth in each area of endeavor by tax policies and other approaches. If I read Mr. Claassen correctly, he suggests there is a tension between the two, and policymakers should not ignore nor discount the value of “lower wage workers.”
The legal profession understands this process. Thousands of lawyers have been laid off, fired or encouraged to retire since the Great Recession. Many of them were document review lawyers or lawyers with little or no marketing skills. In Mr. Claassen’s terminology, these were the “lower or middle income” lawyers of the profession. Such economic disruption never happened in the profession before. Despite the economic improvement of our economy, and law firm profitability, most of those jobs will not return. Why? Because technological improvements have made many obsolete or more expensive than clients want to pay. Discovery search technology is far more efficient and accurate than hundreds of document review lawyers. These jobs will not return. This is progress. Does it come with some pain to individuals? Yes. Should there be an economic soft landing for those affected? Perhaps. That is a matter for society to determine, but it is not reason to limit wage increases or disfavor research and development.
Lawyers from around the country continue to call me, asking for information on how to sell their practices. In response,we recently opened our LawBiz® Registry. Visit the archives for articles about buying and selling law practices and other ways to monetize the goodwill that you have spent so many years to build. In addition, you may want to buy one of our books or tapes in our store on the profitable law office exit strategy or planning for your next 6000 days.
Contact me at any time if you have additional questions.
You’ve worked hard to address the challenges brought to you by your client. You’ve put other matters aside to deal with his or her crisis. You‘ve achieved their desired results. And now, they’ve become a slow payer or non-payer. Why? What could you have done to prevent this, to know from the very beginning that they would not pay you as agreed, and to assure that you will finally get paid? Failure to get paid, or low realization rate, is the bane of most lawyers.
See Collecting Your Fee: Getting Paid from Intake to Invoice, written by Ed Poll at the request of the American Bar Association. Learn what to do at the very beginning to assure you get paid, learn how to anticipate whether your client will pay in accord with your agreement and learn what you can do if the client suddenly becomes a slow payer.
Many writers and “pundits” suggest a doom and gloom forecast for the legal profession, Among those who say, “Wait a minute,” Neil J. Squillante puts a different spin on our world. See Neil J. Squillante. First, he separates the legal business into segments. Not every segment will be impacted in the same manner. And thus the close to 80% of the legal profession who represent the “consumer” market of individual customers are likely not to be affected, at least in the short run.
And yes, while technology will impact every lawyer, the impact will have different ramifications and benefit lawyers and legal consumers differently. First, being more efficient, lawyers can be more profitable … or at the very least, get off the annual rate increase treadmill. Not all consumers will need or understand the effects of technology on a lawyer’s practice. Richard Susskind, a thought leader in our profession, suggests four elements of change that will dramatically alter the profession. I concur with him in only one of his four elements, and that is technology. The others can have their impact traced to earlier times, just as in other industries. But, technology, that is an area where the legal community has lagged far behind in innovation. Today, such innovation is moving ahead at lightning speed. And its impact has been recognized even by the organized Bar which is including technology proficiency as an element of the definition of “competency” to practice law.
Being more efficient and effective in using technology to perform legal services will, for the first time, enable and encourage lawyers to alter their billing modalities and move away from the billable hour should they choose to do so … and this will have a major impact on consumers, both large and small. This will be a game changer. While technology itself will not be the catalyst for major change, the changes wrought from technology’s utilization will. This will not happen overnight, but when we look back in the rear-view mirror, we will ask ourselves “how did that happen so quickly?”
The business cycle consists of three elements: marketing to get the new client and retain the old client; production to produce and deliver the legal service, advice and/or documents; and finance to collect your billings and operate your firm. The first two tend to be the focus of most lawyers. Billings and collections tend to be ignored or given short shrift or delegated to a staff member with less interest and skill.
One statistic shows that sole practitioners spend 40% of their time in non-billing tasks, such as marketing, billing, collections and other aspects of running the law practice. In firms of 11 to 20 lawyers, the percent falls dramatically to 8%. Hence, the larger firm earns more money. They produce more effort; they bill more; and, even with poor collection efforts, they will likely collect more revenue than their solo counterparts.
