Tag Archive: Cash Flow – Finances
Today’s Los Angeles Times discusses the high cost of its corporate parent’s bankruptcy proceeding, again mentioning the specter of $1,000 per hour fees for some lawyers and the average of $500 per hour for all the lawyers. Why should lawyers be paid so much?
At the outset, it’s easy to understand the emotional reaction to lawyers getting so much money. Society, and the media, love to hate lawyers. Just read Shakespeare. Why is it that such visceral reaction is not visited on entertainers or ball players? Why is it that we don’t ring our hands at the low compensation when talking about teachers who mold our next generation of thinkers and leaders? Ah, but that is a different subject, right?
Let’s remain with the lawyers, for now. First, we’ve allowed industry to get huge. In this case, one person, Sam Zell, was able to borrow over $8 billion!!!!! He acquired the Tribune, with all its subsidiaries including the L.A. Times, Chicago Cubs, and others. This alone would make the task one of great complexity.
Then, add to this the federal Bankruptcy Reform Act of 1978, new enough to still be uncertain in some of its applications and broad enough to enable debtors to have a larger hand in the restructuring of their own organization. Next, add the increasing complexity and sophistication of the financial markets, and you have a cauldron that requires very sophisticated counsel and other professional skills. All of this increases the cost of legal services. It’s the opposite end of the spectrum of work … it certainly is not commodity work. In effect, this type of work may be in the category of “bet the company” work … and this always is expensive.
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In the only case decided today, in United Student Aid Funds, Inc. v. Espinosa, (No. 08-1134) the U.S. Supreme Court allowed the restructuring of a student loan. I didn’t think such loans could be part of bankruptcy proceedings, but apparently I was in error.
My question now is: How many more students/former students will be pushed into bankruptcy just to reorganize these normally very large debts?
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In an interview with Todd Gerstein, President of SmartWeb Parts, he talked about attorneys’ time "leaks." This is an interesting concept, one supported by a number of different surveys. These surveys all point to the fact that time is lost (and therefore not billed) when an attorney fails to make contemporaneous notations of work being done.
Todd suggests that at least one in five timekeepers are guilty of failing to contemporaneously record their time. That’s 20% of the profession. Actually, I thought it would be much higher. But, perhaps our discussions over the years on this topic have sensitized a growing number of attorneys about the need to pay attention to their billing practices. He also suggests that almost 80% record their time days or even weeks later! This is just short of criminal negligence!
Attorneys defend their actions (or lack thereof) on a number of grounds: Too busy doing the work for the client; not in the office to input time into the firm’s system; forgot to do it now, but will catch up later in the day or week. While these are all good reasons for not making a time entry, they are not good excuses.
The real question, then, becomes what is the impact of failing to record time contemporaneously with the work? What is lost, if anything, by failing to record one’s work effort? The simple answer: Revenue!
Todd mentioned a new survey that I found interesting.
If you fail to record your time while you’re in the office, the loss is 12 to 30 minutes per day. If you fail to record time while you’re out of the office, the loss is 30 to 60 minutes per day. Let’s use the latter number, 60 minutes per day, for ease of calculation, times $200 per hour billing rate. Using a 50 week year, you’re now looking at $50,000 revenue that is lost … that is, never billed! Forget about the issue of realization rate and collection. You never can realize what you don’t bill. Your client will never pay what is not billed.
You’ve "cheated" yourself out of a very significant amount of revenue by not adhering to good operating procedures in accounting for the time you spend on clients’ matters.
Listen to Todd’s podcast for more.
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It didn’t take all that long … I received in the mail today, along with more holiday greeting cards, an errors & omissions insurance policy application. Finally, the insurance industry is showing its true colors in the recent campaign to have uninsured lawyers painted with the “yellow band” brush.
The cover letter for the application says, in bold print: “The Rules in California are Changing” and continues to talk about new Rule 3-410, effective January 1, 2010, to the effect that lawyers must disclose to clients in writing that they do not have E & O insurance coverage. The obvious ploy here is to scare lawyers into buying malpractice insurance.
How much more premium money will carriers earn from this new rule? And how much client defections will 20% of the California Bar suffer as a result of the inadequate measure recently adopted by the California Board of Governors and approved by the State Supreme Court? I suspect enough to have made the insurance industry’s efforts worth their while.
As though the bad economy hasn’t hurt the sole and small firm practitioners enough this year, the Bar throws more oil on the fire by either causing this group’s expenses to increase (to the obvious delight of the insurance industry) or its revenue to decrease. Either way makes this generally economically marginal group’s life more precarious …
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It’s reported in today’s Los Angeles Business Journal that SBA loans have evaporated. “Banks really are stingy…” is the headline. Small Business Administration guaranteed loans, funded by banks, have fallen by 53% from the 2008 level, a year in which the number of loans also decreased from the preceding year. This is further evidence that banks’ credit for business and for real estate ventures has been dried up. With TAARP money going to make financial institutions healthier rather than a stated purpose of loosening credit strings to jump start employment and business activity, the financial executives just don’t get it. They wonder why Main Street is upset with them as they sit back and take large bonuses; if they also were to spend the funds to help as intended, I suspect the American people would not be so upset. Also, in U.K. where there will be a 50% tax on bonuses. Wow. Wake up Wall Street and bankers before we tumble backward …
Law firms seeking either an extension or increase in their lines of credit are walking in this same environment. It’s tricky, at best, and possibly disastrous. Creating and enhancing a good working relationship with your banker is even more critical in these times. That’s the point I make in my book, The Successful Lawyer Client Relationship: A LawBiz Special Report. Just as lawyers are being told to create a “partnership” with clients, so, too, they should create a “partnership” with their banker. This will pay dividends.
