Episode Transcript
[00:00:00] Speaker A: Welcome to the Relay, the legal show for personal injury law firm owners, presented by lexamica, the number one attorney referral network. I'm your host, Gabriel Steeritz. Joining me today is Tim Mackey, founder and CEO of Vista Consulting and someone who's been over a decade helping plaintiff firms reach their full potential. And Tim is not just a cpa. He has decades of experience inside law firms, looking at their numbers, their metrics, their operations. He's one of the most experienced people who have ever been in the the injury space. And I also appreciate the shared sense of dad humor that he and I both have. So apologies in advance for jokes that really aren't funny on this episode, but I'm really excited to have Tim on the show. This is actually the second of two episodes that we're doing together, and this one is going to be about the core metrics, KPIs, that every law firm owner needs to understand about their injury firm. If you are starting a firm, if you've been In a firm 20 years, if you don't know these metrics, you don't understand your firm. So Tim's the guy who actually taught me a lot about these when I was getting into the industry. So I'm excited to have him on the show and discuss. Welcome, Tim.
[00:01:04] Speaker B: Thank you so much. I appreciate the kind words again. And on the first episode, you slipped in a little bit about my age and you just called it experience this time. So I'm thankful for the fact you lightened that up. And I guess that's one of those dad jokes that we were talking about.
[00:01:19] Speaker A: So, Tim, to. To dive right in on this. I think that if someone was talking to me about an injury firm and I wanted to understand in five minutes what the health of the firm is, there's a few metrics that I would ask for, and if I had them, I would feel pretty good about understanding their law firm. And if I couldn't answer them, I would say, well, you don't. You really don't understand your business fundamentally. And those are, in no particular order are going to be the where is the money going in your firm? And there's three categories inside of that. Marketing, operations, and profit. Where's the money going then? Two major kind of quality metrics. One is the cost of acquisition for your cases and the average case value. You can really capture most of the health of a law firm in those metrics. Agree or disagree first, and then let's dive in and talk about them.
[00:02:10] Speaker B: Agree. And there may be one or two little twists and some details on some things you said and that I think that's why we're doing the podcast together. I absolutely agree.
[00:02:20] Speaker A: Yeah. So let's, let's just start with, with the overall breakdown. It seems pretty self evident, but where your money is going is absolutely critical. And I think it's easy to get overwhelmed. If you're an attorney and you're starting to look at a profit and loss statement for the first time, your accountant shoves something at you. It's been 18 months since you've seen this thing and it's a whole bunch of numbers in a spreadsheet. But the way that when you started to break it down at Vista at, at the leadership summit, it, it's really simple. There's, there's three major categories. Walk me through what they are now.
[00:02:48] Speaker B: And I'm going to, I'm going to break it out into possibly four said case acquisition, which is marketing, cost, operations and profit are the three. I'm going to twist this up just a little bit and give you a little bit more detail. There are really three major expense categories in law firms. Expense categories. Now we're talking about attorney compensation, non attorney compensation, which is the support team. And then there's the case acquisition or the marketing cost. And then there's a tremendous number of other smaller costs. Those are the big three. Attorney comp, non attorney comp or support. And then case acquisition costs. Everything else are the things like, you know, your rent, you're maintaining the law library of the electric, all of those things that we put in the other category. So we try to take a P and L statement and break it down on the expense side into those four categories. Again, attorney, non attorney, marketing, and other, which is all the other things. That's the expense side. The thing that we, and what we do is we look at ratios of revenue to those four items. Okay. And we also have to know what stage the firm is in, because if you mentioned startup, what numbers do I need to know? Well, the startup numbers are possibly very different than a firm that is sustaining success, you know, that has been in business for a while, that has an ongoing operation. So we look at four different stages of firms.
