June 11, 2024 • 11 mins
I spoke with John Scott, an accounting partner with Anders CPAs and Advisors and the Legal Niche Leader at Summit VCFO Services by Anders. We discussed the most important financial metrics for growing a law firm, best practices for maximizing the leverage model, and how law firms take advantage of dynamic forecasting.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:31):
I'm great, Ari, how are you?
I'm doing really well.
I appreciate your time today and I'm looking forward to this conversation.
So tell us about your background and your role at Anders, CPAs and advisors.
I work in the tax department, so this is a busy time of year, but I've been around since
probably before you were born.
I joined Anders in 1992, large local firm, one office and we tended to work with a lot
(00:56):
of attorneys.
So I was very fortunate to know a lot of attorneys.
And early in my career, I worked with a very entrepreneurial attorney who built his practice
from just the St. Louis much bought an area from coast to coast in the United States and
he did it by focusing on data and metrics.
He would go to another much bought an area, find a managing attorney in that area, rent
(01:18):
space and in six months he would make money.
And I watched him do this over 17 years and in working with all the other law firms I worked
with, I saw that if you paid attention to data and metrics, there were better ways to
run your firms to increase profit cash low.
And so I've been doing that ever since and I love working with attorneys.
(01:43):
What are the most important financial metrics for growing a law firm?
I think the most important thing is cash.
If you don't have cash, why are we doing what we're doing?
But beyond that, it's production.
How do we turn efforts into cash and then our financials and then of course pipeline?
Where does our work come from?
So I think those are the four metrics that we tend to focus on with cash being the most
(02:04):
important one.
And there are various ways you can increase your cash position, but we start out by saying
depending on the type of firm you are, you should have 10% of your expected revenues in
the bank in cash.
All the way up to 30% if you're a more risky firm.
And the risky firms are contingent firms or their firms with one or two large clients that
(02:30):
if you lost one of those clients, you'd be in a cash branch.
And so really focusing on that working capital or cash position, we think is very important
for firms.
And a lot of firms at the end of the year will take everything out and we try and counsel
them not to do that.
Leave some of that money in there.
You have to have money to pay the bills and you don't want to rely on a lot of credit
(02:51):
to do that.
Although historically in the last 20 years, it hasn't been that expensive to use a lot of
credit, it's becoming more and more expensive.
What are some best practices for maximizing the leverage model for growing legal practice?
All firms do not generally use enough leverage.
There's a very old firm here in St. Louis, well respected and I was talking to the managing
(03:17):
partner and I said, hey, what's your leverage?
And he actually looked down because his leverage was less than one.
They had more partners than staff.
And it's just no way to maximize profit and cash flow.
Yes, the partner is in charge and responsible for all the work that's done on their behalf
for the clients.
(03:37):
But if you can increase your leverage, you're going to increase your ability to serve clients
and thereby cash flow and profit.
And so encouraging firms to standardize processes that are repeatable.
Not the really complex things that need creative thought, but the repeatable task.
Pushing that work down to less experience attorneys or even paralegals will help them
(04:04):
produce more, serve more clients and improve their profit and cash flow.
If you look at the accounting profession, leverage is 9 or 10 to 1, where a really good
law firm might have 3 to 1.
What about in other professional services?
Is it the same kind of ratio?
The legal profession is less leveraged than any other professional service group.
(04:27):
Architecture firms, engineering firms all push, work down and they all have different levels
of review.
In the accounting profession, we have preparers.
We have managers that review the work and then the partner reviews the work before it goes
out the door.
So there's 3 sets of eyes that touch it.
In the legal world, it tends to be either the partner is doing the work or they might have
(04:47):
an associate or a paralegal doing it and then they review it and go out.
You can do more and serve the clients better if you are pushing that work down.
And think about this.
It also trains someone who can replace you.
You have these associates.
If you don't give them challenging work to do, you're not training the next generation
(05:09):
of leaders.
How could law firms take advantage of dynamic forecasting?
I think this is really exemplified in the migration of the accounting profession and that's
what client advisory services is all about.
If you think about the CPA firms of the past and many still today are historical in nature,
(05:30):
they take your records, they record it, they reconcile it and tell you what happened.
We're migrating to what we're trying to do and it changed how people feel about accounting
is to take all the instantaneous data that we have and use that data and those data points
to predict the future.
So if I'm reconciling my accounts on a weekly basis, so that I instantaneously know that
(05:55):
balance sheet and ink up statement is good.
