John C. Scott, Partner + Tax for Anders CPAs + Advisors, has been with Anders since 1992, and now he’s trying on a new hat: Summit Virtual CFO Service by Anders. With his extensive experience working closely with the law industry, he joins Tom Wadelton and Jody Grunden in today’s episode to talk about his experience with Virtual CFO services, and how he helps lawyers to better manage their finances. John shares his expertise on accounting services for lawyers and how CPA firms can best serve them. He also discusses the challenges of operating within the legal industry and provides tips on how to work with lawyers and law firms effectively.
“Typically, lawyers are focused on what is right in front of them. They think if they do good work that's right in front of them, then good things will happen. And, sometimes they do, but you can enhance that if you focus on what the value drivers are for the business.” -John C. Scott
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00:00:17
Tom: Welcome to today's episode. I am excited about today's topic.
00:00:21
We talk a lot about niches and focusing on niches, and we often talk about the one that Summit CPA Group focuses on. We're gonna talk about a little bit different niche today. I'm Tom Wadelton. I'm one of the full-time virtual CFOs at Summit CPA Group, and we're a division of Anders CPA and Advisors. I'm joined by my usual co-host, Jody Grunden.
00:00:39
And Jody is a partner with Anders CPA and Advisors and was one of the founders of Summit. Welcome Jody.
00:00:44
Jody: Yeah, thanks. Usual. Huh? I, this is only the second time I've been with you .
00:00:48
Tom: So your usual, it was so impactful. And our guest today who's probably now thinking why did I join this podcast is John Scott.
00:01:00
John is a tax partner with Anders CPA and Advisors, and John focuses a lot on lawyers and legal firms. So John, welcome to our program today.
00:01:10
John: Thank you, Tom, and good to see you, Jody.
00:01:14
Jody: Yeah, good to see you as well. So Tom, before we get started here, . So can you kind of explain to us some, you know, let's kinda do like a fun round robin thing here before we actually get into the meat of things.
00:01:27
Tell us something funny that's happened on a podcast that recently .
00:01:31
Tom: So recently we're on a podcast and before we do the podcast, we do like sound checks and camera checks and everything. And one person, my usual co-host who made fun of me had his phone that just continued to go off during that time.
00:01:44
And John made a comment that he likes to call people. when that happens. I was mentioning that I was in a meeting at one time, probably with 10 people, and our boss, who was a very uptight person, had said, this is a really serious meeting. Everyone turn your phones off, all this stuff. I had gotten a new phone.
00:01:58
I'm like, no one knows this number. [00:02:00] And so I didn't turn off my phone. One of my peers across the table noticed that, and he immediately called me. And so like 30 seconds after everyone turns off their phones and all this my phone starts ringing , and my boss looked like he wanted to kill me. I'm really embarrassed.
00:02:13
I'm gonna look over and I can see this guy across the table laughing and I'm like, man, you just totally cooked me on that one. So it's one that's reminded me. ,
00:02:22
John: I'm the guy who calls you
00:02:25
Tom: Oh, cruel. Exactly. And he was smooth. He was like under the table. No one noticed he was doing it. But I talked to him after.
00:02:30
He is like, I could see you were the one who was like, I'm not touching my phone. He goes, that's not gonna work.
00:02:37
Jody: How about about you, John? What? You're a prankster. What have you done recently?
00:02:41
John: Well, the same thing happens in church. You know, somebody's phone will go off and my wife all of a sudden will get paranoid and she'll go to make sure her phone is turned off. And I'm like, really? You know, come on.
00:02:51
My phone's always on silent, so I never have that issue. I guess if you wanted to prank me, you could flip the sound on when I didn't see it, that one,
00:03:00
Jody: then you wouldn't even know
00:03:03
Tom: and Jody. Oh, anything in particular during the podcast?
00:03:07
Jody: Oh, and so,
00:03:11
Pranks during a podcast. I, you know, it's kind of funny cuz you know, we don't joke a whole lot around here at Summit. So we think my biggest, I think my biggest one was a prank. That wasn't even a prank really. We were turning virtual, we decided to go remote.
00:03:25
We always start the meeting. We always start our meetings off. We had standup meetings back then, you know, you know, standup, so it goes quicker and all that kind of stuff. And we had 18 folks and we were sitting around this big table in our conference room, and we always start with a joke and it just happened.
00:03:37
The joke was, my joke was for, you know, for that week. And I come in and some background was, I was really kind of thinking about going remote. I thought this would be a great idea. Let's go remote. Let's be some, let's be. The first financial firm ever to do it. And I thought, this is gonna be exciting.
00:03:53
And so I went into this meeting, I'm like, it's so exciting. I forgot about the joke. And I started telling everybody about how we're going to go remote and [00:04:00] how we're gonna kick everybody outta the office and all this kind of stuff. And it was like, . Everybody's just waiting for the punchline cuz it was like a dead silence.
00:04:07
You know? Adam was dead silent. Everybody's just like looking at me like, what are you talking about? So really the joke was on me cause it wasn't a joke. And you know, with that, you know, that was kind of the spark that , you know, kind of got us to, you know, go, you know, doing a fully remote fully remote office.
00:04:25
Cuz after that I'm like, you know, hey, we're gonna plow away, plow forward, we're gonna actually do this. And kind of created the game where, or the, basically the roadmap there. And, and all 18 people said, we ain't doing it , you know, we're accountants, we don't like change, we're not gonna do it.
