Ontario Bar Association | Association du Barreau de l'Ontario The Ontario branch of the Canadian Bar Association | La division ontarienne de l'Association du Barreau canadien
Law Practice Management is published by the Law Practice Management Section of the Ontario Bar Association. Members are encouraged to submit articles or suggest story ideas.
The articles that appear in this publication represent the opinions of the authors. They do not represent or embody any official position of, or statement by, the OBA except where this may be specifically indicated; nor do they attempt to set forth definitive practice standards or to provide legal advice. Precedents and other material contained herein are intended to be used thoughtfully, as nothing in the work relieves readers of their responsibility to consider it in the light of their own professional skill and judgment.
Law Firm Accounting Part IV: Information as a Strategic Tool David Debenham*
Hours, hours, hours. We train our lawyers to work hard, not smart. To a great extent we do this because we believe lawyers have the power to control the number of hours they work, while the fates control the other variables separating labour from cash. This belief keeps us from seriously analyzing a lawyer’s practice and skews individual performance appraisal. Consider a first year associate with the following targets:
Hours Worked
Hours Billed
Hours Collected
Billing Rate
Revenue
1600
1280
960
$100/hr
96,000
Now, assume the associate actually brings in $90,250. In most firms, the associate will have missed the target and be chastised financially and socially (gently or severely depending on the firm). But, what happens if the numbers are examined more closely?
Utilization variance (1600-1300) = (300 hours) Ratio of worked versus billed: Standard is 80%, actual is 92%: positive variance of 12% Ratio of billed versus collected is 80%, actual is 80%: no variance Realization Variance (950-960) times $100/hour= ($1000) Billing Rate Variance ($95/$100) times 950 hours = ($4750) ($5750)
These variances help reveal root strategic issues.
Reasons for Utilization Variance:
Insufficient work has been distributed to the associate.
The associate showed superior performance in turning WIP into billings, but only average performance in turning billings into cash.
Reasons for Realization Variance:
Client bankruptcy/insolvency/disappearance
Solutions: client credit checks/retainers/security by partner
Client dissatisfaction regarding quality of work
Solution: Training
Associate billing rate too high for type of work being assigned
Solution: Re-assignment or lower rate
Reasons for Billing Rate Variance:
Write-offs due to market’s perceived value of this type of work versus standard rate.
Doing work for favoured clients at a discount.
Solutions: provide better quality work or move into a niche with greater perceived value to the client; credit the discount given to the favoured clients for the associates’ work against the partner’s billings for those clients to properly compensate the partner and factor the cost of the discounts into the assigning partner’s compensation.
In point of fact, the only factor under the associate’s control may have been monthly billing on the files, which was accomplished quite well. Punishing associates for factors beyond their control breeds only resentment and dissension.
Lesson Four: Properly reported accounting information reveals whether a firm needs more work, better work from its lawyers, or better work for its lawyers. A lack of hours means the firm has reached overcapacity. Watch partners now for a tidal bore: work that normally flowed to associates reverts or stays in partners’ hands to maintain their billings. Fighting this trend invites conflict. Associates need to learn marketing skills to use internally and externally to secure a niche. All lawyers must bring in more work. If additional training will improve the billing rate variance and then better work quality, training and continuing education are at least part of the problem. If write-offs are given to compensate for a perceived lack of quality independent of technical proficiency, the market segment cannot bear the target rate; either the target billing rate must be reduced (to avoid quoting non-competitive rates) or the lawyers must shift to more profitable segments. Realization variances result from failing to pre-qualify clients financially, bill and collect regularly, and secure receivables. Bad numbers from associates indicate a variety of strategic issues, many of which are beyond the associate’s control.
* David Debenham is Counsel with the Ottawa office of Lang Michener LLP. He can be contacted at (613) 232-7171 extension 103 orddebenham@langmichener.ca.
Make Money, Not War Paul Kuttner*
Monitoring overhead has real merit. However, when softening firm distributable profit is on the agenda, the executive committee usually declares war on overhead. Yet, smart firms have learned that cutting costs alone does not improve the firm's cash position in the medium or long term. Rather, applying business logic and identifying the key factors that directly and indirectly have an impact on producing gross revenue can change a firm’s business practices that adversely affect overall revenue. This in turn increases income. As we discuss some profitability procedures, check how many apply to your firm.
