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The new year has already proven to be a good one for new associates. Due to the strong economy and a shift in careers to nontraditional legal organizations and dot-com companies, salaries for first-year associates have increased dramatically. Law firms are scrambling to find ways to manage to pay the high compensation packages that are being demanded. In an already tight talent market, firms are competing with lucrative offers by in-house corporations, accounting firms, and consulting firms offering bonus plans, stock options, and tenure, in addition to high compensation. How does a firm with fewer than 50 lawyers fund six-figure compensation and remain profitable? RAISING RATES A common reaction for law firms to fund higher compensation levels is to increase lawyer billing rates. But firms can raise them only so high before they become a great concern to their clients. Generally, first- to third-year associates are not profitable anyway because many of their billable hours are written off or discounted to make up for the learning curve. Some partners also write off hours to develop better relations with their clients. If your firm’s rates have not increased in years, the partners should begin having discussions with their clients to prepare them for higher rates. If the firm provides quality legal services, clients should consider the higher rates as a kind of bonus for favorable results. Of course, if a relationship with a client is on unstable ground, the partner will need to justify the increases. Areas to consider as reasons for raising rates would be huge technology investments and the increased cost to keep good secretaries, as well as the greater expense of recruiting and retaining superior legal professionals. Again, if you provide outstanding legal services, clients should be receptive to your reasoning. Legal assistants, or paralegals, are a hidden profit center for most firms. Their profitability is greater than that of new associates at the higher compensation level. For the most part, clients do not have a problem paying for legal assistant services. Therefore, you may want to utilize your legal assistants more and increase their rates ever so slightly. DISBURSEMENT RECOVERY Effective disbursement recovery is also essential to profitability. Law firms have used a variety of methods to bill clients for out-of-pocket expenses. Instead of wrapping these costs into your billable rate, include them on your disbursement list. You may want to consider billing clients for secretarial coverage, word-processing services, library research projects, and, of course, for overtime. Quite often, partners arbitrarily write off disbursements that are crucial to providing outstanding legal services to clients. No matter who is performing the service, the time should be billed. If work done by librarians or research assistants can be billed out, why not take advantage of this? Firms should, from time to time, review their disbursement policy to ensure consistency among the billing partners. This exercise could generate a sizable revenue figure, which ultimately affects the bottom line. Using the latest technology to track disbursements is well worth the investment. These essential software packages are useful for generating reports to help you determine whether or not disbursements are being handled appropriately by the partners. RAISING REVENUE Besides billing more, one way to raise cash to allocate to the high compensation package for associates is to fine-tune collection efforts. A visionary approach to increasing revenue is by partnering with clients for stock in trade for legal services. This approach made an attorney at Shaw Pittman a millionaire and identified a dot-com trend. Be aware that the market may take a correction, as it has recently for technology stocks. This can be a minefield with some clients, so consult a financial expert. CUTTING EXPENSES Be careful not to go too far when cutting expenses. Being overzealous could get to the point where the firm’s operations are crippled. Too often, expenses relating to staff are the first to be cut, causing morale to deteriorate. Partners must keep in mind the value of the staff to the success of the business: Paralegals, secretaries, and others play a crucial role in ensuring that clients receive quality service. Cutting expenses such as group luncheons will not be well-received when staff members are aware of the big increases associates are getting. In fact, firms today of all sizes are trying to decide how to handle the issue of pay raises for the rest of the firm. Here are better ways for firms to reduce expenditures. � Take a look at your benefit costs and compare the many benefit packages that are offered by different providers. Renegotiating with your current providers is also an option. � Audit telephone usage. The firm may be paying for lines that are not being used. This could substantially reduce overhead costs. � Take a look at the library. You may be taking up expensive space for materials no one is using. Moving books to a conference room with bookshelves, for instance, frees up space for new offices. Switching to online research is another alternative to buying and updating expensive books and other materials. � Limit the use of temps. Hiring a temp when a secretary is out for a day or two can be quite expensive. To train a temp how to use the firm’s systems for word processing and billing, as well as for other administrative tasks, takes two to three hours. It’s much more economical to have two or more floaters who can fill in where needed. The second line of defense is to utilize other secretaries in the practice group. At most small firms, however, any secretary should be able to jump in to help out an attorney in any other practice area. Technology has made it easy to call up a document that someone else prepared and copy the formatting. � Restrict support staff overtime. A policy that overtime must be chargeable to a client and preapproved will reduce the amount spent on overtime pay. A lot of work that is done after 6:00 can be done during business hours. DEPARTMENTAL BUDGETS Many small firms do not have an annual expense budget and instead make expenditure decisions based on cash flow. It is much better, though, to develop an expense budget so that you can see where expenses stand at any point in time. When each department’s expenses are tracked on a weekly or monthly basis, you will know exactly when and where to put the brakes on spending. STRATEGIC PLAN Before preparing a budget, you need to have a strategic plan that projects revenue and operational costs. The strategic plan requires the collaboration and cooperation of all the partners. Each partner should develop a strategic plan to identify current and future client matters and to monitor their lawyers’ hours. Is there enough work to justify the number of associates on the payroll? Is the minimum billable target or requirement being met? Have the partners given associates opportunities to ask questions and gain a clear understanding of what’s expected of them? How much of the associates’ time is being written off? (A mentoring program will reduce write-offs.) Are associates being trained in business development? ADMINISTRATOR’S ROLE Where does the legal administrator fit into the picture? The role of the administrator should be, first, to collect a strategic plan from each partner. The next step is to canvass the market in order to assess the trends. After compiling as much information as possible about compensation, partner-associate ratios, minimum billable-hour requirements, and benefits, the administrator should meet with the managing partner (or management committee) to discuss how other firms of the same size are dealing with the changes within the industry and how these changes are affecting the operation of your firm. The administrator must be able to explain to the partners how the firm can be competitive yet remain profitable. At the very least, the administrator should be meeting regularly with the managing attorney to discuss openly and honestly the firm’s financial status. While not all of the above suggestions may be practical for every law firm, they may be helpful for smaller firms that see spending spiraling out of control. Those that are unable to adjust their spending and billing practices to keep up with pay increases will find it difficult to recruit and retain top legal talent and maintain profitability. Toni K. Allen is administrative manager of the Washington, Pittsburgh, and New York offices of Omaha, Neb.’s Kutak Rock.

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