[00:04:17] Speaker A: Yeah. And let me, let me just, let me just like drill this in, which is. Attorneys love to get lost in the weeds. Like they just love detail and nuance. And I think it's really important to look at there, there's something called a sensitivity analysis, which is really, which is when you're looking at a number of metrics or data points and you, you need to understand that if you're looking at like a 30 cent or a five line item or expense on a million dollar profit and loss statement, a sensitivity analysis for any given item. If I double that or half that, how much of an impact does that make on my business? Well, a $5 transaction, it makes no difference whether it's $10 or two and a half dollars. If it's a $500,000 part of your, your, your budget, then it makes an immense difference. And so I think that it's really important to contextualize. Like we are not saying here that every single transaction is created equal. And that other category, the junk drawer, honestly matters because you can, you can mentally clear up a whole lot important parts of your business. We're talking about being an executive, a law firm owner. And how do you categorize this in such a way that you can understand your business at a glance? So just walk us through. So you've got, and I appreciate the breakdown inside of what I would say is operating expenses, which is attorney comp, non attorney comp, and other. And honestly, even other, which is everything else is generally going to be below 10% of your total operating expenses. Right?
[00:05:42] Speaker B: We try to keep it below.
[00:05:44] Speaker A: Yeah, exactly. So don't high center on who's buying coffee and did your partner, you know, spend an extra $5 at lunch? Like double or half it, it doesn't matter. Let's major in the majors here on the executive dashboard level. So yeah, so walk us through what so, so you're saying that different types of law firms have different ratios and the ratios should just be meaning if you have a hundred percent of money going out the door at the end of the year, what percentage goes to each of these categories? So let's walk through. We'll first talk about just at a high level, Tim, from top to bottom. Again, this is executive level. Let's start with the biggest things first. Walk through us down the list of what are the biggest expenses down to the smallest ones. And then how do those ratios generally look like high level. Before we talk about different types of law firms.
[00:06:28] Speaker B: Okay. Again, we look at four key areas and they're big categories that you just set them. Attorney comp, non attorney comp, marketing or case acquisition. And then other. And I like the way you talked about other. You know, we often say are. We often see law firm owners getting upset because that we spent $150 on snacks. That's the kind of thing you were saying we can double it or half it. It doesn't matter. You know, removing Twinkies from the break room is not going to break or make your firm. In fact it may piss off some of the the team members. So let's keep the Twinkies flowing. Let's really look at the big areas. You know, how are your attorneys being compensated and what is the ratio to what they're bringing in? That's the ratio we like to, to look at, you know and this is a thing that I believe has changed or morphed a little bit over time. We've been doing this 15 years. That ratio for a firm that's sustaining success. And again, I hate to go, you know. No, you didn't want to go there. But you know there's different ratios for different types of firms. Startup, startup, turnaround, realignment or sustaining success are those categories.
[00:07:33] Speaker A: Which is a great framework by the way. I love it. I encountered that through the first 90 days book. I don't know if it shows up in other business literature but I think it's a fantastic framework looking at different types.
[00:07:43] Speaker B: I mean you know, everything's not equal in, in any, in any firm. You know, they're different, they're at different levels, they have different systems, they have different cultures. You know, that's the one thing. And again, and you know, this is not sales. I mean I'm going to toot our horn here for just a second. We have to assess what's going on with the, in the firm to know how to advise a firm to implement best practices and those kind of things. Coming with a cookie cutter and saying hey, you've got to do things like this without knowing what they're doing before is in my opinion a little bit silly.
[00:08:13] Speaker A: So yeah, yeah. But I'm a big fan of rule of thumb heuristics like what are my, what are my ranges? Let's talk about the big one at first. So marketing, case acquisition, what's the range? Walk me through low end to high.
[00:08:24] Speaker B: End on that staining success firm. Your let's just go down the list. Attorney comp should be 25% or below. We used to say 20% that has creeped up over the years that we just see that across the board. The firms that are being the most successful, once they're up and going, you can keep that ratio in the 25% range to your gross revenue to that expense line item. Then you've got the support team, the non attorney compensation again in the 20ish percent range. The firm is doing well. Case acquisition costs. Spend a dollar, you get five back, that's 20%. Okay. And my friend Chad Dudley, who you know, he and I started VISTA together long ago. You know, Chad says something one time that I think is so cool and right on. If you're spending a dollar and you're getting $5 back, do it till it breaks.
