EPISODE 383 – Driving Law Firm Profits with Data-Driven Decisions: Legal Luminary, Brooke Lively, Shares Strategies for Success

Brooke Lively is the CEO and founder of Cathcap, a data-driven company dedicated to empowering law firms by providing invaluable insights into their financial data. Her book, From Panic to Profit: How 6 Key Numbers Can Make a 6-Figure Difference in Your Business, offers a roadmap for law firm success.

Aiming to bridge the divide between traditional law school education and business savvy, Lively and the team at Cathcap employ their expertise to analyze data from law firm management and marketing systems, offering attorneys a comprehensive assessment of their current status and a clear path toward greater success and higher profits.

In this discussion, Lively shares invaluable knowledge about growing the law firm you’ve always dreamed of.

Tune in to learn:

• The elevated risk inherent in flat-fee practices compared to hourly billing structures
• What it means to run a law firm on the ‘rule of thirds’
• The inverse relationship between firm size and owner compensation percentages
• Solutions for common attorney challenges, including self-doubt and ‘paralysis by analysis’
• The critical importance of cash flow forecasting and the optimal frequency for updating forecasts (e.g., weekly versus monthly)

Don’t miss out on the knowledge that could revolutionize your law firm and life–press play now.

To learn more, visit Cathcap Fractional CFO Services and Financial Insights.

Richard Jacobs: Hello. This is Richard Jacobs with the Secrets of Attorney Marketing Podcast. My guest today is Brooke Lively. She’s the CEO and founder of Cathcap. She works with law firms to help them understand their numbers and to grow their firm and to get off death’s door, if their revenue and their net doesn’t really seem to be as much as they want it to be. We’re going to talk about from panic to profit, how six key numbers to make a six figure difference in your law firm as a title of the discussion. So welcome, Brook.

Brook Lively: Thanks, Richard. I appreciate you having me on.

Richard Jacobs: Yeah, if you would tell me a bit about your background first, we’ll start with that.

Brook Lively: Well, I think the biggest thing is, I ended up doing this accidentally. I have a thing for attorneys. My father’s an attorney, my brother’s an attorney, two of my uncles and virtually every guy I’ve ever dated, including the guys I dated in high school, grew up to become six foot two, left handed lawyers that wear glasses. Somehow, after grad school, after a stint at a hedge fund, I ended up working for my family’s law firm. We hired a guru, kind of like you, to help with sales and marketing, who works exclusively with attorneys. His clients, came to me and said, can you do for us what you’re doing for your family? That was when I truly understood how hard it is for attorneys, how little Law School prepares them to run a business, and how they weren’t running their firms based on the data and on the numbers.

Richard Jacobs: Yeah, I hear from a lot of attorneys that they feel this is not working. They feel like this is going to help them more. Yeah, they seem to run more on emotion. I don’t know if they I guess they’re more in the world of rhetoric and words and less in the world of numbers. Maybe they just have a natural disinclination to numbers. I don’t know.

Brook Lively: Yeah, I don’t think there’s anything wrong with their gut instinct. I think that in general, attorneys have great gut instincts. I think there are two problems. The first is that when you are running on gut instinct, you make every decision multiple times. You make the decision at three in the afternoon, and then you go home and you’re having dinner with your family, and you’re like, “Ooh, wait. Was that the right thing? Should I change and go the other way?” You wake up at 2 AM and then you’re in a deposition the next morning, and you’re going over that decision again. I don’t know if you’ve ever experienced that, Richard, but most of the attorneys I’ve worked with have.

Richard Jacobs: In that they tend to the second guess themselves over and over anyway.

Brook Lively: Yeah, you second guess yourself. You keep making that decision over and over. When you have data and you make a decision based on data, you don’t do that.

Richard Jacobs: This is like, you know, if you’re in the courtroom, oh, I mean, you know you’re representing a client, mistakes are very high, and you got to get things right if you want to do it well and find little details that may turn a case. So maybe that’s why all day at work, they’re in that mode. When it comes to personal decisions, maybe they can’t break out of that so easily.