Strong Firm Management
Some firms’ management systems provide for long-range planning (beyond next month), day-to-day administration, and an accountable appraisal of results achieved. They also have an effective two-way internal communication platform in place. Typically, a partner or group oversees the firm’s successful and effective operation as a dynamic business. This strong management structure allows partners to avoid the distraction of turning their attention to every operational problem. Strong management identifies problems early and investigates different options without diverting partners’ attention to “fighting fires.” Unfortunately for many (even large) firms, by the time partners identify and resolve problems, months have passed and all hands are needed on deck. Often, year-end dollar results consequently suffer.
Properly Managed and Coordinated Practice Areas
Disciplined management of practice groups – so called practice management – differs vastly from firm to firm. Too often, the highest billing lawyer leads the practice group instead of the best manager in the group, a sure-fire recipe for disaster. Other problems arise because of lawyers' personalities and abilities, relationships with clients, self perceptions, attitudes about being managed, and willingness to relinquish some degree of personal and professional independence to function as a business unit.
Firms and groups who “get it” understand that pressures on law firms to provide high quality legal services in a timely and profitable manner have encouraged partners to consider systematically applying basic management principles to substantive practice areas. When the balance of business and legal practice is understood, questions fundamental to profitability can be examined. These questions include, "Is this particular practice area really profitable? How does it compare to other areas of the firm? Should the firm re-direct its efforts to other practice areas? Who is the best manager to lead a particular practice area? Are we overstaffing one area relative to the return?"
Fair Billing Rates
In the marketing mix, examining billing rates is known as pricing. The price of a firm’s services (meaning partners’ and associates’ hourly billing rates) needs to be fair, competitive and, above all, a positive contribution to the bottom line. Most clients understand and tolerate the dynamic of rising inflation. They do not tolerate greed. Practice shows that pricing has elasticity, but at some point the elastic snaps and clients walk.
Clear Expectations and Lawyer Business Plans
A law firm is a business. As a business, the firm needs all functioning roles to prepare a simple plan of action each year. Together these plans provide management with an understanding of potential hard costs and bankable revenue, as well as operational and professional development needs. The plan of action should include some indication of time spent that, for whatever reasons, will yield no cash return – the dreaded non-billable hours. This basic planning and review process rests at the heart of any successful business; and, smart law firms understand that they are not exempt from the task.
Clear Marketing Plans
In a competitive environment, partners in law firms of all sizes must remind themselves periodically that every good existing client represents a potential new client for some other law firm. Many lawyers think of marketing as the “fluffy” (and usually expensive) stuff that distracts from the practice of law. Successful boutiques, mid-sized and even large firms quickly make the connection between business plans and marketing plans. When marketing plan goals are tied to billing revenue, lawyers’ attitudes toward marketing and selling change. A road map with measurable milestones that need some “fluff” to achieve financial goals usually delivers a far more profitable law firm. Without a business plan, firms generate ad hoc, confused marketing strategies and lame efforts that increase costs and frustrate everyone. Responsibility becomes diffused, lawyers work at cross-purposes, and the bottom line suffers.
Clear Financial Plans
With a few taps on a keyboard, profitable law firms can quickly answer the question, “How are we doing?” But, knowing how the firm is doing is different from knowing how the firm is doing against “plan.” With no financial plan, the answer will always be, “Just fine.” Without a projected financial plan for income and expenses against which actual performance is measured, lawyers have little opportunity to identify and correct economic problems. A basic financial plan that includes income and expense projections broken down by month, department, and (with hope) lawyer enables lawyers to identify positive and negative trends, prepare for contingencies, and mitigate financial surprises. Financial plans also constantly remind partners and associates of their billable hours and collections obligations.
Compensation Plan that Encourages Performance and Addresses Firm Priorities
It is human nature to perform behaviours that bring reward. Most partners do what they are paid to do – billable work. When a balance is struck between providing billable hours and participating in other firm-critical activities, like marketing, associate training, declining and delegating work, managing the firm, and leading practice areas, a foundation is set for longer term, more stable cash flow and increased financial success for the firm.
Balanced Work Mix
Having a balanced mix of clients and files is all about risk management. Different kinds of engagements mean varied billing frequencies and patterns, retainer sizes, and resource requirements. Too much reliance on a few significant clients can put future profitability and firm stability in jeopardy. Business focus is good, but a narrow scope can be disastrous as demonstrated by US firm Brobeck, Phleger & Harrison LLP, which concentrated almost exclusively on dot-com IPO’s and disappeared into receivership when the tech bubble burst.