I can use the amounts that are in AR and the whip production that the firm has to predict
the cash flow 12 weeks out in a year out so that we can stay on task.
And if you think about when your grandfather took the family on vacation, he pulled out a
10 year old atlas and he wrote down some notes in the next day, he filed everybody in the
(06:18):
station wagon and away he went.
He can only react to what he saw in front of him.
And then our parents had triple e-tripp ticks which told them the outside of Atlanta, there's
a roadblock, here's a workaround.
Today we have the way Zap and Google Maps.
We get instantaneous data and that's the same thing we can do in a firm with their case management
(06:39):
system, online banking, all these technological tools like bill.com or divi cards, everything
can feed right into the general ledger.
So we're not waiting 15 or 20 days.
We can sync up immediately.
What types of data-driven decisions should law firms be making?
I think some of the big decisions are how much capacity do we have?
(07:02):
What is the ability to serve clients?
And if we have access capacity, how do we go fill that capacity?
Because as crafts as this sounds, we're like factory machines on a factory floor, right?
If we have 12 hours of capacity but we're only filling five, there's this wasted time there.
(07:25):
So I think knowing what your charge hour expectation is or the ability to serve x number
of files and how many people you have, it will influence your decision on that next new
piece of work, right?
If you think about a contractor who is full, he's full for the next six months and you want
to get your kitchen remodeled, his price is going to be pretty firm.
(07:48):
But if he's got a hole in his schedule and he wants to keep his folks busy, he's going
to be a little more aggressive on pricing because he wants to keep them on.
He doesn't want to lay anyone off.
The same thing occurs in a firm.
If I'm not a capacity and I've got nothing but a clients, the next client that comes in
the door, I'm going to be very selective as to whether or not I take them.
(08:12):
But if I do have, let's say, 20% capacity and somebody could be an a client, I'm not
a client, I would be a little more aggressive to take them on.
So using those data points and knowing what my capacity is will help me fill that capacity
with the right clients.
What are the most successful partner and staff compensation models?
(08:33):
If we talk to 10 firms, accounting or law firms, you'd have 10 different cop models.
But I think when you migrate away from, eat what you kill to a goals based system.
When I say that, goals for the firm and then individual partner goals that align with
those goals, I think you're going to get everyone moving in the same direction and the firm
(08:56):
overall is going to do better and then the partners will do better as well.
And then staff, we're all struggling to find and retain good staff.
So we have to be competitive to keep those folks, which means it's going to put fee pressure.
We're going to have to start charging more for our time.
And I think we've seen that.
We've seen it in everything we do on a bacon is 10 bucks and used to be six and the same
(09:19):
thing's happening to wages.
But a goals based system in my mind is one of the better ways to migrate to over time.
And you can't just flip the switch.
You can't go from book a business model to complete goals based.
It takes time to migrate that way.
How do you see AI changing law firm economics?
I love AI. I realize there are inherent dangers to AI.
(09:44):
But when I get into the accounting profession, PCs were not prevalent.
Okay.
We were doing amortization schedules depreciation schedules by hand.
And if you can imagine the time that's hooked and the mistakes you could make, I remember
my first boss.
I came in with some notes in a pen and he looked at me and he said, hey, I make
(10:09):
50 mistakes a day.
That's why I use a pencil with an eraser.
How many do you think you make?
So I'm like, okay, I got the message.
But the point is we got these PCs with the floppy disk and all of a sudden the things you
used to do by hand could now be done with a program.
And it was so much quicker.
We're today, we're just at that next wave of the revolution where AI is going to change
(10:32):
and take all these mundane repeatable practices and make them so much quicker.
Now, I think that we have to put some guardrails around it.
And I was at legal week in New York earlier this year and I know that the bigger firms are
putting fences around their generator, AI, keeping it all in house and then setting up frequently
(10:54):
ask questions for good uses, inappropriate uses, what you can and can't do.
I think firms need to do that.
You need to have some best practices for people.
The other thing for law firms, and I'm sure many of your listeners know this that if
you create an efficiency and you're charging by the hour, you have to pass that efficiency
on.
(11:15):
But if you modify your engagement letters to say, hey, some of the things we do are fixed
fee, then I think you can capture that efficiency in the bill.
This is Ari Kaplan speaking with John Scott, an accounting partner with Anders, CPAs, and
advisors and the legal niche leader at Summit VCFO Services by Anders.
(11:36):
John, thanks so much.
You are.