[00:09:19] Speaker A: Okay.
[00:09:19] Speaker B: In other words, he keep monitoring this. And that's why knowing your numbers and looking at, hey, are we still getting that ratio of revenue back when we market is extremely important. And then we talked earlier about that whole other category, trying to keep it 12 or below. And if you, if you run the numbers, that yields you a profit in the 25 to 30% range. We see firms that are doing a lot better than that. We see firms that are doing worse than that. And I say some of them are still sustaining success because in some instances the partners are handling cases. Okay. And when the partners handle cases, you can expect a higher bottom line revenue because they take part of their profit or part of their income in salary, expense. And there's a difference between getting paid for what you do and profit.
[00:10:11] Speaker A: Yeah. And just a whole little sidebar, which is that how you calculate ownership on the profit side versus putting that into attorney compensation as a whole, their discussion. And yeah, that's. You just have to account for it some way. But great rule of thumb. So let me, I'll just recap that.
[00:10:26] Speaker B: Yeah, recap.
[00:10:26] Speaker A: Since you ran through it. So your biggest single item as a percent of gross revenue is attorney compensation. That should be just under 25%. Marketing case acquisition, 20% non attorney comp, 20% other under 12. And then that leaves you with about a 25% profit margin. Bam. There it is, five numbers. So you can understand roughly where your business is. Again, you could be a little high and low. My big thing, I went to art school. You have to know the rules in order to break the rules. If you want to be a great artist, you don't go and just immediately start slapping paint around. You have to know how to paint before you can start to go and be a Kandinsky and make everything up. So you got to know the rules in order to break them. So that's, that's amazing. I thought that case acquisition was a little bit higher. Frankly, I think I would have said closer to 30%. Are you seeing that number change or is that like, is that more mature business where the case acquisition is down a little bit as a percentage?
[00:11:19] Speaker B: You know, I tried to, to couch that is this firm that has been in business for a while and we call it sustaining success. They're, they are doing well and they've been able to work through a lot of these numbers. And this is what you hit depending on again where you are on the case, on the, on the firm lifespan, startup, turnaround, realignment, sustaining success. These numbers can, can and will vary. And quite honestly we've seen the percentages in those big areas differ, differ as much as 5 to 7% and the firm still be sustaining success. They're just putting it in different bl. Hey, we've got a reputation and I could name a firm in Las Vegas that's not the biggest spender but has tremendous amount of intake coming in because they built their brand, they do reach back to their clients on a consistent basis, which is the most inexpensive form of marketing there is. And they have cracked the code. They've been in business for 35 years, so their ratios vary. But the profit margins are still about the same. They've just reallocated within if. I hope that makes some sense.
[00:12:29] Speaker A: No, absolutely. Well, to use two extreme examples, there's a firm in Dallas that I was on a panel with last week and the guy has, he has 30 attorneys and he has 520 staff. That's the highest staff to attorney ratio I've ever heard of. Obviously his attorney comp is going to be a lot smaller than his non attorney comp. And then on the other side, I know law firms that have very few staff because they're more trial focused and everything comes in from a referral and they're paying a 5050 split. But their, their profit margins are fantastic. So there are many ways to break the rules. This is just a great understanding of what are the, what are the buckets though? Because I think that's like to go back to the beginning, what are the buckets that you can use to understand a firm Quickly. It's not as complicated as you might think in large part because you have a junk drawer that includes only 12% of all your stuff doesn't go. This is the big point. Four things make up 90% of your expenses and then you just dump the rest into a 10% bucket. And that's great. Like don't worry about the rest of that. As long as the number works as a percentage of gross revenue, you have.
[00:13:30] Speaker B: To know your numbers. And that's where you know, we have to have a starting place. And that's why what we do is so custom. Every firm is a little bit different. There's a little bit of nuance in everything. You know, I very much Appreciate you looking at these rules of thumb at a high level. I say get the numbers, and then you're going to have to go in and dig into each one of these, because every firm is a little bit different.