Explicit Fee Agreements
The value of clear, concise Engagement Letters cannot be stressed enough. Well-managed firms usually have a policy requiring confirmation letters as an integral part of accepting new matters, especially from new clients. Too many fee disputes, write-offs and discounted bills result from lawyers’ failure to confirm in writing the nature of the engagement and the arrangements for fees, retainer, and disbursements.
Tight Billing and Collection Practices
An efficient timekeeping and docketing system does not guarantee that lawyers will use it. Many large and small firms alike have shameful track records for capturing billable hours, moving work in progress to invoicing, and collecting receivables. How many businesses do you know that would willingly allow their cash flow to sit in uncollected receivables over 90 days old?
Frequently tell all of your lawyers this basic fact of business – slow billing and slow collections can destroy firm profitability and reduce the amount of cash in their pockets. This can be particularly disturbing for individual lawyers whose personal tax is reported on a billed-for rather than cash-in basis. Deciding when to bill is important since working capital is needed to cover unbilled time and disbursements. What does your managing partner do with your monthly list of WIP and aged receivables?
Remember, making money is a whole lot more fun than saving money.
* Paul Kuttner is a Principal of innovate!Marketing. He has been providing marketing and business development support to law firms of all sizes and levels of marketing sophistication in Canada and the US for 15 years. Paul can be contacted at www.innovatemarketing.ca.
Some innovations, like the Internet, will stand the test of time. Outsourcing promises to be one of those innovations. The term ‘outsourcing’ originated around 19801 and it means simply: to purchase (goods) or subcontract (services) from an outside company or individual, rather than hire internally. Work can be outsourced ‘offshore’, ‘near shore’ or ‘home shore’/ ‘on shore’.2 In the Canadian legal context, these terms have taken on the following meanings:
Offshore refers to legally trained individuals who are located overseas, like India.
Near shore refers to service providers who are in different countries but are relatively close in proximity, have similar cultures and speak English without a strong accent. For example, Canadians would refer to American mid-west lawyers as being ‘near shore’.
Home shore/onshore are interchangeable terms that mean, essentially, practicing lawyers3 located in Canada.
Simply put: outsourcing work – offshore, near shore or onshore — is a way to enhance firm resources and better manage deadlines and tasks.4 With proper technology, lawyers “can work on a matter anywhere, anytime and access any document they need…”5 It is not a fad6 and, according to some, “Combined intelligently, core competencies and extensive outsourcing strategies can improve returns on capital, cut risk, provide greater flexibility and make companies more responsive to the needs of the customers – all at lower cost.”7 Creative new firms, sole practitioners, lawyers practicing in association with other lawyers, or at small and midsize firms may be in a better position compared to larger firms to capitalize on the advantages that onshore outsourcing has to offer since they are more likely to be able to adapt.8
Of late, offshore outsourcing seems to have caught the attention and imagination of the media. Pundits suggest two primary reasons to outsource legal work offshore: first, work can be turned around literally overnight; and second, hourly rates can be substantially lower. Criticisms include:
outsourcing appears to threaten the livelihood of the domestic workforce;
a lawyer could be aiding the unauthorized practice of law if the lawyer outsourced legal support services overseas to a “non-lawyer” and did not adequately supervise the work;10
when billing for services of non-lawyers, in some jurisdictions, absent a specific agreement with the client to the contrary, the lawyer should charge the client no more than the direct cost associated with outsourcing, plus a reasonable allocation of overhead expenses directly associated with providing that service.11 Therefore, the exercise of outsourcing offshore may generate revenue but not profit.
The majority of these criticisms are mitigated by strategic outsourcing onshore (to Canadian lawyers), who are subject to the same code of conduct and ethical considerations to which you are subject. An additional advantage to outsourcing onshore is that it can combine having the right people, in the right place, at the right time to best serve your client’s unique needs. For example, lawyers can now efficiently contract lawyers to attend at court or discoveries without incurring travel costs and, more importantly, time lost in transit.12
To capture the essence of the concept of outsourcing professional legal work to a qualified Canadian lawyer, Taran Virtual Associates coined the phrase “virtual associates” to refer to their contract lawyers.13 “Virtual associates” are practicing lawyers who work off site and online, using their own equipment and software, creating work product to your specifications and tailored to your practice, on an assignment by assignment basis. The work product is supervised by a practicing lawyer called a project manager. As an independent contractor, the virtual associate is neither an employee nor a subordinate. The virtual associate and project managers are professionals who recognize that every project could be their last if the lawyer or firm they are assisting, and the ultimate client, are not satisfied with their work product. It is a collaborative relationship – the virtual associates specify the type of work they are interested in doing and they are not required to do anything unless they have committed to do it. The lawyer client, on the other hand, can outsource with confidence, knowing that the virtual associate has been pre-qualified and has the skill and expertise to deliver quality work.
