February 14, 2011

The Distribution of Law Firm Profits

Distribution of profits is frequently one of the most potentially disruptive experiences that partners or shareholders have to face. It is axiomatic that no single compensation plan will be universally accepted and agreed to by partners in firms no matter how closely these legal organizations may resemble each other in size and type. The "best" compensation plan for any law firm is the one that creates the least amount of discontent, and has the highest "grade" of fairness among and between the partners.

Philosophically, every law firm has a method for compensating its lawyers. Many compensation plans are purely subjective in nature, while others are highly structured. Most plans are a combination of the two. A compensation plan that is well-conceived and skillfully implemented should: (1) enhance the ability of the lawyers to provide a high quality of legal work; (2) reward extraordinary performance in terms of business developers, over-achievers (production and collection), rising "young stars" and lawyer managers (legal and administrative); (3) promote an atmosphere conducive to client service; (4) attract and retain qualified lawyers; (5) encourage efficiency through division of skills and utilization of the expertise within the firm; and (6) improve the economics of the practice.

The rules of the compensation plan should be understood by the lawyers before the beginning of a new year. The compensation plan should be supported with reliable records that are comprehensible and can be made readily available. The plan should be fairly administered and its rules and results should be evaluated appropriately. Any compensation plan is only as good as its implementation. A good plan can be badly handled, and a bad plan can be handled reasonably well by fair-minded attorneys.

Over the years, a number of plans have evolved for the distribution of income to the partners or shareholders of law firms. It is advantageous to examine certain principles of selected plans that have stood the test of time and worked well for the firms which have used them.

Decisions To Be Made:

For most firms, certain basic decisions have to be made for the current operation of their plan. As the firm matures, the nature of the plan and its elements may change. Among these basic decisions are:

(1) Who or what body will make the decision on allocation of income?

(2) Will the allocation be based on percentages, units or participation?

(3) Will the distribution be prospective (distribution percentages or units of participation determined in advance of the year) or retrospective (distribution percentages or units of participation determined when year-end results are known)? Or will an initial percentage be prospective and a specified amount of dollars or percentage be withheld for end-of-year distribution based on retrospective considerations?

(4) Will the firm determine that the profits to be distributed will consist of all that is left over after overhead is paid, or will profits be considered everything after a predetermined draw (or salary equivalent) is paid to partners or shareholders in addition to overhead? 

(5) Will the firm have a class of non-capital partners whose salary and bonus will be exempt from the final distribution of income to general partners or shareholders? Or will there be a gross percentage to be divided among general partners and other pools to be divided among other partners? (The term "partnership" is used to represent either a partnership or a corporate form. The term "partner" is used for a partner or shareholder).

(6) Will hourly rates be periodically established or reaffirmed by or for each partner, associate, or other direct producers of income - law clerks, legal assistants (non-lawyer professionals or paralegals) and sometimes secretaries - so that an equitable base for billing to clients and the resultant gross billings allocation for all partners will be equitably established?

Partners Functions:

Virtually all plans consider that partners perform the functions that create and maintain a continuing, vital entity. In simplistic terminology, one firm designates those persons who perform these functions as: finders (or rainmakers), who originate the business from a clients source; minders (who maintain the business originated by others; grinders, who do the work on client matters; and binders (who provide for the management functions, engage in community or bar activity, attend and comment on continuing legal education, and enhance the firm's ability to obtain business through its acquired reputation).

In addition, past earnings records, the competitive legal market for younger partners or outstanding specialists, and unusual retirement, death, or capital provisions may have a bearing on the judgment applied in income distribution.

The following are examples of selected plans ~

Straight Percentages or Unit Systems:

(1) Percentages or units of participation without formula, prospectively determined (a smaller number handle this retrospectively with predetermined draw) is the most commonly-used system, backed by statistics, with a committee making the decision. The committee may or may not submit this for partnership approval or rejection for further review. These committees have recently broadened the age range of membership. They are now more often selected by the partnership, often with preselected nominations. The committee generally uses a sounding-out process. Some have all partners participate initially in the decision making, and many interview all partners before the decision in made. A few use a secret vote by all partners that is submitted to the committee.

(2) Using a percentage with float is the same as (1) above, except that a float or reserve ranging generally from five percent to ten percent is used, based on the year's performance.

(3) A third alternative is similar, except that one "owner" (or more) or a continuing senior partners' committee makes the decision.


(4) Many highly-institutionalized firms have moved from one person or senior partner domination of allocation to a committee of broadened age membership.

