The Role of a Business Plan in a Law Firm
In a profession such as the law, where human capital is the primary asset of a successful firm, it is imperative to establish a business plan that works. The development of a law firm business plan forces you to consider the current state of your firm, the current economic environment, your vision for how your firm fits into the marketplace, how you will prepare for and deal with challenges, and what you will do to achieve your goals for taking the firm into the future. It allows you to analyze and prepare for the future in a detailed yet concise way all in the hope of improving your competitive position in the marketplace. Time spent preparing a plan is time well spent and will ultimately lead to a more successful practice with higher profits.
In a challenging legal environment, it is easy to fall into the trap of focusing all your attention on the current state of your firm. It is important not to allow yourself or your firm to get bogged down in day-to-day concerns with difficulty of finding work , concerns with collections, managing stress, and the like. While building a detailed strategic plan is its own challenge, and will take considerable time and effort, it is essential for the long-term success of your law firm.
A law firm business plan should cover all aspects of the business of law in a firm, and will almost certainly include a variety of details. In particular, you should hammer out specifics for the following key areas:
When done properly, all of these components will form a cohesive plan that covers the strategic and operational aspects of running a law firm. Although the plan can be modified over time, it sets out the foundation for long-term viability for your firm and works to protect everyone involved.
The future of your firm depends on how well you prepare for it now in terms of strategic planning. Rule 1.1 of the ABA model rules of Professional conduct requires competent representation, and a law firm business plan is one way to accomplish that.
Essential Elements of a Law Firm Business Plan
When it comes to law firm business plans, there are key components that are essential to a comprehensive plan. An executive summary outlines the firm’s future plans and financial forecasts. It should provide a concise overview of the law firm’s history and plan on how it will generate enough profit to meet its projections and provide for its operations.
Market analysis includes a detailed study of the legal marketplace the firm is looking to establish itself. If the firm is concentrating on corporate transactions for small businesses in a particular community, the analysis should provide a well-rounded view of the competition in the area. It should also include an analysis of the firm’s strengths and weaknesses along with that of their competition. It could highlight the fact that a certain number of new businesses open each year and need legal services with respect to incorporation, commercial leases or drafting employee contracts. This type of analysis helps in targeting potential clients more closely.
An organizational structure document should outline the firm’s structure, such as whether it is a limited liability partnership or a professional corporation. It should also include whether there will be partners, associates or specialized departments, such as a litigation department or a personal injury department. The structure may also include how actively involved the partners will be in the firm’s day-to-day operations.
Financial projections include a review of the law firm’s expected revenue for a specified period of time, such as the first 12 to 18 months. It should include capital outlay, operating costs and analysis of potential revenues from specified clients. It may also include revenue projections for various departments or divisions of the firm, such as raw litigation revenue versus litigation revenue after deducting the firm’s outlay for expert witnesses, legal services, costs of production and overhead.
Analyzing the Market: Identifying SWOT
As any good scout would do before attempting to be victorious in battle, lawyers should research the market for their specific practice area. You must know how many competitors you have, what your target market consists of, and if there is a niche market opportunity in your area.
Here are some ideas for your competitors: Spend some time Googling your competitors in your area, see what they are up to, can you learn from them? If they have been around more than a couple of years it is possible they have insight you do not have.
Think about your demographics: With Facebook and LinkedIn some very good tools have emerged that are totally free to use for researching your market. Have you been using them? Facebook and LinkedIn Insights are two such tools that provide you with information on your page users demographics. If you have a business page for your law firm you really need to be on top of the statistics that these free services provide to you, but most of you don’t everyone is too busy. Why not, as part of your 10 or 15 minutes of Social Media time each day, spend it learning more about your business page users?!
Do you have a niche market you serve? If so you should be looking to see if there are Facebook groups that relate to your niche. Join them, get involved in discussions, become visible and answer questions if you have the answer. You will build your place of expertise in your targeted market. Facebook groups are just one avenue you should be exploring in the online world all groups are searchable use some common search terms, try these out; personal injuries, injuries, bankruptcy, family law etc… Keep in mind that a public group can be seen by anyone, anywhere, why is that important price, you will be very visible to anyone that might be a potential client, and you don’t even have to spend a ton of money on advertising. Any time you can reach your audience free you should.
Find out where your potential clients are: If you have a website or blog you should have access to Google Webmaster tools. The tools are free, and provide phenomenal information, use them if you don’t already.
Learn who is coming to your website and blog: Go to www.google.com/analytics and pick your website or blog that you are interested in viewing the statistics on. Now you have a ton of data at your ability, use it to your advantage. Learn what works so that you can continue to build onto it and make it more efficient. You can delve into the information much deeper if you want by clicking on all of the tools on the sidebar. You have just scratched the surface of all that is available to you.