Virtual associates are an outsourcing strategy that can provide lawyers with all of the best solutions for help. Lawyers get a professional team member and are relieved of the cost (and potential liability) that hiring a full time associate can present. Best of all, busy lawyers can delegate, without frustration, the work that they prefer not to do, and free up time to do the work that they enjoy, do best or that generates financial stability. All of which ultimately enhances career satisfaction.14
Anyone who has ever managed even one person understands how important it is to be able to delegate. When delegating work internally, one of the primary goals (because often a task may be performed better and faster by the lawyer delegating it) is to create an opportunity for the person to whom you are delegating to learn or develop a new skill. Experts say that you likely will not delegate effectively if you: believe you can do the task better/faster yourself; or worry that the lawyer to whom you are delegating might not do the task properly and, because you are ultimately accountable, your professional reputation may be at risk.15 Like delegating, outsourcing involves getting the job done through others. They both involve entrusting another with responsibility or authority. An important distinction between delegating and outsourcing is that delegating allows people to learn by doing whereas when you outsource the goal is to send the work to someone who is familiar with the practice area and already has the skills or abilities needed to complete the work. Therefore, outsourcing eliminates much of the frustration and time loss typically associated with delegating. When outsourcing, ensure that the firm has a policy that lawyers have appropriate experience and are not ‘learning on your client’s dime.’ If you have confidence in the person to whom you have assigned the project, it is a way of increasing your time, allows you the freedom to focus on what you should be accomplishing and to better see the big picture.
As you become more senior, consider only doing tasks that nobody else can do. Review your file list regularly, prioritize your work,16 and determine what makes sense for you to delegate internally and what you will outsource. Experts like Kathleen Brady and Edward Poll agree that the likelihood a project will be successful may depend on how well it is planned. It is critical to have defined and approved goals, a committed team and a viable plan of action that can accommodate change. By investing time at the beginning of the file and thinking it through, you can clearly define the goals and objectives, assign the tasks, and assess the progress to ensure you get the end result you want, which will ultimately save time. At the beginning of the assignment, consider:
What is the goal or desired end result?
How many people do I need to accomplish the goal? What type of skills do they need to possess?
Can some of the tasks be carried out in parallel, perhaps by different teams?
Will delegating critical tasks to someone else free me up to troubleshoot as problems arise?
Are there competing projects that are going to take up key resources?
Any tasks that you cannot complete efficiently, that you do not have time to complete, or that could be performed when you are not there or unavailable, are tasks for delegation or outsourcing. Never keep work because you have not organized the file or have fallen behind. Developing the discipline required to delegate or outsource certain tasks to others, on a timely basis, by reviewing the file in advance, is a way of developing good organization and practice skills and is an effective way to address a substantial cause of malpractice claims. According to Daniel Pinnington:
Most lawyers are surprised to learn a failure to know or apply substantive law is not the most common error that lawyers make. It is only the fourth most common error at firms of all sizes. The biggest claims risks, and the biggest opportunity to reduce claims exposure, lie in the basic lawyer/client communications, and in time and deadline management…
Missed deadlines and time management and related errors are the second biggest cause of LawPRO claims in all sizes of firms… Lawyers at firms of all sizes seem to have a dusty file or two that sits on the corner of their desks for far too long, and makes procrastination-related errors the third most common time-related error. (p. 25)
The eight most common malpractice errors represent more than 90 percent of the errors for all sizes of firms. In terms of risk management and claims prevention, taking some proactive steps to address these claims is your best opportunity to reduce claims exposure…(p. 27)17
“Lawyers need to delegate more often, if only to respond to clients who are demanding that work be delegated when and where appropriate to keep costs as low as possible. Clients don’t want to pay for inefficiency.”18