00:04:39
And So I, that's when I had, that's when I did the office build and spent a bunch of money, a hundred thousand dollars plus building the office, rearranging things so that we could actually not work remote because they will use my entire team. And then once the again, the joke was on me again.
00:04:54
Once we got done, everybody's like, ah, I'm good. Let's work remote . And so that's how we started, you know, so it was kinda like a joke was on me inadvertently, you know, through that. So I think that's probably the, the one that hits my pocketbook the most.
00:05:08
Tom: For sure.
00:05:08
I'm sure people who worked at home during the pandemic can relate to the. . I never thought I could work from home. Hated it. And then once I started it, it's funny you have that, Jody. Cuz now as you know, when we do our all team meeting every Monday, the first thing that we do is start with a joke that someone's assigned.
00:05:22
And not always a very good joke. Giving accountants and lots of dad jokes, but we get our best shot.
00:05:29
Jody: Well you know the cool part about it, it's kind of funny cuz it's the first time a lot of people there actually spoke in front. That many people. Yeah. And you know, you're looking at, there's 75 plus people in our, in our you know, departmental team meeting there.
00:05:41
And that person has to deliver a joke, which I can't imagine, for me, it's not a big deal. I can't imagine For some people it's like, oh, that's a big, huge leap of faith, you know, a big, huge step. Yeah, it is. And they. They always pulled off.
00:05:53
John: It is great training for accountants to do that, and they do it in a safe space because you're amongst your [00:06:00] coworkers and it trains them then to speak to people that aren't their coworkers and it makes 'em more comfortable doing that.
00:06:06
We used to do that with internal meetings where we would have them, the youngsters present on a topic that everybody in the room knew. But it got them comfortable talking about payroll taxes to 15 of their peers so that when they had to go out and talk to a client, they were already comfortable doing it.
00:06:23
Tom:
00:06:23
Yeah, that's a good point.
00:06:25
Jody: That's a hundred percent why we do it. Yeah, a hundred percent. It's funny, and that's also why we have like a, our CFO meetings, a lot of times we'll have an individual shadowing the CFO and we call that our senior advisor. Senior accountant, where they're actually in a lot of our CFO meetings.
00:06:39
And the purpose isn't really to. give a lot of information that the senior's gonna be talking, but the purpose is kind of just hearing what everybody else is saying. Right. You know, how does John speak with a, to a client? You know, how does he answer those questions? What does he do? And it's amazing what they pick up just from being in that meeting.
00:06:58
And the comfort level they start developing is pretty unreal. You know, I can't imagine throwing. You know, a kid ran outta college into a meeting and say, you know, Hey, I want you to, you know, you're not a CFO and I want you to, to tell this business owner who's been doing it forever, how to run his business.
00:07:12
Sure. You know, that would be horrible. I can't, yeah. You know, even though a lot of college grads feel that they could do that they would fall, they would fail.
00:07:19
Tom: Most especially having never but seen that kind of meeting. Right. For the very first time to walk in and not know how it usually goes.
00:07:24
That would be really scary.
00:07:26
Jody: Yeah. And so that, that's the important thing about shadowing, you know, being with, you know, you know, listening to what people say. And so, you know, a big, you know, a big shout out would be is, you know, anytime you're in a meeting like that, you know, really listen, you know, don't formulate in your head what the next thing you're gonna say.
00:07:41
Really listen to what other people are saying. And you'll learn a lot and learn how to communicate, you know, much better.
00:07:46
John: I do have a horror story about that. I was working for a partner when I was very young in my career and I did some research for a client and the partner didn't have time to go over the research with me.
00:07:57
And the research was, my conclusion was [00:08:00] wrong. And the response I got from the CFO at the client was I was a partner in a big four accounting firm for 20 years before I took this job. That answer is wrong. And I went back to the partner, I'm like, I don't know how this, I was wrong, but you know, it's a learning experience for him and me and yeah, just you grow from that
00:08:21
Tom: I bet you would learn a lot for that.
00:08:25
John: Well, yeah.
Tom: So, John, how did you get,
00:08:27
Jody: so let's switch, let's, yeah, go ahead Tom, go ahead.
00:08:29
Tom: I'm curious how you got into working with lawyers and law firms and that being a bit of a niche for you.
00:08:35
John: You know, when you get into the accounting profession in a mid-size or large firm, You're a generalist.
00:08:41
and you get work and you just kind of gravitate towards something you enjoy. And early on I worked with a lot of law firms and early on, one of my better clients was a very entrepreneurial firm that decided they wanted to work on their business rather than in it. And they grew from one metropolitan area to almost every state in the United States.
00:09:00
And they did it like focusing on data and KPIs and that taught me that dashboards and data are the way to grow net income, revenue and cash flow.
00:09:13
Tom: Interesting. And this was a law firm, is that right? And were they
00:09:16
John: It was a law firm and not a, typically lawyers are focused on what is right in front of them.
00:09:24
and they think if they do good work and it's not just lawyers, it's every professional. If they do the work that's right in front of them, then good things will happen. And sometimes they do, but you can enhance that if you focus on what the value drivers are for the business.
00:09:40
Jody: And I think that really goes with every business, right? I mean, if you understand the vernacular, if you understand, you know, what makes, you know, what makes the business run, you know, I think it's easy to communicate that then. So it, with law firms, you're talking about what utilization average bill rate, you know, effective rate, all the different you know, [00:10:00] all the different key metrics that you would typically
00:10:03
talk about an accounting firm or maybe a, you know, any kind of service based company. Yeah. You know, you build those metrics and you talk about 'em. But, you know, kind of Tom spinning it over you, you know, the, you know what the metrics all by themselves, what really don't mean anything.