Thank you for listening to the reinventing professionals podcast.
Visit reinventingprofessionals.com or Ari Kaplan advisors.com to learn more.
(upbeat music)
I'm great, Ari, how are you?
I'm doing really well.
I appreciate your time today and I'm looking forward to this conversation.
So tell us about your background and your role at Anders, CPAs and advisors.
I work in the tax department, so this is a busy time of year, but I've been around since
probably before you were born.
I joined Anders in 1992, large local firm, one office and we tended to work with a lot
(00:56):
of attorneys.
So I was very fortunate to know a lot of attorneys.
And early in my career, I worked with a very entrepreneurial attorney who built his practice
from just the St. Louis much bought an area from coast to coast in the United States and
he did it by focusing on data and metrics.
He would go to another much bought an area, find a managing attorney in that area, rent
(01:18):
space and in six months he would make money.
And I watched him do this over 17 years and in working with all the other law firms I worked
with, I saw that if you paid attention to data and metrics, there were better ways to
run your firms to increase profit cash low.
And so I've been doing that ever since and I love working with attorneys.
(01:43):
What are the most important financial metrics for growing a law firm?
I think the most important thing is cash.
If you don't have cash, why are we doing what we're doing?
But beyond that, it's production.
How do we turn efforts into cash and then our financials and then of course pipeline?
Where does our work come from?
So I think those are the four metrics that we tend to focus on with cash being the most
(02:04):
important one.
And there are various ways you can increase your cash position, but we start out by saying
depending on the type of firm you are, you should have 10% of your expected revenues in
the bank in cash.
All the way up to 30% if you're a more risky firm.
And the risky firms are contingent firms or their firms with one or two large clients that
(02:30):
if you lost one of those clients, you'd be in a cash branch.
And so really focusing on that working capital or cash position, we think is very important
for firms.
And a lot of firms at the end of the year will take everything out and we try and counsel
them not to do that.
Leave some of that money in there.
You have to have money to pay the bills and you don't want to rely on a lot of credit
(02:51):
to do that.
Although historically in the last 20 years, it hasn't been that expensive to use a lot of
credit, it's becoming more and more expensive.
What are some best practices for maximizing the leverage model for growing legal practice?
All firms do not generally use enough leverage.
There's a very old firm here in St. Louis, well respected and I was talking to the managing
(03:17):
partner and I said, hey, what's your leverage?
And he actually looked down because his leverage was less than one.
They had more partners than staff.
And it's just no way to maximize profit and cash flow.
Yes, the partner is in charge and responsible for all the work that's done on their behalf
for the clients.
(03:37):
But if you can increase your leverage, you're going to increase your ability to serve clients
and thereby cash flow and profit.
And so encouraging firms to standardize processes that are repeatable.
Not the really complex things that need creative thought, but the repeatable task.
Pushing that work down to less experience attorneys or even paralegals will help them
(04:04):
produce more, serve more clients and improve their profit and cash flow.
If you look at the accounting profession, leverage is 9 or 10 to 1, where a really good
law firm might have 3 to 1.
What about in other professional services?
Is it the same kind of ratio?
The legal profession is less leveraged than any other professional service group.
(04:27):
Architecture firms, engineering firms all push, work down and they all have different levels
of review.
In the accounting profession, we have preparers.
We have managers that review the work and then the partner reviews the work before it goes
out the door.
So there's 3 sets of eyes that touch it.
In the legal world, it tends to be either the partner is doing the work or they might have
(04:47):
an associate or a paralegal doing it and then they review it and go out.
You can do more and serve the clients better if you are pushing that work down.
And think about this.
It also trains someone who can replace you.
You have these associates.
If you don't give them challenging work to do, you're not training the next generation
(05:09):
of leaders.
How could law firms take advantage of dynamic forecasting?
I think this is really exemplified in the migration of the accounting profession and that's
what client advisory services is all about.
If you think about the CPA firms of the past and many still today are historical in nature,
(05:30):
they take your records, they record it, they reconcile it and tell you what happened.
We're migrating to what we're trying to do and it changed how people feel about accounting
is to take all the instantaneous data that we have and use that data and those data points
to predict the future.
So if I'm reconciling my accounts on a weekly basis, so that I instantaneously know that
(05:55):
balance sheet and ink up statement is good.
I can use the amounts that are in AR and the whip production that the firm has to predict
the cash flow 12 weeks out in a year out so that we can stay on task.