To increase profit, you must decrease costs, increase revenue or plan to achieve a combination of both.19 Outsourcing is a practice whereby lawyers can cut down on fixed costs. Typically, virtual associates are available at hourly rates that are below the market rates charged in metropolitan centers. This is possible because virtual associates are often located in areas where billing rates are lower but quality is just as high. Also, virtual associates do not have the overhead that firms often carry in larger centers and therefore can be profitable at substantially lower rates. In 1997 the Law Society of Upper Canada said that “It is our opinion that the [outsourcing] agencies are performing a very useful service to the members of the legal profession and those clients they serve.” Furthermore, it is in order that the lawyer or law firm gross-up the fee so long as “it is revealed to the client and the client consented”.20 Therefore, not only is onshore outsourcing a source of revenue, it is potentially profitable. Take a hard look at the numbers and calculate the cost and benefits of adapting to include outsourcing as compared to hiring a full time employee, remembering that outsourcing work smartly can free you up, as well as your full time associates and partners to do higher level work. Carefully consider and calculate what makes sense for you to do, and not to do. It has often been said that law firms are made up of ‘finders’ (those who develop client opportunities), ‘minders’ (those who maintain client relationships once they become clients) and ‘grinders’ (those who do the work and often prefer to avoid client contact, if they can). Firms may make the mistake of focusing on training associates to be ‘grinders’, when it is in the firm’s long-term best interest to develop the skill sets of ‘finders’ and ‘minders’. It may make sense to outsource repetitive or low level work. Firms may also need to find alternative ways to get work done to keep talent.21
To enhance profitability through outsourcing, consider:
Outsourcing the work for which you cannot bill your full hourly rate, and devote your valuable time to more profitable work;22
Capitalizing on ready access to up-to-date technology (without necessarily incurring the fixed cost for it) and research skills of lawyers who are efficient;
Managing peak periods without adding overhead that may not be justified;
Increasing your client base by accepting clients that you might otherwise have declined given your overall workload;
Increasing time for client development;
Reducing cost of traveling; and
Offering a greater array of services utilizing the skills of virtual associates.
Allison Shields suggests that lawyers consider preparing a “don’t do” list to help them to manage time and reduce stress. To prepare this list, Shields suggests that you think about your strengths and weaknesses and try to be brutally honest. Are you a great speaker, but a poor writer? Perhaps writing articles, and drafting motions or briefs should go on your “don’t do” list. You are far better off to work with your strengths and let others work with theirs to help you. You must learn to prioritize what you will do and what it makes sense for others to do. If you are like most lawyers, you believe that you must do everything … or at least, appear to be capable of doing everything. Perhaps that is why so many lawyers are unhappy.23
Outsourcing may also be an essential practice tool that will help you to provide exceptional customer service. According to Karen MacKay:
In the perfect client service firm everything would be designed around the client… The perfect firm of any size would leverage technology in very powerful ways that would enable lawyers and clients to collaborate, use knowledge and anticipate client needs. Leveraging technology enables small firms to have a much stronger “punch” than their size would normally permit.24
Your goal should be to have customers who would advocate this product or service to family and friends, and more importantly, to colleagues. And if you rely on word of mouth referrals, in other words, clients who refer other clients, perhaps you need to think about the bigger picture: What will make them come back – doing the research yourself or having it done efficiently by a lower cost lawyer? What will make them refer others – doing the work yourself or getting it done quickly and efficiently? If you or your firm were subjected to a customer service survey, would you find yourself listed as one of the top providers of legal services of your type in the community?
Keep in mind, the more you explain in that initial meeting how things will transpire, the more comfortable the client will be. This is your best opportunity to manage the client’s expectations. Be proactive and explain to clients that you use outsourcing to handle a client’s matters on a cost effective basis. Explain the benefits of having a junior lawyer or a lawyer who has developed some expertise in the practice area handle the task. It is important that you have the client’s consent to outsource or delegate work.25 Managing client expectations and communicating with them is an enormous part of your job, and your skill in this area may significantly impact the likelihood that your client will be a satisfied client, and that you will be spending less time addressing complaints. The five most common malpractice errors all involve client communication and basic practice management issues, all of which are “easily preventable”.26 Ultimately, it is about effective time management. Keeping your client apprised of progress eases client stress and tells them that you are on top of things. As you become busier, client management takes up more time. It is often putting out fires that keep lawyers busy on a day-to-day basis. As well, there are few things that are more frustrating than unreturned phone calls. Two or three successive phone calls without a response are likely to create the impression that you are too busy to do the job well, or that you don't care. Through outsourcing you can free up time for this all important client contact.