00:10:18
Right. It's really how you, how you implement 'em, how to use them. Yeah. So how do you, how do we use metrics overall?
00:10:24
Tom: Yeah. From the beginning with metrics, we're talking to the clients and seeing if they're aligned with the metrics. If it's within our niche of digital agencies, we have recommended metrics that many of them adopt.
00:10:35
Otherwise, it's really interesting. Hey, how, what really drives your business? Most business owners won't talk just from the financials. . Right. And so that's the kind of their language of doing things. And if they do talk from the financials without the KPIs, what we often find is they might say something like, I want to grow by 25% next year.
00:10:52
Cause I want to be X size. When you start drilling down, if they don't have it they don't know what's under that. And so you can get to, okay, what does that mean? And it's just maybe a kind of a star off in the distance and they don't know how to get there. And so the KPIs at that point very quickly become, okay, what would it take
00:11:06
Just let's say grow 25%. Is it new customers? Is it utilization? If that's true, then how many more people or how much more work do you get out of each person? And you can start saying, okay, so it looks like you're gonna grow by X number of people. You this many more hours. This is this what your business is gonna look like?
00:11:22
And if they can visualize it, like John said, then they've got a picture of, okay, here's what next year looks like. And I've gotta do this on the sales and demand side, and then this on the providing side. And if you explain the business to 'em, then when you're doing financial statements, if you're really good, you're talking much more from the KPIs than you are from the financials and saying, because our utilization knocked it outta the park, and we did add people and we did this.
00:11:43
The numbers look great. I mean, that's almost the byproduct of that. But you guys keep focusing on these key performance indicators. Which I think John, you would likely say that's the working on the business part that I'm not sure. I would imagine many of our listeners have heard that working on the business versus in I'd be interested in what you saw the [00:12:00] difference when you can see like a client who you feels like is working on it versus working in it Well, do you see a big difference?
00:12:07
John: There's a huge difference in that. You know, you can say, I want to grow 25% but if that means I have to hire five professionals, it's gonna take me time to do that. And so my growth in that year, I'm not gonna be able to hire everybody on January 1st, right? I might hire one at the end of January, two in March, and the rest in the summer.
00:12:24
And how am I gonna hit my growth goal given that I can't hire everybody on day one? And we all know how tough it is to hire people. And of course we have to retain what we have. It's five net new people. It's not I'm gonna hire five people and lose three. That doesn't do me any good. Right? And I have to stay focused on what that goal is and how do I get there?
00:12:43
What levers do I pull so that I can achieve that goal and it's gonna change throughout the year.
00:12:48
Tom: Mm-hmm. .
00:12:51
Jody: Yeah, and it's kind of funny because, you know, it's adding the new people, but it's also kind of reflecting back on what the, what your base, you know, what your starting point is, right? You know, my, my wife works for a law firm, you know, she actually owns her own law firm, and she's been in law for 20 plus years.
00:13:05
She worked for a large, a real large law firm. What happened was they had a super, super awesome year, year before. A lot of things just really went. And it was a really solid base and they, and they had all records, you know, record type of revenue. And then the next year was actually probably their third best every year.
00:13:23
But they based all their forecasting on, hey, we're just gonna increase revenue automatically by another 10%. You know, they stocked up their employees, their staff and everything based on that unrealistic number. And when they had their third best year ever, they ended up having to lay people off.
00:13:38
You know, cause. Because they, they misunderstood or did not understand their financial numbers. Do you, do you see that very often, John at all? Or was that just like a one off for me,
00:13:49
John: no. I think it's pretty typical of all professionals, accountants, attorneys, engineers, anybody that charges by the hour for their services until they [00:14:00] understand what levers they need to pull and what drives cash flow, net income and revenue growth.
00:14:07
They're just saying, okay, I want to grow 10%. But they're not saying, they're not mapping out how do I get there and what do I have to do to achieve that goal? And that's working on your business and not in it. You know, I think utilization at its core, you look at how many hours does a professional have available, and you have to subtract.
00:14:29
what the non-viable hours are. you know? pdo, CLE, Yep. Any sort of things that we want them to do administratively. And then you come up with a goal for each professional and each professional's goal is different. And then you have to spread that goal throughout the year and monitor it.
00:14:44
So if I work as a lawyer 2,500 hours, and I bill, my goal is 75%, I need to bill 1,875 hours. And so those are the things that I think. executive committees need to focus on when they look at their population of lawyers, what is our capacity? And it's not 25 hour, a hundred hours per professional. Yep.
00:15:07
Because we're asking them to do things that aren't billable. And so once you get that and you can monitor individual goals and then overall goals of a department or a firm, then I think you can start to get where you want to get. And you can say, okay, I don't have the capacity to achieve my goals. I need to go higher.
00:15:27
I have plenty of people, maybe I can pull some different levers to achieve the goal because I have the capacity to do it. I mean, the next logical one to talk is about realization. And realization is, okay, they charged 1,875 hours, did the client see that value? And can the partner who's billing it bill it?
00:15:48
I had a conversation with an owner the other day that was bragging about their star performer. This person was fully [00:16:00] utilized, which is a mistake, right? The realization was a hundred percent. And I said that's great. What's the rate per hour? 250? I said, well, that's great. So you're getting 250 an hour on almost all of our hours.