Brook Lively: Well, that’s really the second problem, and we call it paralysis by analysis. Attorneys are taught not to ask a question to which they don’t know the answer. In a deposition, when you’ve got somebody on the stand, never ask a witness a question if you don’t already know the answer. They don’t, you know, very often an attorney is going to say, “Well, maybe we need more information, maybe we need to think about this. Maybe we need to dig a little deeper”. What ends up happening is paralysis by analysis. Nothing ever gets done, that decision never gets made, the action never gets taken. When you have data, it satisfies that need to make sure you have looked at everything.

Richard Jacobs: So, do you help them (the attorneys) to draw in their mind a corroboration between evidence and data? Is data, the non-courtroom, personal life equivalent of evidence?

Brook Lively: Yeah, it is. “Here’s the evidence, here’s what we see, here’s what has happened. Here is what’s going to happen. You have three options. The data says this. Our experience tells us that you have three options. Our opinion, just like you, Mr. Attorney, has an opinion of what course you should take based on your incredible education and experience, is that you should take this path. We’re going to tell you the same thing we think you should take option B, but ultimately, the attorney needs to take the option that they think is right for them”.

Richard Jacobs: Okay, so how do you give them a better decision-making matrix? You know? What are some elements of it where they won’t get tied up like this forever?

Brook Lively: So, what we do is we dig deep into the data. We go into their practice management systems; we go into their marketing systems and pull-out information. But I think the thing that really people should pay attention to is there are, and I call them the six key numbers. They’re actually kind of six key reports that all law firms should have, and they build on each other, and they get more advanced the further you go.

The first one is all about cash. You need a cash flow forecast. You need to know, depending upon the size of your firm, the smaller the firm you need to know weekly, the larger the firm it’s monthly. But especially with a small firm, you need to know how much cash you are going to have at the end of every week for the next six to eight weeks. To build that cash flow forecast, you’re going to need to know your actual cash balance. You’re going to need to know how much accounts receivable you have, and you’re going to need to know what your monthly net is. How do you spend money?

Richard Jacobs: Right? For those people, there’s money in the account, they’re like, “Oh (sigh of relief?)”, and there’s no money in the account, they’re like, “Oh no”, but they’re not looking ahead with a cash flow calendar that just it is riding along by feel.

Brook Lively: “Hey, there’s money in the account. I can buy that”, even though they wake up next week and rents do or payrolls do, and unfortunately, they bought whatever the week before, and now they don’t have that cash. The second number you should look at is actually a series of numbers. We call them the ideal ratios. The ratio you need to pay the most attention to is owner compensation. What percentage of revenue are you taking home? Because at the end of the day, if you are not being compensated for the time, the effort and the risk you are putting into owning your firm, then you should just go get a job somewhere.

Richard Jacobs: What are some common margins, common ratios that will be, you know, to tell a firm that they’re healthy or they’re not?

Brook Lively: Well. It depends on the size. If you are a small firm, if you’re doing less than 200,000, the owner should be take about 250, the owner should be taking home 70%. They should be taking home 60% between 250 and 500. 50%, at that half a million. Once you hit a million, and as you approach a million, you’re going to go down to about a third.

Richard Jacobs: Why is that? Because reserves need to be held and kept. Or what’s the reason?

Brook Lively: No, it really becomes a matter of who’s doing the work. When it’s 70% and you’re doing $250,000 or less, basically you’re doing all the billable work. It’s you and maybe a paralegal or a legal assistant, so you’re billing it.

When you are at a third, it’s a much bigger operation. A $5 million firm has non-billable people to keep it going. There may be an HR manager that doesn’t get billed out, an office manager, a COO. You as the owner, may not be billing that much because you may be spending your time doing marketing. You might have a marketing manager. There are people doing jobs that you did as that sole owner. When it’s just you and that legal assistant, you wear every single hat, right?

Richard Jacobs: Yeah, I went through that with my company. I did everything slowly, got help to do more and more activities. Can’t do them all.

Brook Lively: As you take off those hats, the percent of revenue that goes to you personally is lower. But let me tell you, I would much rather have a third of $2 million than 70% of 200,000.

Richard Jacobs: Makes sense. Okay. What about in a practice area situation? I know the you know, the margin gets less as you grow and you have more overheads. But do you have any ballpark figures for you know, auto accident person vs family law or criminal defense.

