Protecting Your Law Firm

Author: Larry Chester, President

As we’ve worked increasingly with law firms over the past few years, there are a number of commonalities that we’ve found with many of the firms that we’ve met and have worked with.  Lawyers are really good at taking care of their clients.  That’s the bread and butter of their business and biz dev, and it’s understandable.  But what’s missing is the “home care” that’s needed to make sure that their firm is running efficiently and profitably.  It’s taking care of those things that resolves problems and issues before they become major stumbling blocks.  Here are a few of the items that we’ve encountered repeatedly that, if resolved, can keep minor annoyances from becoming major catastrophes.

Staffing – This really falls into two areas – First, having enough people, and second, having the right people doing each job.  It’s a wonderful thing to be able to say that you run a lean and mean operation.  Your staff is efficient and hard working.  But if they are continually struggling to get the day to day work done, which results in overtime (whether you are paying them time and a half or not) you’re risking unforced errors, and unneeded stress on your staff.  Remember, it takes longer to fix an error (if you find it) than it does to do it right the first time.  That doesn’t help maintain a healthy work environment, or employee retention.

Also, having the right staff doing the right jobs is critical.  Many firms that start out with one or two lawyers use their administrative assistant to do everything – that’s a natural starting point.  But as they grow, that admin is now doing their accounting without much more than a YouTube tutorial on QuickBooks.  And we also see the opposite, where a CFO has the title of CFO/Office Manager, and is even relegated to ordering office supplies.  Not exactly productive for someone making well over $175,000 annually.

Financial Management: Many lawyers lack formal training in financial management, which can lead to challenges in budgeting, cash flow management, and understanding profitability. Many lawyers have CPA designations as well.  Impressive – really.  But it’s likely that they haven’t used their accounting knowledge for years, and the knowledge of operational finance that’s needed is different from the day to day accounting knowledge that they have.  The real risk is that when monthly financials are presented to management, they don’t know what those reports are saying.  The purpose of monthly financials is two-fold – Showing how the firm performed last month, but even more important, showing where changes need to be made to improve profitability or cash flow, both items that are critical to maintaining a healthy firm.  Ineffective financial management can result in insidious problems arising with the firm that can eventually lead to survivability issues – cash flow problems, debt accumulation, and even bankruptcy.

Policy and Procedure Documentation – As firms grow, and responsibilities change, the original operations or procedure manual (if one ever existed at all) becomes largely irrelevant.  All of the current procedures are in the minds and daily work of the staff and management.  This creates significant risk for the firm and its ongoing operations.  What if the Office Manager of 20 years walks out of the office on the day that payroll is due, and nobody else knows how to do it?  We’ve seen it happen.  Documenting the basic procedures, with a list of who is responsible, is a thankless but necessary task to provide the most basic protections for any firm – regardless of size.

Client Satisfaction: Law firms rely heavily on client satisfaction for not only repeat business and referrals, but also for collection of invoices that they’ve sent out. Do the lawyers in your firm really understand the importance of assuring customer satisfaction, and reaching out on a regular basis to make sure that the client is happy with their work?  And just as important is that assuring the satisfaction of a client is critical to assuring that their invoices are going to be paid.  Lawyers are not shy about working hard to meet the needs and desires of their clients, but those same law firms are uneasy about working hard to collect the money owed to them, thinking that it will be the impetus for a lawsuit for poor performance against them by the slow payer.

Compliance: Law firms must adhere to strict ethical and legal standards, both in their own operations and in representing clients.  This means not just their handling of cases and working with clients and the lawyers on the other side of the matter.  There are also strict rules about the handling of money that they receive as retainers or prepayments by their clients.  Their IOLTA account needs to be balanced and managed to the penny.  Failure to comply with regulations and ethical guidelines can lead not only to damage to the firm’s reputation, but also to disciplinary actions and lawsuits.

Cybersecurity: Law firms handle sensitive client information, making them attractive targets for cyberattacks. Data breaches can result in compromised client confidentiality, loss of trust, and legal liabilities.  So, not only does every business need to be cautious about being attacked by cyber criminals, but every law firm and their lawyers need to also protect the confidential information that they are holding for their clients as well.

Risk Management: Legal work inherently involves risks that are generally more intensive than a typical business.  This includes the possibility of facing malpractice claims, encountering conflicts of interest, or breaching confidentiality. Effective risk management strategies, such as proper documentation and conflict checks, are essential for reducing and eliminating these risks.  And, just as every business needs to have insurance to protect their businesses against loss, law firms also need to protect themselves from general liability losses, business interruption, cyber security breaches and employment actions such as discrimination, or Employer Practices Liability.

Technology Adoption: Many law firms struggle with adopting and integrating new technologies into their operations. This is more than a little ironic, considering that most legal research is now done electronically.  As a result, failure to embrace technology can result in inefficiencies, reduced productivity, and an inability to meet client demands or the increasingly competitive legal environment that they work in daily.

There are many risks facing every company.  But our experience shows that there are even more specific risks facing law firms that spend every day only protecting the interests of their clients, without being cognizant of the risks that their firms face on a daily basis.  These are only some of the risks that law firms face.  If your firm is not making the effort to position themselves to protect against or mitigate these risks, maybe it’s time for us to have a private conversation.  Remember, we take care of the business of business, so lawyers can be lawyers.