Facebook has much of this data available to you in their free Insights report for your business page.
Spend some time understanding your competition, your target market, and how you can find your niche while you are on your mobile device by using Facebook and Linkedin Insights, or looking at your analytics via the Google tools. It is time well spent!
Establishing Attainable Goals and Objectives
An important element of any business plan is the process of establishing goals or objectives, both short and long term. Depending on the type of practice (e.g., startup/expanding, existing/principally serves existing clients, principally serves new clients), there may be very different approaches to establishing these objectives and setting out the steps that must be taken to achieve them. In addition to being mindful of their own vision for the firm, lawyers preparing a business plan also need to consider and implement the steps necessary to ensure that the firm’s objectives align with its overall vision and values.
It will be important to decide what "success" will look like for the firm regarding each stated objective. Law firm objectives might include:
Given the very different natures of these potential objectives, a law firm’s ability to accomplish them may be dependent upon a number of factors such as:
Factors such as a market’s size and the subsequent willingness of that market to support new law firms in the area can have an enormous impact on the ability of a new firm to generate the revenue necessary to thrive – thus, there will be a great deal of variation across the objectives set by lawyers in different markets and what success looks like for each particular law firm. As with any business, however, there are key "success indicators" that while not unique to a particular firm are still relevant. Law firms might utilize these common success indicators such as monthly billings and collections, client retention rates and rate per hour, for measuring the achievement of objectives and success.
When establishing goals, it will be necessary to take care to ensure the objectives are realistic and achievable. For example, while it may be desirable for a firm’s first year of operation to bill and collect $1 million dollars, if you’re in a large legal market, such as Washington DC, that goal may be realistic. However, for a new firm in a town of only 30,000 with limited years of experience, it may not be realistic and could lead to frustration that becomes a negative to the firm’s survival. Setting goals that are too aggressive can inhibit growth and create a culture of frustration. One area that will require some careful thought is the extent to which starts sales and marketing efforts prior to opening, especially if the new firm will feature a partner or partners that have been with another law firm, such as advertising the firm’s name, etc. The terms of the partner’s severance package or employment contract can be a very important factor here for determining when and how to introduce the new law firm to current and potential clients.
Law Firm Financial Planning and Budgets
Law firm financial planning and budgeting are critical components of any business plan. They determine how a firm manages— and will manage—its cash flow, and they serve as a blueprint for achieving profitability. No effective business plan could exist without them.
Budgeting is more than telling a law firm where to allocate resources. It’s a tool to help your firm understand its operating environment. For example, how many new clients does it need to handle to meet its financial goals? What kinds of cases deliver the most predictable income? And what mix of case types is most likely to ensure success?
The Law Firm Business Plan explains that all budgeting is "based on estimates and projections." The better these projections are, the less likely they will derail a law firm’s business plan.
An essential part of creating budgetary projections is accounting for all of a firm’s financial variables. It’s easy to underestimate a law firm’s costs, especially if its overhead (like rent, utilities, and other expenses common to all businesses) is growing as it expands. When calculated accurately, these basic expenses provide a baseline for determining a firm’s future profitability.
Projecting revenue is the law firm business plan’s bedrock financial figure because it delivers a dollar total that can be confidently adjusted. Projects costs can be estimated with a high degree of accuracy. But revenue projections are based on past performance and competition from other law firms. No amount of projecting can predict how a firm will fare against its competitors — and that can skew its revenue projections off course.
The importance of accurate revenue forecasting should not be underestimated. The Law Firm Business Plan explains:
Sometimes , inaccurate revenue projections are unavoidable. But when they become a recurring theme, they can turn a booming law firm into a weak one—the kind that cannot make its budget work because it cannot forecast revenues accurately enough.
Effective law firm budgeting requires understanding how case types affect revenue and profits. For example, a firm could bill $100,000 in December and collect $10,000 of that in January before collecting another $40,000 in March. This cycle would not repeat in February or April.
In a different scenario, a law firm bills $60,000 in January, $20,000 in February, and $20,000 in March. It collects all of that in March. Which approach, judging by cash flow, is preferable for a law firm? The first scenario requires an ability to plan for revenues and expenses over three months; the second is much simpler because everything happens at once.
Expanding on this example, consider the law firm revenue cycle. It takes time to convert potential sources of revenue into income. However, every law firm has a finite amount of budget dollars available to serve these prospects as they take shape. How long they take depends upon how well each prospect converts into a client.
Every business must tap into legal markets wisely. Your law firm business plan is no different. A budget and forecasting model that measures market activity helps any law firm channel its resources efficiently. If it gains only one or two new clients annually, it’s not likely to need a huge resource base to serve them. But if its market has growing demand, that could change.