00:16:14
What if we sacrificed some realization and said, I'll take 90%, raise a rate to 300. , now I'm getting 270 per hour and a light bulb came on. it's like, wow, there's 20 hours an hour extra. So I think focusing on data and metrics helps you achieve and exceed your goals.
00:16:35
Jody: Yeah. It's amazing.
00:16:36
That's a great example. Cause when we when we work a lot in the creative agency space, and they, and they do the same thing as, you know, they're hourly billing, they're flat fee billing of all different kinds of billing. But the realization on what. You know, just knocking that utilization down and increasing that average bill rate, what that might impact.
00:16:53
Because if you take the utilization rate times your average bill rate, that's your, you know, you're basically your effective rate. And so the idea is playing a game to make sure that effective rate is really as high as you can. So like, you're right. If you're, if you're not writing things off, you know, not bad debt, but writing hours off, you're probably not billing enough..
00:17:10
Your bill rate's probably too low. You need to increase it up just like you're saying there. And it's amazing when you kind of play with that and kind of really look at the data. You know how just something like that can really impact things. And it may be that, you know what, now we, that lawyer doesn't have to work 2,500 bill hours.
00:17:28
Maybe that lawyer needs to work 2,400 or 2,300 and still be able to maintain the same size of book based on adjusting utilization and average bill rate.
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00:17:59
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00:18:18
Tom: So John, you're a tax partner. Sort of how often do you meet with these clients who are willing to work on their business?
00:18:24
And I'm just curious kind of what that looks like when you're reviewing KPIs with them and giving that kind of advice.
00:18:30
John: Well, in an ideal world, I want to be part of the management committee. with the entrepreneurial firm. I met with them once a month as part of their finance committee meeting. We went over their KPI packet, we went over what else is going on in the firm, and I didn't have a vote, but you know, I certainly had input into
00:18:49
what those decisions that needed to be made were made. So I would say monthly in most cases.
00:18:58
Jody: Yeah, and I think as we really kind of really blow up this vertical, cuz we're really looking to add a, add a bunch of legal firms into the into our virtual CFO niche. You know, working with a monthly is going to be a bare minimum, you know, we've gotta be able to
00:19:13
work with them, at least on a monthly cadence going through, you know, all the different numbers and really kind of meeting with the, you know, the management committee, you know, per se, who are the partners that are in charge that we can actually help them deliver. But even so, you know, often we we'll work with the clients on a weekly basis.
00:19:29
We're meeting with them as part of their weekly management team and being more involved in the decision making process. Cuz again, a lot of times when you're at the end of the month, you're getting, you're hearing things. You know, after the fact stuff, you know, Hey, here's what we did, here's what we did, here's why we did it.
00:19:44
Whereas if you're in the meetings during the week, you're kind of being part of that discussion process. And so it makes it more involved to where you can give a little more informative decision or kind of steer the ship a little easier. Tomhaving worked with many clients, you know, over the years, you know, [00:20:00] you work with a lot that, you know, you work with on a monthly basis and a lot that you work with also on a weekly basis, I would say our typical client base is split 50 50.
00:20:07
We meet with half our clients monthly, half 'em weekly, you know, which ones do you get more fulfillment in, or do you feel the client gets more fulfillment in? And I could be really wrong. I'm gonna say my bias is towards weekly. But Tom, you might say something differently. What's your, what's your take on that?
00:20:21
Tom: No, I think it's weekly. It, it gives me the feeling that I'm a lot closer to the business. And John, just to give you an idea, the usual cadence, if I work weekly with a client, would be in the first week of the month, we're looking at their sales pipeline, what's already committed work and what do they see potentially coming in?
00:20:36
to look at what, especially the next three months, but then longer term looks like usually the next week. Then we look at the forecast. So what revenue did we say last week? And then what's that look like if it looks like a pretty rough next couple of months as an example? Then we talk about other places where we can cut spend, what do we have to do so that long term we can get back?
00:20:53
Up out of this. If we're doing revenue recognition, we'll do that at that same time. And in the next week we'll look at the financial statement from the previous month, talk about the KPIs. How do we do for this month? And then if you've got a fourth meeting, it's usually project related. Are there any big things that we need to discuss?
00:21:08
Those are from the sales especially. I like getting engaged just to kind of cap that. Most of my other clients are actually on a biweekly basis, so probably a little bit more than half weekly. , maybe 25% every other week. And then a little bit are once a month. The every other week is a forecast meeting, discuss how they think things are going, and then a financial statement meeting.
00:21:27
Those are kind of the two that we have in a month. .
00:21:30
John: I think that cadence makes a lot of sense. And I think in a law firm, when you look at pipeline, it's really a function. And this applies to accounting firms too. What matters are out there and what's the value time wise of that? Yep. Of those matters. And so do I have enough work to keep the 25 attorneys that I have busy?
00:21:50
Yeah, I think I do. And you should monitor that all the time. Do I need to go out and, and drum up some new work? Do I need to go hire someone? [00:22:00] And the other thing, I like about how you guys do things is the fact that you reconcile cash and credit cards on a weekly basis. I mean, I can't tell you how many times you look at the historical monthly financial statements and they haven't been reconciled yet, but there's a half million dollars of cash sitting there beyond what they need.
00:22:20
And in reality, Until you reconcile, you don't know. But the owners are saying, okay, distribution time. But you need to know, is that cash real? Yeah. And you know, once you make a distribution, it's not coming back to the firm. If it is, it's very painful.
