Posted Feb 21, 2007 10:11 am CST
When Youshea A. Berry decided to strike out on her own, she didn’t plan on being a solo.
The Washington, D.C., lawyer thought she’d be opening a firm with a colleague she’d met after law school, when both worked on Capitol Hill. The two had even gone so far as to create a business plan, which called for them to merge their practices after each had a year to separately develop business.
The merger was supposed to happen last year, but Berry’s would be law partner developed a case of cold feet and took a job with a government agency. Berry soldiered on.
Three years later, her solo practice is not only surviving but also on the verge of thriving. But success is bittersweet: Her schedule has become so jam packed with work, business development and community service that she is regularly logging 12- to 14-hour days. As a result, she’s become reliant on a stable of contract attorneys and clerks to help ease the workload for her.
While her outsourcing system is working, it’s also eating into her bottom line. She’s wondering whether it wouldn’t make more sense for her to formalize a relationship with one of her contract lawyers and make her an associate.
Berry says she both wants and needs to grow. With an associate, she believes, she could bring even more work into the firm. And, she hopes, she would finally have a bit of breathing room to start fulfilling some personal goals like having a family and maybe even helping her husband open a restaurant.
But it all boils down to this: Can she afford to hire a full time associate? And how can she know if expanding her firm is even the wisest plan?
“What is smart growth?” Berry asks. She wants to know how to grow as a solo, but she’s concerned about stretching resources. “I don’t want to overcommit myself with expenses.”
Examining Goals, Profits
The answers lie in berry’s personal and professional goals, says Life Audit law firm financial management expert Ed Poll. If she is committed to growth, then she should commit to hiring another lawyer.
That said, Poll is not so sure she needs to take on the expense of an associate right now.
Berry thinks she needs an associate because of the long hours she is working. But Poll points out that she has little in the way of profitability to show for all of her work, and that requires further examination.
If Berry is working as hard as she says she is, Poll says, her annual profits which he defines as the money she is taking home should be about $20,000 to $40,000 higher. “Her growth from one year to the next is pretty darn good, but her profit is not,” he says. “It is key for her to understand that she needs to make more profit.”
Generally, Poll says Berry should aim to double or triple her revenues before she starts thinking about hiring a full time associate. And Poll says Berry is in no position to be outsourcing.
Poll believes Berry’s reliance on contract labor is keeping her bottom line low. Berry has proven herself to be a highly capable rainmaker, but she is so busy with nonbillable work that she must send out most of the billable work. Oftentimes she says she has to eat those workers’ time, but she still pays them for all they’ve billed. And that’s not good, Poll says.
Berry says there’s an additional reason she hasn’t been maximizing profitability. Her accountant, for one, has advised her to minimize her tax liability by investing in capital expenditures such as office equipment. Poll thinks that’s the wrong focus for this early point in Berry’s career.
“If you are buying equipment, and that is the reason that you are not showing a profit, then you may want to think about leasing or financing the equipment so that you have the cash available for your personal living expenses,” he says. It’s more prudent, he believes, to make capital expenditures when she has real revenues to offset them. “Only when you are flush should you begin to pay for the equipment.”
To turn it around, Poll wants Berry to get a better grip on her firm’s finances beginning with her expenses. As a general rule, he says, law firms allocate one third to one quarter of revenues to overhead, labor costs and profit, respectively. Lawyers can control how much revenue turns into profit by limiting their expenses. Poll wants Berry to eliminate her contract labor. She also might want to consider raising her billable rate. Though lawyers often worry that raising rates may repel clients, Poll has found otherwise. “Lawyers have found very little price sensitivity in the clients. That means that clients will accept increases in fees to a point that is often greater than what lawyers think clients will accept,” he says.
Put Rainmaking on Hold
Poll also wants berry to cut back her business development and community service work. “You have to be selective,” Poll says. “You can’t just be on a board because it is a good cause or because a friend asked you to do it.”
Instead, he suggests checking out who else is on the board and determining whether they are potential referral sources. “If they are folks like you who are just starting out, then they’re not likely to be referral sources. But if they are from large firms or are businesspeople in the community, those are very serious potential referral sources for you,” he advises.
“It is clear that Youshea has good rainmaking skills, but she needs to balance those skills with the economic realities of where she is now,” Poll says. “Those rainmaking skills will not go away, even if she does not use them immediately. It means that she can stop taking cases that are not appropriate for her to take now, and when it becomes appropriate, she can go back to those referral sources.”
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Life Audit Hot Tip: WIIFM?
It’s easy to join charitable boards or engage in community service activities. But not all rainmaking activities are equal opportunities. Before you take on any non revenue producing commitments, ask a simple question: What’s in it for me? The answer will tell you whether it’s likely to be a worthwhile endeavor, says Life Audit law firm financial management consultant Ed Poll.
Ed Poll is the principal of LawBiz Management, a law firm business management consultancy in Venice, Calif. A nationally recognized coach, law firm management consultant and author, Poll has been coaching and advising lawyers and law firms in strategic planning, profitability analysis and practice development for more than 25 years.