I may have told this story before, but it bears repeating. I joined my first law firm immediately after graduating from night class at the highly regarded Maxwell Institute, where I learned computer programming in four languages on a state-of-the-art IBM 60. I graduated second in the class. While attending college, then grad school, followed by computer school, I worked full time in several multi-corporate environments, where I managed everything financial, human resources and what little technology existed. I learned everything on the job.
My first law firm hired me because they wanted someone who knew how to program computers. That firm was a 100+ year-old 13-attorney institution founded by a grandfather (and others) of one of the then-current partners. The culture was deeply ingrained. It was a surprisingly family-friendly environment where employees were deeply respected. The halls and offices echoed quiet whispers of people intently focused on dispensing justice and providing high quality legal representation in a very traditional manner. Dignity and a sense of service radiated from every corner.
The woman I replaced had been on the job for over fifty years. As the story goes, she ruled her roost with an iron hand. On her last day, she had her packed bags in the trunk of her car. She drove directly to the nursing home at the completion of her last day at work to live out her retirement.
For the last eleven years of her job, the firm had been using one of the first outside computer services for their time & billing needs. She submitted the batch work to the computer service under protest each month. She distributed the reports, which arrived a week later. But she refused to look at any of the reports, including the error reports, in protest. She provided no help or oversight for the secretaries and attorneys who struggled to provide accurate information. Over the 11 years, a lot of garbage had accumulated.
As a result, the firm decided her replacement had to know full charge bookkeeping as well as computer programming. I was probably the only person within a several state radius with that unique combination of skills. In fact, they were wrong regarding the computer programming requirement. There was no actual programming involved. There wasn’t even a computer onsite.
On my first day I was led into my office by the managing partner. It was huge and it had its own bathroom. Sweet. It had three separate massive wooden desks. I immediately noticed that two of the desks, and almost all the floor space, were covered with shoe boxes which were stacked up to the ceiling. The managing partner gave me a paper with the combination to the huge floor safe in the closet. He demonstrated how to open it. It was filled with ledgers and check books. As I started to examine the contents, he was already at the door, starting to close it behind him, saying “Payroll is due this Friday.” And with that, he vanished behind the sliding door.
After going through all the ledgers, including, gratefully, the payroll ledger, I turned to the checkbooks. There were six accounts, but no running balance appeared in any of the checkbooks. Hmmmm. How did my predecessor know how much money was in these accounts without written balances? I started opening the shoe boxes in hopes of finding answers.
To make the story significantly shorter I will just say that within those hundreds, maybe thousands of shoe boxes, was every single crumpled receipt, old ledger pages, scraps of paper, adding machine tapes by the thousands, cancelled checks, bank statements and so forth, from over fifty years, in no order and with nothing collated. Entire shoeboxes were stuffed with rubber-banded checks, no corresponding statements and no labels on a single box.
Yes, I got the payroll done. Fast forward a few weeks, and the end of month was approaching. Time to get ready to produce my first set of financial reports. I had yet to find any from the past and didn’t want to admit to the managing partner I was clueless as to what the firm was reviewing regularly. But I mustered the courage to casually ask him if he had kept any of the past financial reports, so that I could take a look to ensure I “didn’t make any radical style changes” to what they were used to seeing. It worked.
He was proud to say he reviewed them each month and kept an entire year’s worth of reports in his desk drawer. He opened the bottom drawer and handed me a large collection of adding machine tapes, held together by a big binder clip. “Uh, what are these?” I asked. “These are the P&Ls,” he said. I asked if I could borrow them to examine more carefully. I tried not to let him hear panic in my voice. He was a bit concerned, and I needed to assure him they would be returned promptly and intact.
I hustled back to my office to solve the puzzle. Each adding machine tape had a month and year scribbled on the top. Numbers were printed positive in black, negative in red, with a total of zero at the bottom. What the heck is this, I wondered? It’s not possible that the firm has had zero profit every month.
Suddenly, I realized what I was looking at. It was the firm’s trial balance. Basic bookkeeping: Assets = liabilities + capital. If you add them all up each month it should always equal zero. That’s how you know your books are in balance before producing your reports. I pulled out the main ledger and subsidiary ledgers and quickly verified that all the numbers matched the monthly totals in the ledgers.
When I had the answer, I quietly started laughing. All these years and they hadn’t had a single profit statement. I was going to be a huge success at this firm!
I took all the adding machine tapes back to the managing partner. I asked him what information in the P&L was most beneficial to him. He looked back like a deer in the headlights. I asked a few more probing questions. He got up hurriedly and closed his office door, walked over to me and looked me in the eye with a pained look on his face. He quietly confessed that he had no idea what those numbers were supposed to tell him, and that he was too embarrassed to ever ask.
Over the coming months I ever-so-gently asked innocent-sounding questions of the partners to determine the level of their understanding of the metrics which drove their firm profits. To my astonishment, I discovered that none of the partners had any discernable understanding, and not only that, they actually had an aversion to thinking about and focusing on anything numbers-related. Literally, their eyes would glaze over whenever a discussion involving numbers began.
And that’s when I realized that one of my primary missions at a law firm would be to not only uncover and examine the meaningful data, but to find ways to convey the information such that it would teach them what the numbers really meant. It was the only way to ensure that they could make good business decisions.
I have been true to that mission all these years. From managing a series of law firms to serving the legal community at large; educating attorneys about financial metrics has been a calling. But sometimes I stray, given the need for information that lawyers have nowadays.
A week ago, a CPA put a post on LinkedIn about the differences among his clients. He emphasized the aversion his law firm clients had to reviewing and discussing numbers. A lot of attorneys piled on with comments about how they just didn’t “get” anything when it came to the numbers, and they instead just focused on production. It renewed my interest in this area.
Then last week, I had a hotline call with a well-seasoned attorney who just left his partnership at BigLaw to start his own solo firm. And in the many start-up questions asked, it became apparent that a successful career path had not included any need to learn about firm metrics beyond compensation and he was undaunted, at my suggestion we schedule an additional call to discuss them in more detail.
So, this article serves as an introduction, fair warning, and a call-to-action on your part. My next article, and maybe the one thereafter, will discuss the important metrics at a law firm. Please do not interpret that as an excuse to skip the next issue(s) in which my column appears! I promise I will explain things clearly and that you will be able to understand why and which metrics are important, and how to examine them at your firm.
I also invite PBA members — only those who are willing to learn more about metrics — to schedule a call with me. There’s no cost: your dues dollars at work! Oh, and you might want to make a suggestion to your bar officers about bringing me to your county for a live CLE on the topic. I promise it won’t be a snooze-fest!