Is your firm ready to profit from data analytics?
JOEL HERMAN, CPA
Data analytics is the process of using qualitative and quantitative techniques to increase productivity and business gain. Attorneys are increasingly seeing the value of data analytics when preparing for and trying cases. However, the potential value of number-crunching goes much further. Law firms also can wield data analysis to operate the firm more efficiently and drive profits outside of the courtroom.
Data analytics brings vital focus to a business generation process that might otherwise suffer from a scattershot approach. It identifies promising prospects and saves time, effort and frustration. For example, if you decide to pursue a client in a particular industry with specific needs, you will have historical, real-time information at your fingertips to develop persuasive tactics.
Of course, data analytics’ usefulness for generating business is not limited to new clients. You can use it for existing clients to predict outcomes of cases. For instance, you can use it to weigh data related to venue, judge or opposing party. Data analytics also helps identify opportunities for cross-selling and up-selling that might otherwise go unnoticed and untapped.
For new and old clients alike, the ability to apply data analytics to the predictions of outcomes and to case preparation activities will help you optimize your pricing. You will set a more educated price point to give your firm a competitive advantage and position yourself to profit.
Using data analytics, you can obtain a more comprehensive picture of potential hires and better assess how their expertise, background and education matches your firm’s needs, while shielding yourself from potential liability. Social media sites frequently reveal a wealth of information, but browsing the accounts of job candidates in a haphazard manner may expose you to discrimination claims. Data analysis can set boundaries that protect you.
When you are ready to pursue the best specific prospects, data analytics helps you make a compelling case with current numbers on your firm’s growth, revenue, clients and professional advancement opportunities.
Thinking about adding space, moving or opening a new office in a different city? Infrastructure decisions generally have a major impact on the bottom line. Additionally, they are often long term commitments that are difficult to reverse. Data analysis reduces the risk involved in such decisions by providing solid evidence on the best course to follow.
For example, you can scrutinize different geographic markets to determine whether or not they have a sustainable demand for your services. If a need does exist, the numbers will indicate if it is lucrative enough to justify the associated costs. Data analytics also predicts trends in rent and cost of living.
Inertia is common when it comes to ordering supplies and engaging third-party services. It is easy to simply go with the recognized brand or stick with the products and services you have always used. However, this routine can also cause firms to be saddled with unnecessary expenses or excessive costs.
Purchasing a software license? Let data analytics estimate how many users you will have. Leasing a printer? The data can tell you if the extra cost for double-sided printing capabilities offsets the savings in paper when likely demand is factored in. Looking for a cloud service? Turn to data to evaluate the reliability of different providers. After all, a great price is small comfort if you cannot access critical files when you need them.
Spread the word
Incorporating data analytics in the day-to-day operations of your firm can have another significant benefit: It raises data consciousness throughout the organization. This leads to sound decision-making all around, whether in litigation strategy or firm management.
Keep your partnership agreement current
ROB SWENSON, CPA, MST
When was the last time you looked at your partnership agreement? In today’s rapidly evolving legal industry, regular review is essential to ensure that appropriate amendments are made to address new partner entry, existing partner exit, leadership transitions, equity adjustments and similar issues. Even if your firm does not undergo such changes, you should periodically review your agreement to confirm it still aligns with your firm’s long-term strategic objectives.
Law firms can use their partnership agreement to address a wide variety of issue. These include:
Identify the current partners and lay out the process for the admission of new partners, including how to decide to bring on new partners, buy-in requirements, and voting rules and obligations of different partnership tiers. If new partners must satisfy a buy-in requirement, your agreement should describe how the buy-in amount will be determined.
Define the capital structure, document how much capital each partner has contributed and establish the amount of retained earnings required to maintain financial stability. You also may want to provide a method for raising additional capital for emergencies, expansion or other reasons.
Most firms are better off not getting into too much detail about profit distribution in their partnership agreement. Rather, outline the profit allocation structure and give partners the flexibility to change relevant factors or alter compensation without formal amendments to the agreement.
- Decision Making and Voting
Will action require a majority, supermajority or unanimous vote? Will votes be granted on a per-capita or weighted interest? Try not to designate a single approach for all matters, but instead base the voting protocol on type of issue. For example, require a supermajority vote on issues too important to hinge on a difference of one vote, such as admitting a new partner or merging with another firm.
List reasons for expulsion, such as disbarment, criminal conviction, bankruptcy and/or malpractice. Detail the expelled partner’s rights and state whether or not your firm will return capital.
- Death and Disability
Describe how payment will be made to a decedent’s estate. Will the firm return capital? Will it pay out a pro rata share of the firm’s value? For disabilities, state whether the partner will receive full or partial compensation and for how long.
Retirement raises many issues. For starters, will retirement be voluntary, or will your firm enforce a mandatory retirement age? What if a partner is still contributing at retirement age? Some firms enforce mandatory retirement at a certain age, but offer renewable annual contracts on a case-by-case basis.
Your agreement should address the return of capital (including fixed capital and undistributed earnings) and equity interests to retiring partners. You may need to detail a valuation process and payment schedule for a partner’s interest in accounts receivable and work in progress.
Post-retirement compensation is another vital issue. In the past, firms regularly paid retired partners a stipend for a limited period, usually an amount based on former compensation. Many firms now use transition agreements that base post-retirement compensation on client transfers and continuing part-time work and business generation.
Additionally, do not overlook post-retirement liability obligations. If your firm has large loans with personal guarantees, it may need to institute a capital call or require a pledge of additional collateral from the remaining partners. Tax obligations in the case of a post-retirement audit of pre-retirement tax years also warrant attention.
Do Not Wait
If your firm is like many firms, you probably do not refer to your partnership agreement until a partner is leaving the firm, but that could be a mistake. An out-of-date agreement can throw your firm into tumult at the worst possible moment. So, take the time now to review and update it as necessary.
Sidebar: Valuing the law firm
Partnership agreements often require law firm valuations to determine how exiting partners will be compensated for their interest. To avoid disputes when the time comes, your agreement should specify which of the three common valuation methods will be used:
An agreement might apply a multiplier to the most recent year’s earnings, but this approach looks backward and may not reflect your firm’s current value. Moreover, it can be hard to incorporate into a formula every factor that might affect earnings in any given year, including discretionary, unusual or one-off expenses.
- Fixed Price
Some agreements identify a fixed price reached through negotiation by the partners. Like a formula, a fixed price might not capture your firm’s value at the relevant time.
An appraisal is much more likely than either a formula or a fixed price to account for current circumstances and is more likely to produce reliable results. Your agreement can provide for the use of a single appraiser or two or more appraisers (with a mechanism for resolving significant differences if multiple appraisers disagree with one another).