And that's, you know, that's not bad. You know, I'll give you an example. I mean, maybe I'm showing my age again here. Back in the old days, Vince Lombardi had the Green Bay sweep. You know, it's just this tremendously successful play for them. Everybody had a job, everybody knew who they were going to block. But I love what Lombardi said at the end was then, we're going to pitch this ball to this halfback, and he's going to run to daylight. So you have to have some agility, some flexibility in these things to understand what's developing in front of you. And if you're monitoring this over time, you start to see patterns.
[00:14:29] Speaker A: That's why you read my mind, Tim, because I was going to say one of the important things about having consistent metrics is that knowing your metrics over time is almost more important than a static snapshot. Especially we're in a dynamic. Well, two things change. One, your strategy, your firm changes as your firm grows, but also the marketplace is changing. So let's talk about that. These metrics, these KPIs, have been changing. I'm hearing it across the board, across the industry, these metrics have been changing. Not nailing down percentages, but what metrics are changing over time inside law firms that you're talking to right now? What are those changes in the industry?
[00:15:03] Speaker B: Things are trending up. We talked about. Attorney comp is a little bit higher than when we began this 15 years ago. Marketing is getting more and more tricky. There's just so many more marketing channels now than there were 15 years ago. I mean, the digital marketplace, I could say, has taken over or taken bites out of the traditional other, you know, the tv, radio, print type things. You know, I'll go out on a little bit of a limb here and say TV is dying, but it's going to be a slow death. It just is going to happen over time. And I'm not saying that everybody should go out and buy tv. That's not it at all. It depends on where you are in your market and what is going to work for you. And I'm going to say one other thing that is without exception, no matter how you market, the biggest cases in all of our clients come from a referral, from either a very important referral source or a Client who has come through your firm before that you have kept in contact. That is the cheapest form of marketing. Everything else, I facetiously call it chumming the water. But then when you put the hook in front of a fish's face, you're more likely to get the hit. And that's what this, this particular system allows you to do.
[00:16:19] Speaker A: Well, and to put a finer point on it too, is that not every case is created equal. And your point is? I've seen it. When there's a high trust relationship, that's where the biggest cases are going to go to the highest trust relationships. People are more likely to send their catastrophic injury to their brother Jimmy, who's a family lawyer, than to the best injury lawyer in the country. Because when the chip are down, people want to go to who they trust. And that client referral or that attorney referral relationship I talked to, I talked to a guy who said his referrals from other attorneys are worth on average twice as much as the cases he gets, even from his core brand based advertising, which is a really great marketing channel. Sure. And so, yeah, I totally agree with that. We're coming up on time. Tim, this has been absolutely fantastic. Would really like one. If you don't know these numbers, you have to know them. If that's too intimidating for you. Tim is a cpa. He does this with law firms all the time. You should call him. You should ask him. If people want to get a hold of you, what's the best way for them to reach out?
[00:17:21] Speaker B: They can go to our website, very simple. Www.which stands for consulting team vista ct.com or call my cell. And my cell is 225-931-7045. I'm pretty much a stickler that I will return calls. If I don't pick it up right away, I will, I will make that call. Look, I very much appreciate you allowing me to get on here. I love what you guys do. The referral mechanism is tremendous. So.
[00:17:48] Speaker A: No, I appreciate it, Tim. And if you, if you, if you know me, you can, you can get Tim's info for me as well. And I would also say if you want to ask for it, I'm happy to share. Or Tim can. Just the basic template for putting those numbers in place for your business and some of those rules of thumb I know we talked about a lot. I'm a very, a very visual person. So reach out to either of us and happy to send you the template so you can see it for yourself.
[00:18:12] Speaker B: Yeah. Let me give you my email address. So if you want to email me, I will send you some templates for you to look at. It's T M C K e y@vista ct.com t m c K-E-Y vistact.com There we go. Knows where to get me.
[00:18:29] Speaker A: Amazing. Tim, thank you so much for being on.
[00:18:31] Speaker B: You're very welcome.