There is now a heavy use of computerized or well-organized manual systems of statistics. Business origination may not be a statistic, but the firm must be aware of who brings in business or controls business. Heavy attention is given to client responsibility and outstanding lawyers. The firm may or may not give attention to firm or department management.

Statistics are developed to show what major client business results from which fields of law, and seasoned judgment is applied to allocation information and past records of compensation. There is careful planning of income and expense budgets; attention is given to the outside activities of lawyers, firm-wide management of recruiting, appraisal of gaps in legal organization at all levels, assessment of progression needs stemming from the aging process; a watchful eye is kept on new trends and legislation and what other major firms are doing.

Formula Systems:

Statistical plans are frequently calculated according to mathematical formulae based upon the allocation of credit. Weights may be assigned for various elements as follows: three for business origination (permanent); six for work done; and one for profitability. Management time and consequential time may be weighted. Interest is provided on capital accounts.

More than one year's figures are used. Business origination is transferred by assent, or on death, disability, or retirement, or the best interests of the firm. The system places a heavy emphasis on the continuity of management, particularly with regard to the business origination weighting and the interpretations of the rules of the system.

There may be variations of the formula. For example, business origination may be reduced in weight from three to one and a half, while work done is increased to eight and a half, for a total of ten. Some variations split business origination by agreement or decisions into subfactors, such as for maintaining clients or for case responsibility. Management time may be weighted. There may be a modification in percentages based on hard cases, handed-down large estates, or bar association activity in the interests of the firm and its reputation.

A third alternative is an equal sharing plus formula or statistical information plan. Under this formula, a percent of the net income is shared equally among all partners, and the remainder is distributed as determined by a judgment on statistics and subjective factors.

Combination Plan:

Another alternative is a combination plan, which might operate according to this formula:

(1) Work incentive - 50 percent of distribution: To keep every partner a working partner, a proportion of each paid bill is based on the time-dollar contribution.

(2) Group incentive - 20 percent of distribution: To provide each partner with an interest in the performance of all others, the seniority in terms of years as a partner, up to a given limit, is multiplied by average compensation for past years.

(3) Business development incentive: 20 percent of distribution: To make every partner business conscious as well as work conscious, actual data on business produced by the individual or the judgment of the committee may be used.

(4) Incentive to use associates: five percent of distribution: Stimulates partners to delegate work, based on data on work delegated and on supervision of associates.

(5) Contingency fund: five percent of distribution: Sparingly used to compensate for extended illness, public service, hard cases, firm business, and outstanding achievement that reflects credit on the firm. The unappropriated portion is allocated in proportion to distribution under the first four items of the formula.

Profit Centered - Highly Departmentalized:

In rare cases, a firm may be able to have a judgment by one partner or a committee on economic results from each department head. Department heads recommend lawyers within their departments. Subjective judgments may be made as deemed pertinent. Gross receipts, overhead, and profitability are allocated to each department.

Multiples of Lowest Partner's Percentage:

A cap is placed on the highest percentage at four or five or other multiple times the points of the partner receiving the lowest percentage. Statistics and other pertinent factors are considered. Each partner is slotted to a relative ranking position.

"Owners"or Dominant Partners:

"Owners"  or dominant partners set their own distribution; the rest is allocated to other partners. Usually this may occur with a highly profitable practice derived almost entirely from the practice of one, two or three partners.

Heavy capital accounts are usually contributed by the owners.

Individual Achievement:

With a highly-developed system, each partner buys the time of other partners, associates, and paralegals who are direct producers of income. Each partner is credited with his share of the gross receipts. The overhead of partners, associates, and paralegals is directly apportioned, and the general overhead is allocated or directly applied. The managing partner may be provided with a specific supplement.

Profit Pools for Senior Associates and Non-lawyers:

Professional corporations automatically may provide a profit-sharing situation for all personnel by the establishment of a profit-sharing trust or pension plan. Private practice firms in some cases have established an incentive for associates in the form of a percentage of profit or pool to be divided among this group in accordance with established criteria. Some firms have established a pool for non-lawyer participation.

January 31, 2011

Firm's Future Depends on Selection of Partners to Serve as Managers

Democracy has such a nice ring to it. But when it becomes the dominate management structure in a law firm - especially a large law firm - the freedom gained may well be freedom to watch the firm become slow to respond to problems and opportunities with resulting hits to the bottom line.

A total democracy in many firms has been exemplified by virtually every non-routine administrative manner, and many which could be considered routine, having to be brought before a partners meeting; the result of which may be delayed decisions, uninformed partners voting on matters on which others should do their homework and decision-making, partnership meetings weighed down with trivia. Everybody's business becomes nobody's problem.

Better managed firms assign, and recognize, administrative responsibility and accountability. They select attorneys with available time, management skill and motivation to carry out these responsibilities.

This article describes some approaches for selecting partners to manage administrative and substantive areas of the practice.

Management of legal specialties and management of financial and administrative matters develop as a firm grows in size.

Organizational policies need to be communicated to, and accepted by, the lawyer. Accountability to the firm needs to be understood by the individual. If not, the firm can develop an inability to function effectively. And such resultant ineffectiveness can yield to lessened esprit de corps and ultimately create reduced economic circumstances.

Larger firms frequently develop a representative government for administrative matters.

Major Management Functions:

The Management Committee is entrusted with the responsibility for the general management of the firm. As a firm continues to grow, it is important that this committee have confidence in the ability of the organization of the firm to follow its policies and to manage profitability client matters, human resources and technology.

Among the Management Committee's major organizational concerns are: lawyer direction of administration, financial and professional personnel management; specialty and client management; forward planning and appraisal of results; and partnership affairs.

It is an important function of the partnership to insure a good management committee and of the management committee to insure competent managers. In some situations, the talent for the principal management posts may be on the management committee. If so, and these people are selected, they should have time available and the will to accomplish the best possible results in their assignment.

It is also sound management policy for firms with growth expectations to insure a competent and appropriately compensated staff in support of its lawyer management. The staff should be of sufficient intelligence; schooling; training and experience to complement and supplement lawyer management.

Some management activities are likely to require significant time commitments of certain partners. An attempt is made in the chart below to estimate the management hours per year which may be consumed by those that head certain functions.

Management Activities and Estimated Hours Per Year:
Directing Partner Management Committee:  500-700
Finance:   300-500
Professional Personnel:   300-400
Administration (and non-lawyer personnel and technology):   400-700
Specialty, Major client or major case group or team:   300-500
Forward Planning:   300-400

Other management activities may also have substantial time commitments, such as the hiring partner, or a partner selected to assist or share the burden of managing a large specialty group.

It is possible for a managing partner to handle a combined responsibility for: finance, professional personnel and administration. All of the talents required for top-level thinking in these areas may not be possessed by one individual. Thus, as an example, it is likely that a human resources-oriented individual may wisely select a partner to assist in finance.

Management Committee Duties:

The Management Committee should meet periodically at a regular time. It should maintain an overview of the major organizational areas of the firm - whether of specialty groups or their subdivisions, client teams, branch offices, administration and others.

The Management Committee should approve the appointment of chairpersons of major committees or the designee for a major administrative post or project. When beyond the power of those appointed, and the occasions should be rare, the Management Committee should settle administrative differences between those involved.

The Management Committee should exercise overall policy guidance for the firm and decide on major issues concerning client acceptance and client responsibility which cannot be resolved by those directly concerned.

It should review the monthly financial and economic reports, and provide an annual and continuing review of budget, strategic planning and major administrative activities.

The Management Committee should decide on conflicts of interest, directors positions, ethics questions and matters or professional liability which cannot be otherwise resolved. It should review recommendations on partnership admission and advancement toward percentage partnership.

Further, it should review the costs of the entire compensation package for employed lawyers and non-lawyers. The committee should review the costs of the entire compensation package for employed lawyers and non-lawyers.

The committee should prepare or review income distribution recommendations for the firm. It should maintain the partnership agreement and matters pertaining to the withdrawal, retirement, death or disability of a partner. They should designate "partners-in-charge" of branch offices, and plan and manage directly or indirectly all other functions and activities relating to the firm.

Key Managers Qualifications:

The organization supporting the legal effort should be managed well to enhance the efforts of attorneys in providing services for clients in a cost-effective manner.

Management posts must be covered by those best qualified to handle these duties with relative ease and optimum results. Management responsibilities should be recognized by all lawyers as an extra commitment undertaken by some lawyers, usually in addition to their legal work.

The attorneys who are gifted managers as well as talented lawyers are in a position to perform a unique service. Conversely, the selection of attorneys who are not talented in administration for key management aspects of the firm, can be a disservice and impede progress.

Those selected must also be willing to serve in the assigned management capacity, and be in a position to manage their time and availability so that the expected performance is provided. Those lawyers or non-lawyers selected for management positions are expected to engender the respect of all partners and associates. Their support of the firm's management is essential.


Managing Partner Qualifications:

Should the firm decide to establish the position of managing partner, the qualifications to be expected would include:

* Leadership ability;
* Business sense and a sense of timing;
* Breadth of experience and view;
* Creativity;
* Ability to plan and organize;
* Background in law firm management, economics, finance and accounting;
* Ability to be a good and judicious delegator;
* Capacity to review results;
* Ability to identify with the entity concept for a law firm;
* Ability to interpret or develop policy; and
* Ability to handle crisis.

Committee:

If an assignment can be handled by an individual rather than a committee, then this course should be followed. Other than the management committee, the respective committee chairpersons should select their own committee members. In larger firms, members of a committee, other than those chairing major committees, are normally chosen from lawyers who are not members of the management committee or from the same subdivision of a specialty group.

To a reasonable extent, a further purpose of the firm's committees and other management assignments is to spread overall operational knowledge and responsibility among qualified and committed partners regarding all matters, both legal and otherwise.

For such purpose, appointments to particular committees or assignments are generally to be limited in tenure. Committees should meet and choose meeting times, as appropriate. All periodic (regular) meetings should be preceded by an agenda and followed by abbreviated minutes (chairperson's responsibility, even if the committee has a designated secretary), eliminating only such items as the related committee may deem proper. Distribution of the agenda and minutes shall be to the members of the related committee(s).

Management of Practice Areas:

Each head of a substantive practice area should be responsible and accountable for planning and appraising the proper and profitable handling of work within his or her jurisdiction.

While individual leaders will inevitably emerge from certain subdivisions of client work or areas of law, these division leaders are expected to work in concert with their chairperson.

All department heads are responsible for overseeing the system for allocation of work and quality control within their area of law. If the number of partners, associates, paralegals or others assigned to the area of law if not sufficient, the department head should request assistance from the chairperson of the professional personnel committee (for legal personnel or law clerks), or the administrator (for non-legal personnel).

The department heads should review and recommend to the financial partner, a policy for fees and billing in their jurisdiction, within the framework established for the firm. They should be responsible for planning for business development (or contraction) and for anticipating new developments within his/her area of law.

The heads should oversee collecting, retaining and indexing legal forms, memoranda, opinion letters and important legal efforts for his/her department, within the system of the firm and in coordination with the librarian. They should be consulted on continuing legal education efforts for the area of law under their jurisdiction. They should advise on department policy within guidelines developed by the firm for signature authority for legal matters, letters and opinions and attend monthly meetings of department heads and provide at least quarterly, data for the executive committee's evaluation of the economics of professional services rendered by his or her department.

During the course of firm business, all department heads should provide advice, when requested or if appropriate, on the acceptance of new business. They should consider conflict of interest, ethics, merits and strength of case. Other factors are the time required, nature of the client, ability to handle the work, basic expertise available, "one-shot deals," and availability of lawyers.

The policies of the firm on desirable or undesirable work, economics of the case and value of the firm are additional considerations. If the department head is uncertain whether to accept a case, he or she should consult with the executive committee chairperson. Where questions arise on new directions or policies on business acceptance, the executive committee chairperson should present the case to the executive committee.

Conclusion:
The management abilities and leadership skills of lawyer managers call for the willingness to spot the unusual and to consider a new point of view. If the managers of administrative and substantive practice areas possess unusual skill, they can add to the capability of all of the lawyers and remarkable gains accrue from their efforts.


January 24, 2011

A Four-Step Formula For Strategic Planning

Over the past six years or so, significant changes have occurred within the legal profession that have required law firms to do long-range planning. The market for legal services has become, and will continue to be, more competitive. Mergers and acquisitions have reduced the number of "blue chip" clients available to be served by law firms. Overly aggressive and poorly managed corporate clients have experienced financial distress, others have joined with larger and better managed organizations and many have gone out of business.

The more progressive law firms have initiated aggressive marketing programs in an effort to retain and expand work performed for existing clients and to attract potential clients.

To compound the frustration and anxieties that prevail among partners in many law firms, cost conscious clients are less loyal to established law firms and have initiated "transactional relationships" with several firms, even in the same city. Today, it is commonplace for clients to negotiate fees, seek volume discounts and for certain types of matters, to propose contingency/risk forms of billings. Many firms are under growing financial pressures due to the resistance of clients to fee increases and greater financial expectations and needs of partners.

This article presents guidelines for lawyer managers who need to plan, but who are unfamiliar with planning concepts for a law firm.

Strategic planning is the process whereby a firm, assisted by the administrator, formulates its immediate and long-term goals and methods for achieving these objectives.