00:22:37
Tom: that, that's a great point. And what you're talking about, we do a weekly cash flow meeting with clients.
00:22:42
It is at a high level. It's what happened in the last week from payments going out, payments coming in. What do we think is gonna happen and walk through with them, okay, here are some really big receivables that we expect to receive. And then maybe we've got payroll this week where we could highlight, if you don't get these two receivables, , we're gonna be drawing on the line of credit.
00:22:59
And so that's an action for them to say, let's make sure we're getting 'em. Let's look at that. And then we're looking out 13 full weeks where you could say you're very comfortable doing the distribution cuz look at what cash looks like. or things are looking scary here's what we need to get done during that time.
00:23:14
But for many owners, it's sort of the one time they're checking in and just not letting sort of the business run on that side and kind of wondering what's going on with cash. And so they have a chance to see that. For some, it's also just a good control that they see. Like what? Vendor bills are going out if it's a smaller firm.
00:23:28
So that's a great chance to say, Hey, what's this? What's this, Jody Grunden, $50,000 payment going out, don't know that guy. Something like that. And so then we say, oh, just let that one slide. You know that one's okay to Jody. I know you went
00:23:42
Jody: perfects.
00:23:46
John: Oh, must be hand model.
00:23:48
Jody: Yeah, hand modeling. Yeah, exactly. . No, no, you're right. The cash is the important part, you know, and a lot of companies don't get that visibility. Don't have that visibility. And you know, like you had mentioned, John, you know [00:24:00], when you start making decisions on bad information only, only bad things can happen.
00:24:05
Very rarely does it, does it turn out? to where you, you kinda lucked out. And so that's why it's, for us, it's super important to have a weekly reconciliation meeting. You know, I'd say over half our clients, probably 60 to 65% of our clients we meet with, we are either part of the cash flow process, meaning that we either paying bills, I'd say about 30% of our clients we pay bills and maybe another 10% will help with receivables, but not very often.
00:24:29
But I would say 60% of the time, or at least in that meeting and showing the person or giving. The insight to the person that's actually responsible for that over the next 13 weeks, and really kind of breaking it down, showing the inflows and outflows. And when I'm talking to inflows, you know, bill payments going out.
00:24:43
We're not talking to accounting, we're just talking simply money coming in, money going out no matter how it comes in or goes out. But, but also giving that visibility to like the AR, which is. Important. Cause a lot of times AR gets missed or gets slid until maybe the end of the year. And then we're trying to race to get everything collected that we should have been collected, you know, months and months before.
00:25:00
We don't make, we don't do the collections or anything like that, but we'll bring it to light and say, you know, Hey, these things are getting past due. We probably need somebody to get on those. And then, We can push that back to the attorneys to bring in the cash that's, you know, that's on web or that's bill on AR.
00:25:15
John:
00:25:16
You can help create a culture of accountability amongst professionals because you're right, some billers, bill and collect on a regular basis. and some bill tardy and collect at the end of the year. And that's just not healthy for cash flow. so, you know. I've seen where partners will go into another partner and the best line I heard was there's a little mold growing on your whip
00:25:45
and while that wasn't really necessarily received well at the time that that person started billing their whip, then you know that you can't eat whip and you can't collect it until you bill it. Yeah. Right. So clients don't just magically send you checks. [00:26:00] You have to bill on a regular basis and collect on a regular basis, and you have to train your clients to pay on your terms.
00:26:05
You can't just let the client dictate when they're gonna pay.
00:26:10
Tom: John, one thing unique to law firms, I'm very curious about, law firms will take on cases on a contingency basis like a lawsuit, where my understanding is that, well, I won't charge you the client anything. When we win, I'll take say 30% of the winnings, and so it could be.
00:26:26
you win 10 million and so then the firm gets 3 million. My numbers are probably wrong. I'd be curious how you guide firms to look at that, cuz from a cash flow perspective and things like that, that could really be tricky. Where you could have a multi-year event, even if you win. Right. Payout could be a long time away.
00:26:42
How do you guide firms and think through that? And maybe my facts are wrong.
00:26:46
John: I think your facts are fairly accurate. The the percentage might be low. Okay. But there's another thing you didn't mention is that there are case costs. Expert witnesses. All those things are financed by the law firm, which means they either have to borrow that money or leave more working capital to finance those case costs.
00:27:04
Now they get paid back. If they win the case. That first comes out of the settlement, then they get their fee split and the client gets their money. I think it's a little tougher to forecast. , the PI attorneys know what the potential value is of all their cases. and they can put probabilities on when things might settle based on their experience.
00:27:26
And for how much? It's just a little more difficult to to predict in that arena, but it is possible to, to build a forecast. And it's mainly based on their experience and their experience with the case types.
00:27:41
Tom: Yeah. We often emphasize the importance of forecast, and I can't think of a much better reason to do one, if you're a fairly small firm, right?
00:27:49
To say you're gonna continue going into the hole and hopefully at some point you win and you're just thrilled and all of a sudden there's a big payout. But to help you manage through that and someone have confidence, the [00:28:00] forecast they've put in place is working well would is probably the thing that keeps 'em from being up all night.
00:28:05
00:28:06
Jody: Yeah. Cause you got the extremes like that. You've got the the PI cases there and keeping in mind they don't win all their cases . You know, there's a lot of, there's, I mean, they kinda get a bad rap a lot of times thinking, oh yeah, you just made X amount of dollars.