Perhaps you should engage personnel to deal with some of the non-billing tasks, whether internally or outsourced and/or perhaps you should consider practice management software as your assistant. Failure to attain the appropriate resources to enhance your production efforts and non-billing needs is cheating yourself. Coaching will help you understand how to address these issues.
In yesterday’s news, the Oakland A’s (the best team at this point of the season) announced trades that brought them 2 outstanding pitchers. Why did they do this? After reading Moneyball, you will know why. Teams’ trade activities highlight the two seasons of baseball, the first that will end in a few days and the second that begins after the “trade deadline” date.
I just finished reading “Moneyball: The Art of Winning an Unfair Game.” Great expose by Michael Lewis about the 2002 A’s and their general manager, Billy Beane who changed the way the game is played. How could a team with the lowest payroll in baseball win more games than any other team?
Beane used new data to understand baseball talent, data that was ignored by traditionalists and older scouts. Because of his non-traditional perspective, he was successful in attaining the talent he needed at bargain prices … He won “the game” while being strategic and cost conscious. I suspect that was what prompted yesterday’s trades.We’ll know by the end of the season. 🙂
Are you doing that in your law firm as well?
In a recent case, the lawyer was successful in growing his practice. So much so that he engaged 30 staff; they met with clients and even provided legal advice in loan modification matters. The net result is that the attorney did not provide adequate supervision for his staff and allowed them to five legal advice. This was the unlawful practice of law. The attorney was guilty of violating the Rules of Professional Conduct and was suspended for two years. Punishment could have been more, but the lawyer made financial restitution to aggrieved clients and agreed to community service during his suspension.
Moral to the story: Grow your practice with appropriate supervision of unlicensed staff and technological support. Don’t allow unlicensed staff to provide legal advice. Coaching helps both with growing your practice and with operating your practice efficiently and within professional guidelines.
The larger one’s firm gets, the more management issues arise. Running a law practice is equivalent to running a professional service business and management principles are as important as being legally competent.
In years gone by, many people attended law school because a legal education enhanced their skills. In today’s world, entry into law school is first evaluated based on ROI, return on investment. And, in some instances, the comparison is coming up short. After the Great Recession, getting a job after law school was not guaranteed. Law school graduates, in addition to being uncertain about their job market, faced extraordinary debt burden.
A 2012 survey indicates that at least 24% of law school graduates are not practicing law. Rather, they were finding their way into nonprofit and education sectors and the federal government. This compares with9% in a similar 2003 survey. One factor pushing this statistic is the need to reduce or pay some of that student debt.
And when considering whether lawyers are satisfied in their chosen career, measured against whether they would go to law school again if given the opportunity, almost 2 out of seven said “no.” This latter statistic seems to be consistent with similar statistics of earlier years. In the 1970s, in response to a survey that I commissioned with the State Bar of California, almost 1/3 of the respondents indicated they were not satisfied with the practice. But they didn’t have the huge amount of debt that today’s graduates are carrying. I suspect that what keeps people enrolling in law school is another statistic: those graduates with the highest grade point averages have median pay levels that exceed $121,500, more than those who achieve the lowest grades. This is a significant difference, and the reason for the continued attraction of law schools.
In Life After Law: What Will You Do for the Next 6,000 Days? I focused on the options available to the lawyer in the last phase of his / her career and how to prepare for a profitable exit strategy. What I did not address, however, is the lawyer whose spouse is working and may not yet be ready to retire, travel or otherwise be on the “same page” as the first spouse or significant other…
What to do? The obvious response, as in so many such life situations, is communication. Talk with your spouse or significant other. Discuss the options open to the both of you. Determine whether it’s o.k. for one to play, e.g., go skiing or traveling, etc., while the other stay home and works, whether the two can survive separate paths for a while and then come back together, and do this from time to time.
This is not a small issue or unimportant discussion, to be taken lightly. It’s critical. If not done well, you may find yourself in a divorce. And if this results, you will feel as though you are in the center of a hurricane, or worse. Aside from the psychological trauma, your financial projections which permitted the retirement, or change of career, go out the window … and you may be forced back to work, something you may or may not be able to do successfully.