Do you know the R.U.L.E.S.?

[In 1988 Robert J. Arndt wrote a 31-page pamphlet for the ABA Section of Economics of Law Practice entitled “Identifying profits (or losses) in the law firm”.  In it he described his system called R.U.L.E.S. to help law firms evaluate profitability. Twenty years later James S. Schnieders, Controller at Stone Pigman in New Orleans revisited the R.U.L.E.S. system for the ABA Law Practice Management Section. As 2014 begins it is appropriate to review how current law firm accounting systems can help your firm play by the R.U.L.E.S. to maximize profits.]

While you wouldn’t consider using your 25-year old TV or cellphone any longer, many law firms still use the 1980’s metric of annual billable hours as the sole measure of firm business success. More hours = more success, right? Not any more.

Today, even the smallest of law firms have access to the same powerful statistical dashboards that were once only available to Big Law firms. The basic analysis of which client type and matter type generates the most income should only be the first step. Further basic analysis would include a review of write-downs, prompt/late payments and funds advanced for client expenses.

A complete analysis of your firm’s business health includes a thorough review of the R.U.L.E.S.:

  • Realization of the amounts actually received;
  • Utilization of attorneys and legal staff;
  • Leverage of partners (i.e., owners) to legal staff;
  • Expense control; and
  • Speed of sending bills and receiving 100% payment.

1. Realization: “It’s not how much you bill, it’s how much you collect per hour of effort.”

Many Personal Injury lawyers and other “contingency-paid” lawyers who have retained me for consulting, had never tracked the number of hours required to obtain the settlement check for their client. They felt they “knew” how much they were earning per hour. Once they began recording their hours (at $0.00/hr) the firm’s time and billing software could divide the firm’s share of the settlement by the total hours to determine how much they were actually earning per hour. Many were surprised by the results.

“Discount” rates, bill write-downs and un-paid disputed amounts can each have a negative effect on Realization.

Effective law firm productivity management requires quarterly reviews of income Realization compared to hours billed to determine if the firm is tracking the income projections for the year.

2. Utilization: “If a client is not billed for your time, were you really working?”

Many firms allow for a certain number of non-client-billable hours. This number should be set at the beginning of each year, just like vacation or sick days, so everyone at the firm knows what is expected of them.

Some non-billable events include:

  • The status of large non-recurring matters
  • The ratio of contingency fee matters where most work is non-contingency
  • Non-standard billing rates for special clients
  • Other factors (i.e. bad weather, the flu) affecting attendance and performance
  • Newly-hired associates where collections will take several months to arrive
  • Non-billable activities: bar association, CLE and professional conferences; office management meetings

Well-maintained Realization and Utilization reports can help law firms collect on business interruption insurance claims as a result of natural disasters. In 2012 when Hurricane Sandy slammed the New Jersey coast, many firms had no electrical service for days and thus were not able to work. Those firms which could demonstrate the likely Realization of income from the lost billable hours had a much greater chance of collecting from their insurance carrier than those who did not maintain such records.

3. Leverage: “The more associates or non-equity partners per equity partner means easier annual equity partner income.”

As the ratio of partner to non-partner billing staff (Leverage) goes down, a greater percentage of net income must go to partners to maintain or increase their income. A firm with 20 associates and 20 partners has a leverage of 1:1. If the firm has a ratio of less than one, it has more partners than associates. If a firm is “highly leveraged,” it means that there are many non-equity workers working for the smaller number of equity partners.

Annual income for the equity partners grows by adding more productive associates who produce annual billable hours in multiples of their annual hourly pay.

4. Expense Control: “A dollar not spent is a dollar earned.”

Expenses should be allocated down to the smallest firm component: department, matter, type, attorney. Only by reviewing these detailed expense reports will the firm maintain a thorough understanding of where the money is going. Accounting software programs specifically designed for law firm businesses can create such reports.

Expenses do not have as much impact on profitability as Realization, Utilization and Leverage. Many expenses are fixed from year to year and cannot be reduced. Other expenses, while variable, can have adverse effects on productivity and should be carefully reviewed at all levels of the firm before implementation.

5. Speed: “Show me the Money.”

Until an invoice is approved by the responsible partner for submission to the client, the dollar value of the billable time and firm funds advanced on behalf of the client become an interest-free loan to the client. If all billable time is not entered by the time-keepers on the matter or if all of the expenses for the matter have not been entered by the bookkeeping department the invoice cannot be sent.

A time entry software program integrated with the firm’s accounting system makes adding billable entries and expenses in real time a seamless event which allows every time keeper to be current within one day.

Time (work-in-progress or billed) is the inventory of the firm. A Speedy process for converting that inventory into money is the most important factor of the firm’s profitability.

Finally, many clients today will agree to receive their bills via email. Electronic billing is the fastest method for bill submission and saves the firm the cost of envelopes, paper, toner, postage and staff time to print, stuff and seal each envelope. Accepting payment by credit card is yet another feature available in some accounting systems which brings the payments in faster.

As 2014 gets started in earnest this week, take some time to review the R.U.L.E.S. so you can maximize your firm’s productivity and profit.

Steve Miller, JD  has provided law office productivity consulting services since 1998. He is certified in LexisNexis PCLaw®, LexisNexis Time Matters® and Amicus Attorney®.

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