The name is operational analysis. It’s an in-depth analysis of the firm’s operations or, put simply, getting somebody from outside to take a look at the inside.

Most firms do that when they are facing problems, particularly financial problems.  But better is to do it before the problems occur, says ROBERT HENDER­SON of RJH Consulting, a legal practice management firm in Jackson Hole, WY.  Henderson is also an attor­ney as well as a former managing partner of a firm

Here he outlines what the job entails, starting with the signs that it’s time to get the review rolling.

WHEN IT’S TIME TO TAKE A LOOK

An analysis covers eight main areas, Henderson says.  And it’s when any one of those areas starts to fail that it’s time to start analyzing. The areas are these. 

• Profitability. First is the firm’s overall profitability.

A generally recognized benchmark for profitability has long been 50%, or that 50% of the firm’s total rev­enues should go to partner payouts.

The 50% varies according to the type of practice, and firms experience peaks and valleys that waiver from it, hut that’s a general benchmark, and when the overall profits sink below that, the partners aren’t making enough money and a review is in order.

The consultant looks at all the firm’s historical financial information, usually for the past seven years, and analyzes areas such as the profit and loss state­ments, billing and productivity records, accounts receivable, and attorney earnings.

The review also analyzes elements such as the ratio of overhead to gross income, the profit per partner and per associate, billable hour comparisons among part­ners and associates, the actual dollar amount each attorney brings in, individual and overall collection rates, and partner billings and take-outs “to see if the partners are taking more than their fair share.” 

• Management and governance.  The partners doing the managing “usually are also fulltime practicing lawyers” whose talents and interests are in practicing law, not in managing the firm, Henderson says.  As such, they can get sorely off track in their management work.

Sometimes they manage to the extreme and want to participate in every administrative decision, from buying a new copier on down to “what kind of dough­nuts to keep in the break room.”  In one client firm, he says, the minutes of the partner meetings actually showed discussions on whether to renew a staffer’s notary license.

When the partners are spending time on the minutia instead of on the growth and wellbeing of the firm, “the firm s priorities arc not in order and the firm is in need of help”. 

•  Partner and associate productivity.  The review also looks at whether individual partners and associ­ates are less productive than the others in their peer group.

That’s an important clement to study, he notes, because when productivity falls, the attorney becomes a cost and not a profit for the firm.  Yet the solution is not always to oust that person.  In many cases the poor productivity is a sign that the firm is not using its attorneys’ time to its advantage.

• Partner compensation. Compensation is an issue that almost always needs review, specifically to see if it rewards what the firm wants to produce.  It especially needs review if there’s a general attitude among the partners of “why do that if we don’t get paid for it?’’

“Every compensation system is designed to moti­vate a certain type of behavior,” Henderson explains, yet many times that’s not the case.

If the firm wants the partners to bring in new busi­ness, for example, the compensation system has to be set so as to reward that.  Or if the firm has all the busi­ness it can handle and wants the partners to be productive and get it done, the system has to be set up so as to reward getting the work done.

• Marketing. If there are a few attorneys “sitting around twiddling their thumbs” for lack of enough work, what needs analysis is the firm’s marketing program - or lack of one.

The same is true if the firm isn’t generating enough clients. Most dangerous is the situation where a firm relies on a limited number of clients, because losing just one of them can significantly damage the financial picture.

Every firm needs “an ongoing practice development program,” which means marketing goals, and if there isn’t one, it’s time to bring somebody in to set one up.

• Office administration. This area focuses on how the office’s administrative work is managed, Hender­son says.

The review determines whether it’s being managed almost entirely by the administrator or whether the attorneys are overly involved in it.

In addition, the review’ determines whether the staff are being used efficiently and whether the office has proper staff policies and procedures in place.

     • Dealing with the senior partners. The senior partners are yet another issue, specifically, when it is appropriate for them to retire or change their status with the firm.  And along with that is the issue of succession planning, or how to pass down the business they handle.

That’s “a really delicate” issue of a review, he says, because as people get older “they tend to be less aware of their own limitations.”  Yet no firm can afford to keep status quo when a senior partner becomes non­productive or starts making mistakes.

    • Planning for the future. Strategic planning is another area that gets covered in an operational analy­sis. Mainly, that’s a matter of planning where the firm will be in the next five years, which includes ques­tions such as whether it will add new practice areas, hire new associates, bring in laterals, or look at merg­ers with other firms.

If the partners can’t agree on the plan, it’s time to bring in an outsider.

HERE’S WHAT TO EXPECT 

A good review, Henderson says, should show the firm what it’s doing right and what it’s doing wrong and also how it measures up to the rest of the legal world.

It should also produce viable suggestions for improving the operations so the firm can serve its clients better and thereby become more profitable.

That’s often best done by an outsider because that person sees the forest whereas the partners and admin­istrator are out of necessity focusing on managing the trees. Similarly, the outsider is objective whereas the firm is subjective.

As to where to find a consultant, he says, look at the ads in legal periodicals, search the Internet under phrases such as “law firm consultant” and “law firm retreats,” and also get referrals from other firms.

Look for someone who has experience not just with other firms but with firms of the same size and with the same practice areas.

The consultant should provide same-size and same-practice references - and the firm should call them.

The consultant should be frank, or not afraid to tell people “things they don’t want to hear.”

The consultant should have a plan for conducting the analysis. And the consultant should relate well to the partners and also have a resume strong enough to win their respect so they will follow the recommendations. Otherwise, the review will be “a waste of money.

As to cost, the consultant may charge by the hour or may quote a flat fee for the job.

Henderson finds that most offices prefer the flat fee so they know up front what the cost will be.  Also, he says, with the flat fee, both consultant and partners focus on the job instead of the hours.