Brook Lively: So, we believe in running firms on the rule of thirds. 1/3 of revenue goes to the people doing the billable work. 1/3 goes to overhead expenses, which include marketing, and then 1/3 goes to the owner. That’s our starting point. You customize it some.

When you look at different types of practices, an hourly billable firm really is going to be very close to that. When you look at a flat fee firm, you’re going to see that the 1/3 going to people can go down a little bit. You can spend slightly less than a third, and that money is going to get reassigned to owners compensation, to profit.

When you start looking at something like personal injury, when you look at contingency, that profit can go even higher. Really, what it comes down to is, he who bears the risk gets the reward. There’s very little risk in an hourly practice. I work an hour, at the end of the month, I bill you for that hour, and you pay it. If you’re good, you’ve got a great fee agreement. You already have their credit card on file, and you are authorized to charge their credit card with not asking them every month. There’s very little risk to get paid there. In a flat fee firm, you’re taking on more risk because you’ve said, “All right, I’m charging you $5,000 for this”. It could take you 15 minutes, or it could take you 150 hours.

Richard Jacobs: It’s like a contingency-esque type of you know, if you have a continuum, hourly is on one side, then flat fee. Then contingency on the right.

Brook Lively: Contingency, you may or may not get paid, so you’re taking on all the risk in a contingency based firm, so you should have the biggest margins in a contingency firm.

Richard Jacobs: Okay, that makes sense. Interesting.

Brook Lively: But we always start at that 1/3, 1/3, 1/3.

Richard Jacobs: Is that a floor you never want to go below.

Brook Lively: Well, is there a floor you never want to go below?

Richard Jacobs: Where’s the point at working as an attorney, you should just go work at McDonald’s because they’ll make more per hour.

Brook Lively: You know, it depends. Everybody wants something different. Profit is not always about dollars. There are different kinds of profit. Profit could be freedom. Profit could be the reputation you want to build. Profit could be the amount of time that you want to spend in the firm. I had a client one time, and her deal was she wanted to be at her children’s swimming lesson at 10am every Wednesday morning. That was profit for her.

I had another client that wanted a national reputation. Okay, that’s great. We had to build her a different type of practice so that she could do that. But having that national name was a type of profit, and she was willing to give up some of the money profit to get the reputation profit.

Richard Jacobs: You can only go so far, no money, no business. You got to have, like, some floor in order to operate?

Brook Lively: Well, yes, you do but it depends on how you look at it, because you could have a firm that has a negative profit margin and borrows money to operate for six months. However, they’re doing that because they know they have a case that is really worth working.

That’s what a lot of contingency firms do, litigation contingency firms, not the pre-lit firms. PI that does trucking accidents with TBI and things like that. They can run negative for multiple months in a row, but then they have a big case that goes to court or get settled right before they go to court, and it makes up for it. They’ve been investing the previous four six months to get that case to where it needs to be. So ultimately, you know, when do you quit and go work at McDonald’s? Only you can define that number.

Richard Jacobs: Sure. But I mean, I’m sure you’re encouraging people to calculate it. You know, we turned you into an hourly person. Here’s where you would be at a per hour basis, based on the hours you work in the caseload you got.

Brook Lively: I actually don’t, I don’t. I encourage the firms we work with, I encourage the owner to look at their total compensation. I don’t think you achieve anything by figuring out what you’re making per hour.

Richard Jacobs: Oh, is it just demoralizing?

Brook Lively: It’s just not productive. Let’s say you’re working 80 hours a week and you’re making $7 an hour. I can make more at McDonald’s because they’re paying $17 an hour. Well, you can’t work 80 hours a week at McDonald’s. They won’t let you. You’re comparing apples and oranges.

Richard Jacobs: Okay. What do you do with attorneys that are more money driven? I would guess, perhaps, you know, maybe young guys that are hyper aggressive, maybe have worked for the money. What do you see amongst the attorneys that you work with? Are a lot of them looking for more balanced lifestyles, or some of them just money driven? What are the top motivators you’ve seen of the clients you’ve worked with?

Brook Lively: Most of the firms we work with are very growth oriented. So they want to grow. They want to be bigger. They want be able to help more clients. And yeah, they certainly want more money, and we’re going to help them get that. They also do not hesitate to look at the money, look at what they need at home and say, “Okay, I can take home $100,000 less this year, and I’m going to take that money and put it in marketing so I can get more clients so I can make more money next year”. That’s a great investment. They didn’t need it at home. There are other people who say, I need every penny at home. We cannot make that investment this year. Okay?