00:28:18
on this case in some cases. Yeah. It's true. They made a lot of money there, but for the most part, they're just as profitable as any other firm, right? I mean, they, cuz they're gonna lose two thirds of the cases they're gonna win or 50 50 or whatever that might be. Yeah. And so that, as a PI firm, you've gotta be really selective on the client or the, the case that you do pick up.
00:28:38
Sure. You know, so if they don't just pick up every case, you know, they're gonna pick up cases they feel they've got a reasonably good chance of winning. and which allows that, and then they kind of flip at the other side, you know, like my wife's a estate planning attorney doesn't bill hourly with hardly anything.
00:28:52
She bills out hourly only on the settlement, you know, settlement type of cost. You know, outside of that, everything else is billed on a flat fee. And so the bill is expected. Everything is expected up front where you would get 50%, you know, upon signing, and then the rest upon, you know, 50% up front, 50% up on signing so that she doesn't have an AR in that, in that case.
00:29:14
or, you know, there's a lot of different ways to actually bill, I guess the hourly billing is one of those and it's the most common. But there's other things that are going in there, like a flat fee billing or a value-based billing in case of a PI, you know, PI situation. So there's a lot of different ways to kind of skin the cat when it comes in regard to, to that type of billing structure.
00:29:32
John: You know, the other thing the estate planner has is every plan that they do, those folks are gonna die at some point. So there's a value to that estate work later on. And so key and any estate planning practice is really building value for the future. It's not from the, the flat fee planning that they did for the revocable trust and wills and other documents.
00:29:53
It's really what's the value later on when the. , grandma and grandpa pass away.
00:29:58
Jody: Yeah. The long term value, a hundred percent [00:30:00] agree. And that's where it can get difficult. You know, it can get difficult and that's where the hourly rate, hourly building a lot of times will come into play unless it's by statutory amount where they can only charge so much.
00:30:10
But, you know, for the most part, you know, that's where that's where again, they're gonna make their big, you know. They're a lot, they're money. They're gonna make it at that point versus at the very front.
00:30:21
John: You know, I think one, one KPI we haven't talked about is leverage, and I think lawyers don't leverage enough.
00:30:27
if you look at an accounting firm, leverage might be 10 to 1. So you have 10 non-partner to one partner. And that's a good number and you want to increase that leverage number. But if you look at law firms, a lot of times lawyer leverage is one-to-one. Three to one. And if they can increase that leverage, have more people working on their files, then they're free to go out and bring in new business.
00:30:52
Be more advisory to their clients because they're not down in the weeds. They have to review everything, and they're responsible for what goes out the door, but the higher their leverage is, the better off they're gonna be in the long run.
00:31:05
Tom: Why do you think if you look at a firm that the leverage is lower than what it should be?
00:31:10
Do you have some theories as to kind of what the main, what are the behaviors or reasons that it's like that and why people might resist going to a higher leverage?
00:31:18
John: I think it's endemic in the law world that I have to be an integral part of this. and I don't disagree. They need to own the work product, but if you train your staff and you hire the best people
00:31:33
you can still own the work product and achieve some leverage. I did have a conversation with a managing partner of a very large silk stocking firm here in St. Louis. And we were having lunch and I said, what's your leverage? And he actually looked down and he said, he said, 0.90 seriously?
00:31:52
More than staff. At this firm. I just think the days of that type of law firm are short-lived. . [00:32:00]
00:32:00
Tom: That's interesting. Do you usually have the reaction, like someone's in a confessional when you have them looking down and confessing your sense to you? ?
00:32:08
John: I don't,but he realized that it was a problem.
00:32:11
Yeah. He just couldn't change it.
00:32:14
Tom: That's interesting. And Jody, I think we've had. . I would say we've had, similar with the pitch to dos that continues, but it was really strong about a year and a half ago, was to get the CFOs to delegate more work down to the senior accountants. And the senior accountants have accountants sometimes offshore that they're supposed to delegate to.
00:32:30
And at each level, people are resistant. that in my mind, that loss of control, maybe I'm not really sure how I'm gonna review the work. So it's easier to do. And maybe just the easy one, if, you know, if I'm gonna teach Jodi, it's gonna take me like a half hour to do it. It only takes me 15 minutes to actually do the work.
00:32:47
So I won't ever teach 'em, not thinking about, well I do it like every single week. And so how much time is there during a year and I should just invest the time to teach him how to do it. I would guess a leap the same.
00:32:56
John: There is a leap of faith that you have to train, you have to take the time to train the person.
00:33:02
Then you have to begin to trust them. And that's a, that's a tough leap for some people to make, but once you do it, then you trust the system and you do it more.
00:33:13
Jody: Yeah. I can't imagine, I can't imagine running an accounting firm where you're not leveraging people or a law firm where you're not leveraging people.
00:33:19
That would be. You know, you would be, you could never take a vacation. You can never take time off. You can never do anything. Cause the everything's so dependent upon you. And you know, some people, you know, like I said, the, the biggest part of delegation is the fact that, you know, you gotta review the work, you've gotta trust the people to review the work.
00:33:35
You can't just give them work and then correct it. and then go on. Because what happens is they never know they're making a mistake, , you know, so they're gonna repeatedly give you that same garbage work, , you know, all the time. And then you're gonna be like, oh, nobody's smarter around here.
