Best Practice Tips: Law Firm Financial Management—Managing the Firm's Inventory
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. We have an 18-attorney firm in Portland, Oregon. I was recently hired as the firm administrator. This is my first law firm. My previous employment was with a small manufacturing and distribution company. I have read some articles that discussed the importance of managing inventory in a law practice. Does a law firm even have inventory? I would appreciate your comments.
A. Inventory (or pipeline) management is a term used in the management consulting profession to refer to the process by which you continually evaluate your active opportunities (prospective clients to booked clients) for their balance of quality and quantity. The goal is to continually stay on top of the overall health, which is a full pipeline. Pipeline management allows client relationship managers to more accurately forecast fee revenues, better staff and manage client engagements, and close more client business.
I often also refer to inventory or pipeline management in law firms in the context of using financial dashboards by which the individual charged with financial management responsibilities is continuously aware of significant changes in the firm's inventory or pipeline (from prospects to cash):
- Number of new business inquiries for the month
- Number of pending prospective clients
- Number of open client matters
- Dollar value of unbilled work in process/age
- Dollar value of accounts receivable/age
- Dollar value of billings
- Dollar value of unearned retainers
- Dollar value of fee receipts/collections
By comparing these dashboard statistics to a prior month, quarter, or year, you are able to avoid financial surprises down the road.
Law firms do have inventory and that is their unbilled work in process (matters in process) or in the case of a contingency fee firm, I usually refer to work in process as cases in process.
How well this inventory is managed—managing what is in front of you rather than what is behind you—is a critical component of financial management and has a major impact on the profitability of the firm. However, this responsibility falls primarily to the attorneys responsible for the matters. However, in your capacity as administrator, you can provide the reports and oversight to help keep them on course.
John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at email@example.com.