Richard Jacobs: Okay, so all right. You get numbers there and again, what are the common motivators? Is it prestige? You said a lot of them want to grow well, growth and helping more people. Is that because it grows your prestige as a firm where people know your name, or is the goal there to make more money? Again, to when you say, grow the firm, growth mode, what does that mean? Growing their reputation, growing their money? Growing the amount of business they’re engaged in? Do they have a clear idea what growth means?

Brook Lively: Everybody wants to grow for a different reason. Attorney A- I have one attorney that I worked with that wanted to be the biggest PI attorney in the county to prove to his father that he wasn’t dumb. His law degree is the guy’s third Master’s degree. His father used to tell me he was dumb when he was growing up. That’s why he wants to grow, to prove to his father that he’s not dumb.

I’ve had another firm that wanted to grow because they were in a very, very specialized niche, and they were really driven that they wanted to help people in that very specific thing. I’ve had some people grow because they want to make more money. I’ve had some people grow because they wanted to establish something with their name on it. For every person that exists on earth, there’s a different reason why you want to grow. There’s some people that want to grow just so they can say they made the Inc. 5000 list.

Richard Jacobs: Yeah, but I was thinking, from what I’ve seen, there’s always the 80/20 rule in place. This probably gave me three to five reasons that are the predominant ones. They may look a little bit different, but there’ll be similar category. But, you know, I’m sure there’s a lot of one-offs. Someone wants it for this particular reason or that. Do you see any skew in the data? There are common ones that tend to be the top few? Or do you see it just more as a flat distribution.

Brook Lively: More money and more challenge.

Richard Jacobs: Okay, so what would be the criteria for you to work with a firm? You know, what are some signs or things they would say that would say, “I don’t know if this is right for you or maybe it’s not the right time”, versus like, “oh, yeah, you’re exactly what the kind of person that we work with you” fit.

Brook Lively: So, we work with law firms that have hit some kind of ceiling and know they need help to break through. They want more out of their firm and they don’t know how to get it. The people who do really well with us are the people who execute, the people who, you know, we’re still talking about the same topic from November, and they haven’t taken action- those aren’t our people.

Richard Jacobs: Why do you think maybe, I mean, maybe no one knows why the debts of people’s lives, but are you able to get people off the dime and moving, if they’re if they’re stalled and stuck, you know, they’re too much of a perfectionist, or they’re too analytical, what can you do if that happens?

Brook Lively: So, we can show them the way; we can show them the path and the way they can get what it is they’ve told us they want. We’re always looking at that goal, what it is that they have told us they want to achieve, and we build from there. Every quarter, we look at the goal and we map out what’s going to move us forward the most to get there, and that’s what we work on that quarter. If you keep your eye on the prize, we’re going to eat that elephant one bite at a time.

Richard Jacobs: How is different from, I’ve heard this, an attorney will say, “Oh, I spoke to my CPA, and they said I should only be spending 12% on marketing. Therefore, I don’t want to do this that or the other. Want to cut it” How is your approach different, just to be like, totally frank, versus what I call a bean counter that doesn’t really know about how law works. They just know numbers.

Brook Lively: Well, first of all, your tax accountants job is to minimize your tax liability and maximize your deductions. Their job is to run your business basically at a breakeven level. “Okay, great. You’re not going to pay any taxes, but you’re also not going to be able to get a loan for your company, and, in some cases, for yourself if you want to buy a house”. Let’s just start there that their job is to minimize your tax liability.

We are different because we talk about the tradeoffs. Do I think you should be spending 10% on marketing? Yes, I think that for most firms over $1,000,000, 10% of revenue on marketing is appropriate if you don’t want to grow. If you want to grow, we’re going to have a totally different conversation, and we’re going to start to talk about the ROI of that spend, and we’re going to get more granular about it.

Your tax accountant probably isn’t going to do that. Because we specialize in law firms, we can also tell you things like, “this is what the industry is doing. This is what we’re seeing among our clients”. We can look at certain numbers and say, “Yeah, I know your marketing team is telling you that’s good, but from personal experience with our other clients, we can tell you it’s not” It’s the little things. We just understand the ins-and-outs of the industry so well. Let’s say you’re a personal injury firm that does trucking cases. We can look at your cases and tell you that it’s sitting in this one particular stage too long, and here’s some ways to move it through that stage faster.

Richard Jacobs: Yeah, one of the things I’ve seen a lot is, let’s say you’ve got a criminal defense lawyer.

Brook Lively: Yep.

Richard Jacobs: They’ll do some DUIs, an occasional felony murder, interstate drug case, whatever it is. They’ll do a lot of misdemeanors. They don’t know the margins on the different types of cases.

Brook Lively: Yep.

Richard Jacobs: They’ll know, “Oh yeah, I like DUI’s more than domestic violence. Or the clients are better behaved in misdemeanors than in felony, so they tend to have more money than to felony. Do you get into that and help attorneys shape what they’re putting forth in their marketing so they get more of the types of cases that are beneficial to them, emotionally, financially, et cetera?

Brook Lively: Absolutely. We always want to work the cases that have the highest profit margin. I am going to use a PI firm as an example. I was working with a PI firm here in North Texas, and they did car accidents and hospital slip-and-falls, and that was what they did.

I did some analysis, and I realized that the profit margin was 30% higher on the hospital slip-and-falls than it was on the car accidents. So I’m like, guys, we’re moving all of our marketing to hospital slip-and-falls. They did, and they pushed their profit margin up by a third, just by changing their marketing. It was because we had looked at the cases. Sometimes there are what we call loss-leader cases.

They come in, they buy a starter service from you, and then from there, they buy a second service that has a much bigger profit margin. Okay, that’s fine. But sometimes we see firms that are selling things that every time they do it, it’s costing them money. We’re like, “Just stop doing it!” And they’re like, “But it’s 15% of our revenue!” I’m like, “But it’s costing you 20%, so we’re not going to do that anymore”.

Richard Jacobs: What if there’s a type of case that’s soul-sucking. Let’s say again, I’m personal injury. I do a lot of accidents. Do slip-and-falls, dog bites. I hate the slip-and-falls. Maybe I make more money on that, but I just don’t like doing them. What about in that case? Even if they make me more margin, what if I just, my heart’s not it?

Brook Lively: We have two options. Either we move all of those cases to somebody else in your firm and let somebody else work the profitable cases, or we find a good partner, refer them out and get the referral fee.

Richard Jacobs: Okay, makes sense.

Brook Lively: We don’t do the soul sucking cases.

Richard Jacobs: Oh, good, good. Oh, you know, money is not bad. And all be all. That’s why I bring it up.

Brook Lively: That goes back to what I was saying about profit. Profit is not always about cash. In that situation, profit was not having your soul sucked out by the slip-and-falls. Right?

Richard Jacobs: Okay. Another scenario I’ve seen commonly is, let’s say husband or wife. Husband will do criminal defense. Wife will do family law or other firms; they’ll do what I call immediate need law versus longer term. So, they may do again, a criminal defense for the short base hits, the emergency stuff, and then they’ll do personal injury, which can go a year or two, let’s say, until a case settles. What do you do in those situations? Do you also evaluate? There’s short-term money and then long-term money. Do you encourage firms to have that mixture? They have those two different kind of types of revenue, or do you just focus them in only on the particular type of cases they’re looking at?

Brook Lively: Every firm is individual, and I’m certainly not going to tell a family law attorney that they need to now do PI or a PI attorney that they now need to do family law. Talk about soul-sucking, that that’s soul-sucking. Do we encourage most of our firms to go into one or the other if they’re straddling it? Yes.

Do I understand why a lot of PI firms have those short term type of practices to get them off the ground? Absolutely. Personal injury, SSDI- those are firms that are hard to build because you have to invest so much on the front end until those cases start to pay out.

Richard Jacobs: Right. Yeah, the home run cases, DUI could be a base hit list. Let’s say, what if you have three attorneys in a firm, they all do one practice area. But you run the numbers, and you see, one of the people, they’re just not good at converting, and they’re just bringing in, 20, 25% less than the other two partners. What kind of conversations have to happen there?

Brook Lively: This is so funny. We have had a ton of discussions about partners and value in our company. I don’t think that origination is the only value that a partner can bring to a firm. There are partners who bring value by billing and managing client relationships. Those other two partners may be originating more, but the guy who’s originating less, he may be managing the office, doing the marketing, dealing with clients, and teaching and training the younger attorneys. So no, he’s not out originating as much now.

Richard Jacobs: Right, he’s more of a mentor for the other ones, and a coach. Maybe someone that everyone just likes. You met those people that like, everyone seems to like them. Some people are more lopsided. Some people love them and hate them. Maybe you know someone like that amicable and just makes everyone feel good, has that value, but they’re not, let’s say just only the breadwinner.

Brook Lively: Yeah. Not everybody gives value to the firm in the same way. Now, if you have a partner who is not contributing to the management of the firm, is originating 25% less than the other two attorneys, and is billing 25% than the other two attorneys. Okay, that’s a discussion of, are they really a partner? Should they be a partner? But it’s the compensation structure for the partners, and is that person carrying their weight?

Richard Jacobs: Okay, that makes sense. Any other scenarios you see that I haven’t described that are common or that are really important to get your arms around and resolve, that could be a big problem in the future.

Brook Lively: I think one of the biggest ones is attorney compensation. You really want to align attorney compensation with what you want that attorney to be doing.

Everybody should have some kind of KPI, some key performance indicator they need, one number that they have to deliver on that you manage every single week, and you hold them accountable for, every single week. It might be, in family law, it may be hours billed. In personal injury, it may be demands sent out.

I don’t care what it is, but there has to be one thing that moves your business forward, and please do not say dollars collected, because that’s at the end of the chain of events that gets you money. If we’re going to make sure that we are collecting what we need to collect, we need to intervene. We need to know if we’re off track much earlier in the cycle.

Taking demands as an example, we know that when we send out a demand, on average, we’re going to get a settlement offer back in, you know, 72 days. I’m making this up. Everyone should have a number. Their compensation plan should incentivize them around that number.

Richard Jacobs: Okay, I have a marketing company that works for me, they’ll have their own KPI, let’s say, or KPIs that I would want to watch too.

Brook Lively: Yeah, everybody has a number. Your receptionist has a number. I’m also an EOS implementer. We’re data driven people here at Cathcap . We went through and we looked at our clients to see what made the difference between the people who were doing well and the people who were really excelling. The people who were really excelling were those ones that were taking action, that were making decisions, that were executing. We noticed that most of them were running on EOS. Which is the Entrepreneurial Operating System. There’s a book about it called Traction.

Richard Jacobs: Does EOS compel the person to do (better)?

Brook Lively: EOS is a framework for managing your firm that creates three things. It helps you get a vision that’s shared by everybody in the firm. It helps you get traction; everybody rowing in the same direction, and it helps you create a healthy team. When you have those things; vision, traction and healthy, it is amazing what gets done in a firm. When people are executing like that, when everybody has a number, when they’re executing on their number, it’s huge. And yes, the receptionist has a number. I don’t know what our number is.

Richard Jacobs: What would be an example like number of calls taken?

Brook Lively: Percentage of calls answered before the third ring.

Richard Jacobs: Yeah, there you go. Okay. Who is a client you can help. Who is a client that’s not in your area? In terms of size, practice area, geography, etc. Like, where do you prefer to draw clients from? What situations, circumstances?

Brook Lively: So, we work with firms that have revenue between 2 and 50 million. We have a national practice. We don’t work with anybody overseas. That everything we do, we do virtually, so we can help people anywhere in the US.

Richard Jacobs: How can attorneys that are interested, where can they go to a website, or, you know, what resources you have for them so they can take the next step with you?

Brook Lively: Absolutely. I think our website is the best place. It’s cathcap.com, and if you look on there, you can always just make an appointment with me if you want to chat and learn more about what we do.

Richard Jacobs: Okay. Well, excellent. Brooke, thanks so much for coming on the Podcast and talking about all these metrics and attitudes and what’s necessary to really grow. I think it’s a really interesting call, and I’m glad you’ve been here.

Brook Lively: Well, thanks for having me, Richard. I really appreciate it.

Richard Jacobs: Excellent.

Podcast: Play in new window | Download