And if you think about when your grandfather took the family on vacation, he pulled out a
10 year old atlas and he wrote down some notes in the next day, he filed everybody in the
(06:18):
station wagon and away he went.
He can only react to what he saw in front of him.
And then our parents had triple e-tripp ticks which told them the outside of Atlanta, there's
a roadblock, here's a workaround.
Today we have the way Zap and Google Maps.
We get instantaneous data and that's the same thing we can do in a firm with their case management
(06:39):
system, online banking, all these technological tools like bill.com or divi cards, everything
can feed right into the general ledger.
So we're not waiting 15 or 20 days.
We can sync up immediately.
What types of data-driven decisions should law firms be making?
I think some of the big decisions are how much capacity do we have?
(07:02):
What is the ability to serve clients?
And if we have access capacity, how do we go fill that capacity?
Because as crafts as this sounds, we're like factory machines on a factory floor, right?
If we have 12 hours of capacity but we're only filling five, there's this wasted time there.
(07:25):
So I think knowing what your charge hour expectation is or the ability to serve x number
of files and how many people you have, it will influence your decision on that next new
piece of work, right?
If you think about a contractor who is full, he's full for the next six months and you want
to get your kitchen remodeled, his price is going to be pretty firm.
(07:48):
But if he's got a hole in his schedule and he wants to keep his folks busy, he's going
to be a little more aggressive on pricing because he wants to keep them on.
He doesn't want to lay anyone off.
The same thing occurs in a firm.
If I'm not a capacity and I've got nothing but a clients, the next client that comes in
the door, I'm going to be very selective as to whether or not I take them.
(08:12):
But if I do have, let's say, 20% capacity and somebody could be an a client, I'm not
a client, I would be a little more aggressive to take them on.
So using those data points and knowing what my capacity is will help me fill that capacity
with the right clients.
What are the most successful partner and staff compensation models?
(08:33):
If we talk to 10 firms, accounting or law firms, you'd have 10 different cop models.
But I think when you migrate away from, eat what you kill to a goals based system.
When I say that, goals for the firm and then individual partner goals that align with
those goals, I think you're going to get everyone moving in the same direction and the firm
(08:56):
overall is going to do better and then the partners will do better as well.
And then staff, we're all struggling to find and retain good staff.
So we have to be competitive to keep those folks, which means it's going to put fee pressure.
We're going to have to start charging more for our time.
And I think we've seen that.
We've seen it in everything we do on a bacon is 10 bucks and used to be six and the same
(09:19):
thing's happening to wages.
But a goals based system in my mind is one of the better ways to migrate to over time.
And you can't just flip the switch.
You can't go from book a business model to complete goals based.
It takes time to migrate that way.
How do you see AI changing law firm economics?
I love AI. I realize there are inherent dangers to AI.
(09:44):
But when I get into the accounting profession, PCs were not prevalent.
Okay.
We were doing amortization schedules depreciation schedules by hand.
And if you can imagine the time that's hooked and the mistakes you could make, I remember
my first boss.
I came in with some notes in a pen and he looked at me and he said, hey, I make
(10:09):
50 mistakes a day.
That's why I use a pencil with an eraser.
How many do you think you make?
So I'm like, okay, I got the message.
But the point is we got these PCs with the floppy disk and all of a sudden the things you
used to do by hand could now be done with a program.
And it was so much quicker.
We're today, we're just at that next wave of the revolution where AI is going to change
(10:32):
and take all these mundane repeatable practices and make them so much quicker.
Now, I think that we have to put some guardrails around it.
And I was at legal week in New York earlier this year and I know that the bigger firms are
putting fences around their generator, AI, keeping it all in house and then setting up frequently
(10:54):
ask questions for good uses, inappropriate uses, what you can and can't do.
I think firms need to do that.
You need to have some best practices for people.
The other thing for law firms, and I'm sure many of your listeners know this that if
you create an efficiency and you're charging by the hour, you have to pass that efficiency
on.
(11:15):
But if you modify your engagement letters to say, hey, some of the things we do are fixed
fee, then I think you can capture that efficiency in the bill.
This is Ari Kaplan speaking with John Scott, an accounting partner with Anders, CPAs, and
advisors and the legal niche leader at Summit VCFO Services by Anders.
(11:36):
John, thanks so much.
You are.
Thank you for listening to the reinventing professionals podcast.
Visit reinventingprofessionals.com or Ari Kaplan advisors.com to learn more.
(upbeat music)
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