To outsource onshore effectively:
Start with a small project and build from there.
Outsource aspects of the file if it does not make sense to hire and train lawyers for the specific task. For example, outsourcing subjective codification of documents in jumbo litigation files is both time and cost efficient. Web-enabled hosted review systems are very popular, which facilitate access to databases for multiple reviewers to have access from different locations. Document review in discovery is becoming more complex and time consuming in this age of new technology. The question is: How do we do it, efficiently? Especially for big firms, outsourcing may be the answer. As well, more firms are using software to capture precedents, yet few firms have dedicated the resources required to turn what is becoming a mountain of data into something usable. It may not be cost efficient to hire a full time lawyer to manage resources, but again outsourcing the project may be.
Work with someone who really understands the unique aspects of a law firm because their owners and consultants are or were practicing lawyers.
Check for an informative, well constructed website. Keep in mind that outsourcing is growing because of technological sophistication and innovation and you should gain confidence in the firm’s ability to deliver based on its web presentation.
Conduct a personal consultation, ask for references and check them.
Consider the length of time in business. Some experts suggest you should look for a firm that has been successfully in business, full time, for at least 3 years.27
Review retainer agreements to ensure that you can outsource and the work can be marked up to earn a profit. Ask for samples of retainer agreements.
Confirm that your word processing system is compatible and that the virtual associate has ready access to compatible email, document handling and database capabilities.
Make sure the outsourcing firm you use understands the importance of and complies with the federal Personal Information Protection and Electronic Documents Act (PIPEDA) and that, at minimum, it’s policies regarding managing security and privacy comply with the Lawyers’ Professional Indemnity Company’s risk management initiatives.28
Understand the firm’s docketing policy and insist that they docket in detail. Make sure they bill you at regular intervals, preferably monthly rather than just at project completion, so that you can monitor progress and bill the ultimate client on a periodic basis.
The bottom line is that using outsourcing strategically could enhance your profitability, the quality of your practice and your career satisfaction. It is one technology-based tool that should, if used properly, reduce stress and enhance career satisfaction.
* Aïda Van Wees, LLB, MA, LLM, is a consultant for taran Virtual Associates. She can be reached atavanwees@virtualassociates.caor (416) 262-7762.
To Store or Not to Store: Records Storage Cost-Cutting Tips Barbara A. Schwartz*
Reprinted with the author’s permission.
As the volume of client and administrative records stored in warehouses and on firm computer systems increases exponentially each year, so do the costs of storing and retrieving those records. What can you do to control these costs and improve your firm’s bottom line? The answer is to establish and implement a policy that prescribes what to store and for how long. These elements are specified in a records retention schedule. It identifies what records you have, how long you need to keep them to meet operational and regulatory requirements, and which department or group needs to keep them and why.
Where to Begin
At first glance, the notion of a records retention schedule may seem so overwhelming that it is to be avoided at all costs. Indeed, schedule development can be a complex, time-consuming and controversial process. Before you decide whether to start down that road, however, let me point out that you can realize substantial savings by deciding what your firm will not store.
Ground Rules
Although paper records are the focus of this discussion, for illustrative purposes, the issues discussed here apply to electronic records and any other formats you may have. Keep in mind that the retention policy your firm develops should be applied to all records, regardless of format.
What Is in Those Boxes?
Before you can decide what will not be stored at firm expense, you need to assess what you are currently storing. The easiest place to begin is your commercial records centre, because you can review paper records more easily than your electronic records. Take a look at your current inventory – you may be surprised.
Firm Business?
In addition to old client and administrative files, you will undoubtedly find an array of some or all of the following items:
books, journals and other printed publications;
office furniture, equipment and supplies;
desk accessories such as coffee mugs; and
unused forms.
These items can account for a significant portion of your firm’s off-site inventory, but they do not contain information related to firm business. From a records management point of view, these items should not be stored at firm expense. Determining what is and what is not related to firm business, then, is a reasonable first step in setting your policy.
Are All Client Files Storage-Worthy?
Back at the commercial records centre among the boxes that contain client files, you will likely find a significant volume of material that should not have been sent there in the first place. Although all client files obviously relate to firm business, two additional criteria should dictate which matter-related records are retained and stored after a matter is closed:
ownership of the item; and
whether the record is an official record or a reference copy. (In records management terms, an official record is the original or official copy that provides information or evidence of the organization’s transactions, decisions, procedures or policies. In contrast, a reference copy is a duplicate that is maintained for ease of reference.)