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NALP survey suggests that 2% of 2008 graduates opened a solo practice within 9 months of graduation! That’s a lot of folks who will be representing clients without prior experience either in the management of a practice or much experience in the technical practice areas (tax, family law, bankruptcy, etc.).
I wonder what kind of representation their clients are receiving … and how does one interpret or define "competence?” What do you think?
There is a movement afoot to create an apprenticeship program for lawyers. Georgia and Utah both require first year associates to enter a mentor program; of course, there is no requirement that senior lawyers be mentors, so I’m not sure how their programs work in actual practice.
And Howery has recently announced an apprentice program that is getting a lot of attention. Their new hires will split their time between shadowing senior partners, taking classes and working on "low-grade" client matters, being billed out at very low rates.
The recession/depression ("The Great Reset") has provided the excuse for a recalibration of the economics of law practice by many, both clients and law firms.
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In a suit, Williams & Connolly, a D.C. law firm, is seeking payment of more than $2 million in legal fees. The client and law firm apparently resolved their differences and created a payout plan, with the client pay 1/3 of the amount … and now refusing to pay the balance or 2/3 remaining amount.
What makes this case more interesting is that a resolution of the fee dispute was achieved. And later, the client refused to honor the settlement agreement. The client ostensibly believes it can harrass the law firm and then settle again for a lesser amount.
Questions for the law firm:
1. Why did you allow fees to get so high in the first place? Collections should have been more aggressive.
2. Did you have a budget for the litigation for the client that the client accepted … or was nothing said about the extent of the legal services to be delivered?
3. Was the size of the legal fee a surprise to the client?
4. Why didn’t you fire the client before $2 mil?
5. Why didn’t you get security for payment of the settlement amount, such as a stipulated judgment in the event of a default or other guarantee such as a letter of credit?
Someone was asleep at the switch…both during intake and during the representation … and seemingly also at the negotiation for settlement of the fee dispute.
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The California Client Security Fund has been changed! Now, instead of $50,000, the amount available has been doubled to $100,000 …. AND … there is no "marriage penalty." That means that a husband and wife are considered as two applicants, raising the amount to $200,000 possible reimbursement from the state’s client security fund for a lawyer’s fraud.
Not sure, but do you know any other state that equals this amount.
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The California Supreme Court has now made it official, unfortunately, to the detriment of sole practitioners once again. See
Insurance Disclosure as CRPC 3-410, approved by the Supreme Court on August 26, 2009.
See earlier blog posts for the arguments against this new rule.
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In a recent NY Times article, several recent law school graduates lamented the recent economic changes, as well as they might. Big Law has, in effect, shut down their recruiting efforts and the lush $160,000 starting salaries seem to have evaporated. "Lock step" compensation models have been transformed to merit based models. And a number of law firm’s recruiting programs have been either postponed or canceled entirely.
How can these recent graduates, and even some experienced lawyers laid off from their large firms, survive or even thrive? One way might be to lower one’s income expectations. Where is it written that lawyers are entitled to earn $X?
Helping others deal with the intricacies of our society with its many complexities can be rewarding. Will we earn $1,000,000 by doing so? Perhaps not. Can we earn a very good income? Yes.
One suggestion is to go where the competition ain’t. Go to the smaller communities, to the "second tier" communities. They are still large enough to have prospective clients with sophisticated challenges. But, many of these communities have been ignored by Big Law and even large regional law firms.
In the interim, until there is a new balancing of economics, quality law school graduates and lawyers who have left larger law firms might set up shop in these smaller areas; they might join smaller law firms even in the large cities. Here, smaller law firms have a unique opportunity to engage outstanding talent at substantially lower cost .. and expand the services they provide to their existing client base, as well as expand their client base.
What will be the impact on law schools? That is an interesting question. Big law firms have postponed and even canceled many of their recruiting efforts. That will provide a glut of talented graduates looking for a diminishing number of positions in law firms. And the anticipated assurance, guarantee if you will, of gainful employment on graduation from their school may be passing. If so, will law schools still be able to charge high tuition as they have? Will students be willing to take on huge student loans when employment is no longer assured?
Economics will continue to control the legal profession as in the past. Those economics today include greater supply of talent (lawyers), clients with greater power of the purse (reduced demand) and lawyers who are becoming more attuned to improving their efficiencies … and thereby lower cost to clients … and thereby again impacting the relationships between lawyers and clients.
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