Law Firm Marketing and Business Development
When it comes to the marketing and business development aspects of a law firm business plan, it is important to understand that your plan should be a living document. You should adjust it on a regular, perhaps quarterly, basis to determine what strategies are working and which are not. The focus of your plan could include websites, blogs, social media, newsletters and e-Alerts, as well as more traditional forms of marketing such as seminars, events and even speaking engagements.
With the emphasis on web-based marketing for lawyers, I think a mixed strategy is often the best approach because the public is more media savvy than ever. What may work for one lawyer may not be as effective for another. As a result, having options is the smartest way to go. In many cases, it is best to combine these strategies to reach multiple audiences.
For example, if you have a strong social network, that website will essentially become ancillary. On the other hand, those who do not maintain a relatively robust network may find themselves relying heavily on their web presence. Although many marketing companies will promote websites, it does not mean that it is the best strategy for your practice.
Regulatory Considerations
A law firm’s business plan must also take into account a host of regulatory considerations. Foremost are licenses held by the firm and its prospective owners. For example, in most jurisdictions, to own a law firm or practice as a lawyer, one must be a licensed attorney in that jurisdiction. So at least one of the owners must be licensed to practice law within the firm’s primary target market. In some jurisdictions, partners are required to hold a license. For many investors and owners of alternative business structures, or ABSs, the regulatory requirements are more complex, as they must be regulated similarly to a law firm, and they are subject to the same ethics obligations as a law firm. In addition, depending on their structure, ABSs may become regulated by the corporation’s commission or the equivalent governmental authority that regulates investment firms or other organizations.
Second, all lawyers, with very few exceptions, are required to comply with state bar ethical rules and regulations and other applicable legal industry standards. These can vary significantly by jurisdiction, and specific details will be addressed further below. Although not covered by professional ethics rules, many bars, courts, and states have additional regulations relating to obligations for communicating about a firm’s services, including rules on advertising and marketing. Most bars, for example, regulate the information solicited from the public relating to a lawyer or firm, even to the extent of requiring prior approval of advertising materials. ABA Rule 7.1, the model rule on communications about a lawyer’s services, states a rule consistent with the existing trend, but it leaves regulation to state and local bars. Note that there are no ethical rules for non-lawyer ABS partners, although there may be independent requirements of various regulatory bodies that ABS owners are required to satisfy.
Third, lawyers and law firms are subject to federal, state, and local laws and regulations, including those relating to the protection of intellectual property, employment law, taxation, and many others, which firms must comply with to successfully operate. At a minimum, the business plan should consider these areas of risk, including at various stages of its growth.
Measuring and Modifying the Business Plan
Just as effective business plans are the result of substantial effort and a great deal of thought about the firm’s relationships with clients, the design and management of the plan requires the same attention at regular intervals. Certainly a plan should be evaluated at calendar year-end and beginnings (fiscal or otherwise) but mid-year and quarterly evaluation and planning sessions can be extremely helpful in reviewing progress toward plan goals and in determining how the firm’s resources – both time and money – can be devoted most effectively.
At a minimum, each direct timekeeper should be evaluating regularly his or her own performance to ensure client work is being billed and paid in ways that produce the targeted level of revenue, or alternatively to determine whether a relationship is no longer producing acceptable income for the firm. Obviously, a plan cannot be designed to include any relationship that does not pass that test. In addition to measuring performance against plan objectives, the firm’s evaluative process should measure its progress toward meeting its goals for non-timekeeper staff members as well. For example, if the firm’s marketing plan calls for research tools to be purchased from a particular vendor using funds to be taken from the amount allotted to other planned marketing-related activities, then an evaluation of each area of the budget should reveal early on whether any corrective action needs to be taken .
Many firms choose to include in their formal plan a period of time for evaluating progress toward achieving the objectives of the plan and adjusting the plan as necessary; even when this step is not included in the written plan, it is a good business practice. Some firms tie this process into their annual retreat or partner meeting. Firms can ensure that all partners have a voice in the process of keeping the plan current by scheduling a retreat a few months before the anniversary (or other date) in which a top-down:bottom up evaluation of progress can lead to a vote confirming the continuity of the existing plan or a decision to amend that plan.
For those firms not employing the retreat model, time should be set aside at meetings to permit evaluation of the firm’s progress in both quantitative and qualitative respects. This evaluation might begin with a simple question: "are we maintaining control over the factors responsible for the amount of profit we are generating?" If the answer is "no", the firm will need to make the time, provide the leadership, and commit the resources necessary to create a plan for the future – one in which partners intellectual effort and time are measured by the degree to which the plan is embraced and embraced by all members of the firm.