00:33:49
Or I'm the smartest person because my person I'm delegating to can't do the job. And that's why I correct it. When in reality, if you are the smartest person, you'd be training that person so that they're efficient in, [00:34:00] what they do. and that would allow you to do other things and maybe hire that third person or the fourth person and so forth and, and really kind of build the team under you.
00:34:08
You know,the way I always look at it is that, you know, my goal in any firm is to make myself re replaceable. You know, I want to be able to walk out and have the firm go as nor go as normal, you know? You know, basically not skipping a beat. And, and that's the idea that you really got to create with yourself is you gotta figure out, how can I make myself worthless?
00:34:29
you know, and you're not really, you're making yourself more valuable, but what, what can I give away, you know, to the people underneath me so that I could do other things, you know, maybe not billing all the time. Maybe my utilization's gonna come down significantly because I'm delegating all these other people.
00:34:44
You know, we've got our little, you know, we've got our little profit center going here. And that allows me to then go out and do what I enjoy doing, which is out meeting people and drumming up business and that sort of thing. And so, you know, a lot of people say, I can't get out of my own way, you know, or, you know, I don't have time to do this.
00:34:59
It's like, well, no, you've got complete control of time. Time is never an issue. You know, you've got control of time. You just have to be able to manage it properly and make, you know, things that are more important. You know, you know, put things in priority or what's more important or what's not important, and really kind of really build that team underneath you.
00:35:15
And I think that's that goes with really any service-based company, whether it's an architecture firm or law firm, you know, you name it. If you are the most important person in your firm, then that's a problem.
00:35:26
John: Yeah. It's problematic. And what you just described is working on your business rather than in your business.
00:35:32
Yeah. If you're working in your business, you're not gonna grow. , you're, it's like going out and buying a franchise. you buy a Subway franchise, you bought yourself a job. Yep. If you had 10 subway franchises and you have managers in place running those subways, you have an investment, something that you can sell and has value.
00:35:50
00:35:51
Tom: Jody, you've mentioned a law before that kind of guides the, you'll get the work done within the time allotted. Do you remember the name of that and do you mind? Yeah, it's called
00:35:59
Jody: [00:36:00] Parkinson's Law. And what that means,it's kinda funny because if you're an hourly biller so that you work by the hour, you know, I'm gonna bill, I'm gonna work 40 hours this week.
00:36:10
I'm gonna bill every hour. Maybe I'm 90% utilized. It doesn't force me to figure out the best way of doing things, so I just continue billing and billing and billing, and then eventually the client pushes back, and then that's where the realization comes in. When you bill by a flat fee, you're forced to, to figure out efficiency.
00:36:28
So you have, you've got that one client, you're working 40 hours, you're kicking, you're working a ton of time, you're really doing everything for that client. You put another client in there, guess what? You're working 40 hours and you're figuring out efficiencies and you're thinking, man, there's no way they can work
00:36:44
10 clients. Cause I'm killing myself, working two clients. You put three in there, guess what? You don't work, you know, 120 hours for that week. And you work 40, you figure everything out. You start delegating and the more and more you add to it, The more that you start figuring out how to make the process better, and that's the, I'd say the big difference between a flat fee versus an hourly.
00:37:07
You're always looking for ways to be more efficient because your time is getting compressed, and so if you've got 15 clients, now you're working on. You know, you're still working 40, 45 hours a week, but you're making it more efficient. You're delegating down, you're really making the process go.
00:37:23
Whereas a lot of times when you work in that hourly, it's just, it's a lazy way of doing it. Right? So I'm working hourly, I'm working 40 hours, 45 hours, 50 hours, whatever that is. But I never looked for ways to make it efficient. I just looked for ways of getting it done. And you know, Tom, I can remember when you came on and we told you, Hey, we're gonna get your book of business up to a million and half or whatever it was, and we're gonna, you're gonna work on 20 clients or 15 client, whatever.
00:37:47
I whatever you said. And I think, didn't you about quit ?
00:37:51
Tom: I was close. I was close. It was like you were telling about me tha two clients. I thought, how can people take more? I remember being here six or seven months and told someone I had six [00:38:00] clients, and if you had told me, so now I have about 20 clients, I would've said, there is zero chance I could figure it out.
00:38:05
And I'd heard you describe that, Jody. I'm like, that's not right. It's just how do you do it? But the other thing is you also figure out sort of systems to how do I get things done? How do I keep track so that things aren't slipping off the plate and causing me stress of. . I'm walking into a meeting at the last second.
00:38:19
I remember I promised John I would do something and I never did it. How do you have those so that those kind of oops don't happen? So yeah, I think that's a really powerful law to believe in. I do, you know, I went to the Bureau of Digital Events, so this is an organization that does this thing called owner's camp.
00:38:35
So two full days, people looking really intensely at their business. It's owners and some, it's one of the big sponsors of that group. A big part of the discussion was similar to what Jody was saying is how do I work on the business and help myself pull away? And many people said that. What I found funny is one of the guys says, I feel like I've done that in there.
00:38:51
And he went on to say in my business, and he had a fairly small business. I don't know who the biggest customers are. I don't know who our best people are. I really don't even know what the issues are. And people are looking at him like, what do you know? And he kind of paused. He goes maybe I've made myself a little bit too dispensable
00:39:05
And they were kind of pushing back saying, well, you gotta focus on something. You can't just say, I'm gonna ignore the business . But he had pulled out enough that he had the chance, but he just wasn't yet engaging, but, It was a funny reaction from people.