Who owns each document belonging to a client file – the client or the firm – is a complex issue that is discussed in detail in the Law Society’s “File Retention” article that is referenced in the “Practice Management Guidelines” and will not be covered here. However, your firm’s policy needs to specify which records are the firm’s and which are to be delivered to the client when a matter is closed. Records belonging to a client should never be sent to storage at this time. Clients must retain control over their own records, to apply their internal business rules for retention and destruction.
Because only official records should be sent to storage when a matter is closed, your retention policy needs to specify what constitutes an official record. The “File Retention” article cited above states the following: “Lawyers should retain copies of documents that evidence the client’s instructions, change in instructions, solicitor-client communications and work performed on behalf of the client”. That statement is followed by a list of documents that a lawyer should consider retaining from the client file. This list is an excellent starting place for deciding what components of a client file are official records.
Listed below are some of the document types your firm may wish to consider when defining non-records (that is, records that should be destroyed when a matter is closed):
Legal research. Printouts of LexisNexis searches and copies of cases, regulations, periodical articles and the like can be very bulky. Because the search itself as well as the source material can be reconstructed, these items can be considered non-records. A compromise is to retain only the list of cases and other references.
Drafts. Although the above-referenced Law Society article states: “Copies of drafts of agreements or other documents to evidence or support changed instructions” should be retained, nothing is said about other types of drafts. The decision regarding retention of drafts may vary among practice groups.
Extra copies of documents. An extra copy is an exact duplicate. Therefore, a marked-up document is not a duplicate of a clean copy, but only one copy of any marked-up version needs to be retained.
Working files (also called Holding Files). By definition, these files contain duplicates of records and documents that are maintained for ease of reference by various lawyers working on a matter.
Chronological files (aka Letter Books). These are copies of all of a lawyer's correspondence, regardless of matter, filed in date order and/or handwritten notes initially recorded in a notebook in date order, regardless of matter. The material in these files should be considered reference copies. The official correspondence and/or notes are contained in the client files.
Handwritten notes. Although the retention of “lawyer’s personal notes” is suggested by the Law Society, keep in mind that notes can be easily misconstrued or taken out of context. For this reason, many firms prescribe that only notes transcribed into a memorandum to file are official records.
What About Administrative Records?
Administrative records are those that pertain to the firm’s business operations. Included in this category are records that are maintained by staff in administrative departments and the non-client-related records maintained by the legal staff.
Although the ownership issue does not apply to administrative records, the official record vs. non-record distinction does. The following types of records held by staff in administrative departments should be considered for possible non-record status:
Drafts;
Extra copies of documents;
Superseded promotional materials produced by the firm. (Note: One copy of every promotional piece should be retained as part of the firm’s archives.)
The following types of non-client records maintained by legal staff should be considered when defining non-records:
Paper copies of time/billing and expense records. The data entered in the time/billing system is the official record.
Outdated/unused precedent files. If precedent files maintained by individual lawyers are sent to storage, those files are not being used. Outdated material has no value and should not be sent to storage.
Firm committee records. Only the records of the committee chairperson should be considered official records. Duplicate copies held by committee members are non-records.
Conclusion
Development and implementation of a records retention schedule is the best way to control the growth of firm records and reduce costs associated with records storage and retrieval. If your firm cannot undertake this complex process right now, you can still save money by deciding what will not be stored at firm expense. Once this decision has been made, document and communicate the policy to all firm members. Be prepared to enforce the policy across all levels of the firm. The effect on your firm’s bottom line could be significant.
* Barbara A. Schwartz is president of Barbara A. Schwartz & Associates Ltd. A former law firm Records Manager, she has helped Toronto law firms develop retention policies, manage conflicts of interest, and implement records management initiatives since 1994. Barbara can be contacted at Barbara@barbaraschwartz.comor (416) 690-7766.
Volume 4, No. 4 – April/Avril 2007 
Hours, hours, hours. We train our lawyers to work hard, not smart. To a great extent we do this because we believe lawyers have the power to control the number of hours they work, while the fates control the other variables separating labour from cash. This belief keeps us from seriously analyzing a lawyer’s practice and skews individual performance appraisal. Consider a first year associate with the following targets: