Law Practice Financing
Law Practice Financing - What are the best ways to save money and improve law practice funding?
When a firm's law practice funding is in trouble—whether it be due to a rough economy or just the ups and downs of a firm's fortunes—tough measures are called for to stabilize the law practice financing.
At first glance, de-equitization of older partners may seem like an effective (and trendy) way to save money and improve law practice funding. Upon closer inspection, however, this strategy has a lot of hidden costs and pitfalls. In the end, de-equitizing partners may do more harm than good.
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In this strategy, a firm with law practice funding problems targets older partners in the law firm who charge higher billing rates, but who have fewer clients or draw less business than their competitors within the firm. The firm then removes the targeted lawyer's equity status, effectively causing a de facto termination of that partner.
That partner's clients are then redistributed to the other partners within the firm. In this fashion, one of the firm's larger expenses is cut, and law practice funding is back in the black. Simple, right?
Not really. In order to understand how this strategy can badly backfire on law practice financing, we need to cut through all the technical legalese and just call a duck a duck. We're talking about layoffs here. No one likes being laid off. From the fired lawyer's perspective, they've just been betrayed after years of faithful service, and their livelihood sacrifice on the Altar of the Bottom Line.
In this frame of mind, the laid off lawyer has little desire or incentive to help the firm with the smooth transition of clients and collections to other partners. In a worst-case scenario, they may actually try to obstruct this process as a form of retaliation. Due to the way many law firms are structured, a disgruntled former partner is in a great position to considerable damage to law practice financing with relatively little effort. Below are some potential dangers of laying off a partner.
First, disgruntled, laid-off lawyers may attempt to start a private practice and take their clients with them. Don't rely on the argument that "they're not your clients, they're the firm's" to hold any water. A departing lawyer can easily convince their clients to discontinue their business with the firm and start a "new" business arrangement with the laid-off partner's new practice. Every client a departing lawyer takes with him is another hit go law practice financing , another source of revenue that has been lost.
Even if a laid-off partner doesn't attempt to woo your firm's clients away, they may simply drop them like a hot stone, leaving the firm to clean up the mess. Before a partner leaves the firm (as firms may have already experienced in retirement situations), there is quite a bit that needs to be transitioned to other partners in the firm. The retiree's clients need to be transitioned to other partner in the firm, and any open or overdue accounts need to be closed and collected.
Unfortunately, a lot of partners keep their client-lawyer information as confidential as possible. Many law firms are structured so that compensation is directly linked to a partner's individual performance. This "eat what you kill" environment caused partners to be rather secretive with their client information. They become reluctant to share client information with other partners for fear of having business "stolen" away by new partners scrambling for a client base of their own.
This means that once the laid-off partner has left, the firm may find themselves lacking adequate records of each client to easily transition them to a new partner. The firm may not be clear on which clients have been billed what amounts, or—worse—what accounts are outstanding and overdue, making collecting that income difficult at best, impossible at worst. Finally, all this can result in poor customer service to the clients, who may become fed up and switch their business to a different firm.
As you can see, trying to improve law practice financing by laying off partners can easily cost the firm more money than it might save. Instead, to improve law practice funding, try to find ways to encourage older partners to leave on good terms, such as early retirement, or cutting them back to a part-time consultant. Under a much friendlier situation such as that, the partner will be more willing to help the firm transition clients and collect open accounts.
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