00:39:16
Jody: So completely op. You don't see that very often.
00:39:17
Actually. Not, not entrepreneurs.
00:39:19
Tom: No. The, the main focus was people saying I need to, and kind of being away for two days sort of gave them, here's what it could look like to step away and think about the business and not be so immersed in the daily issues.
00:39:31
John: They know they need to do it, they just don't know how to get there.
00:39:34
I think it starts by hiring. people that are smarter than you are. And then you train 'em up and you focus on those efficiencies so that things can get done quicker, faster, and accurate. And you just keep that migration going until you're not irrelevant, but not as necessary as you once were.
00:39:56
00:39:56
Tom: Yeah. Working on that strategy. Even in my role, so I'm not an [00:40:00] owner of the business, but even in my role, I realize when I don't delegate and I'm dealing with sort of in the weeds, it's really hard to shift my mindset to thinking about the strategy for the client. Because I was buried in the spreadsheet trying to figure out what formula wasn't working and dashing and getting that done and then move on.
00:40:14
And what I want to be doing is sitting back and thinking about, okay, what are the real drivers of this business and how's the,what's the best advice I can give them? So for me, that's a big reason to say, if that stuff is taken care of, then I can do what they're really paying us for. Which is think about strategy, not making sure, spreadsheets are accurate and things like that.
00:40:30
00:40:31
Jody: And for some people it takes a little bit longer to figure that out, right. I mean, you know, cuz you, you're comfortable with being in the weeds cause that's what our past has always been. But as a consultant, we've gotta get ourselves out pretty quickly and start delegating that information.
00:40:44
John: Yeah, that's a great point. Well, you're right, and, and accountants are really guilty of that. They like being in the spreadsheet ticking and tying, making sure everything's pretty and accurate. When in reality, that's just a given. We have to expect that we need you outside of the spreadsheet, and then interpreting the results and telling the story as to why things are how they are, and how do we change that.
00:41:05
Tom:00:41:05
Yeah. I'm curious as we come close to wrapping up, when I think of the kind of firms that you work with, John, do you have a sense to what's the size of firm that has maybe a full-time CFO in a financial shop doing this? And then maybe what's the size of firm that really could benefit from an accounting firm providing advisory services in that kind of space?
00:41:24
John: You know, it's all over the board. The smaller firms have a bookkeeper who knows QuickBooks or QBO. And they don't get great information. But by the end of the year, we get where we need to be. When you get to five attorneys, you start to have a controller, which again, is okay. They're a little better at the accounting part of it, but not really strategic.
00:41:46
And I'd say when you hit 30 professionals, they start to think about getting CFO, they have an executive committee and a management team. Ideally I think. You're looking at zero to, or 1 to 30 [00:42:00] attorneys when you get much bigger than that. They have a finance department and I think some value could still be brought there because maybe they're not focusing on the right things.
00:42:09
It's just a different level of advisory. .
00:42:12
Jody: I definitely agree. I think the kind of, the value prop, I guess is that, you know, you get to a certain point and you think, I'm gonna bring this CFO in, and that CFO is gonna do all this stuff for me, and they're gonna be my accounting department.
00:42:27
In reality, that's not what a CFO is. So, you know that's more of what a controller is. And so it happens is that CFO will then hire a controller to do that stuff. And now that you're spending a lot of money. And so cuz you're hot, you're spending, you know, 250,000 plus for the CFO and you're spending another 150,000 for the controller.
00:42:45
And then you know that controller's like, well hey, I don't typically pay bills as a controller , you know, I've got my accounts payable department that does that. And so you can kinda see how it just kind of blossoms out to this giant. You know, financial department, which is definitely necessary, you know, as you get bigger.
00:43:00
But just kind of keeping that in mind when going into it, when you have nothing or a bookkeeper type personality there and you go to a CFO type personality, there's gonna be a, there's a lot of expense there that you're gonna occur pretty quickly in order to make everything work. .
00:43:15
John: There's a lot of risk too, in that you hire the right person.
00:43:18
I mean, think about all the football teams that are firing coaches right now, COO is the head coach of a football team. And you might make a mistake, a very costly mistake, or you might hit a home run. I mean, the Pittsburgh Steelers have had three coaches in their lifetime. They've figured something out.
00:43:35
But you're gonna have more than one CFO over the lifetime of a firm, and they don't all work out.
00:43:41
Tom: And I can also see, so it's interesting, the numbers you throughout John are pretty similar to what we see when we talk the digital agencies. And from a dollar perspective, kind of three to $5 million range of revenue, annual revenue is really that sweet spot of saying probably not big enough to afford a full-time CFO and the team that Jody described.
00:43:58
But you're too big to just have the [00:44:00] bookkeeper that only knows QBO. Right? And that's where we can help. And I think the advantage they have, and I can see for law firms with you is you've worked with so many, they may never even thought of leverage and utilization those things in those kind of terms, and they talk to you and you're like, oh, I know what other firms do, here's how they've implemented and how quickly I'm thinking they can ramp up.
00:44:17
to where you're really challenging 'em on. What about these couple things I see you guys needing to do in that real value of that experience that you bring in. Well, this has been really valuable. Thanks for helping us better understand sort of the law firms and some of the KPIs and also how it can expandand think about across industries.
00:44:36
John: Thank you. I've enjoyed it.
Tom: Good. Hope everyone has a great day.
00:44:39
Jody: Yeah, it's been great. Thanks.