When properly developed and implemented, the strategic planning process will enable lawyer management and the partners to reach consensus on shared goals, identify qualitative and quantitative benchmarks and develop an action plan that includes timetables and lawyer accountability for performance.

The strategic plan will serve as a guide for allocation of the firm's resources. It will allow the firm to plan its lawyer activity more productively, i.e., the time spent on fee producing work, practice development and image enhancement, management of administrative and substantive activities, recruiting, etc. The strategic plan will also enable attorneys to appraise the results of their efforts. The strategic planning process is usually undertaken in the following four phases: (1) Self Assessment, (2) Analysis of Data Base, (3) Draft Objectives for Presentation to Partners, and (4) Implementation of the Plan.

Phase 1: Self Assessment

This phase involves the managing partner, management committee or strategic planning committee to survey all or a representative number of lawyers through personal interviews, questionnaires or a combination of both to obtain their perceptions about internal and external trends that will have an effect on the firm. Examples of issues that are usually addressed during the self assessment follow:

1. The philosophy, objectives and plans currently guiding the firm

2. The firm's culture

3. The form and effectiveness of firm governance, organization and administration

4. How effectively the firm's growth has been managed

5. Partner/associate relationships, i.e., the ratio of associates to partners, classes of partners and associates, criteria for admission to partnership, communications among and between partners and associates, retirement planning, etc.

6. Firm economics, i.e., partner satisfaction with gross revenue and net profit, individual net income, hourly and billing expectation from partners and associates, etc.

7. Areas of practice management, i.e., does the firm deliver legal services in a quality, timely and profitable manner?

8. Firm resources and capabilities, i.e., strengths and weaknesses, as related to resources, reputation, services and legal market position.

9. Client perceptions and partner willingness and ability to sell legal services, etc.

10. An assessment of the legal market environment, including size, synergism, trends, competition, client behavior, etc.

11. A forecast of the political, social and economic forces of change that will effect the firm and its clients.

Phase 2: Analysis of Data Base

This phase of the process involves analyzing the data base to highlight those key internal and external factors affecting the firm. Planners should be especially interested in obtaining partners' perceptions about the following:

1. Firm Strengths

2. Firm Weaknesses

3. Competitive Advantages

4. Competitive Disadvantages

5. Number of full time lawyers - both partners and associates and their ages

6. Administrative personnel

7. Main sources of clients and income from principal clients over the past three to five years and important changes that would effect client volume favorably or unfavorably

8. Inventory of unbilled time, accounts receivable, costs advanced

9. Billable and non-billable hours

10. Health problems or personal idiosyncrasies of partners

11. Anticipated tangs in the partner compliment, i.e., retirement, withdrawal, etc.

Many law firms have retained law office consultants to assist in the strategic planning process. Experienced law office consultants can expedite the strategic planning process. Being familiar with lawyer dynamics and the economics of law firms, law office consultants can analyze and interpret financial and management information and partners' responses. They can recommend alternative approaches for achieving firm objectives. Further, partners are usually willing to discuss their perceptions about the firm and respond to consultant's questions more readily than to similar questions asked by other partners.

Phase 3: Draft Objectives for Presentation to Partners

This phase includes drafting objectives for presentation to the partners in each of the areas studied. The following is an abbreviated presentation of marketing plan objectives and strategies prepared for one of the author's mid-size law firm clients.

Illustrative Marketing Plan Objectives:

1. To serve well, efficiently, economically, and fully the firm's existing clients (This objective, properly carried out, is probably the most important).

2. Growth - Does the firm wish to grow? An objective of most marketing plans is to increase the number of quality clients served by the firm in targeted industries and practice areas.

3. To identify and market whatever strengths or unique services the particular law firm may have to offer including, for example:

(a) The firm's ability to handle complex and multi-dimensional problems
(b) The firm's expertise in one or more substantive areas of the law
(c) For a firm with branch offices, the ability to better serve clients through one or more offices

4. To increase the firm's exposure in the marketplace.

Illustrative Marketing Strategies:

1. To implement a marketing plan

2. To analyze the market or markets where the firm practices

3. To identify substantive areas of practice where the firm is weak or understaffed an act to correct the situation

4. To determine which of the firm's strengths should be brought to the attention of existing and prospective clients in the markets where the firm practices

5. To identify a specific number of prospective new clients and assigning responsibility to specific lawyers to deal with the prospects, directly or indirectly

6. To meet with each major existing client and determine:

(a) Whether the client is satisfied with the firm's representation
(b) How the firm might improve from the client's perspective
(c) What other services might be performed (In this regard, some firms have developed client evaluation questionnaires).

7. To analyze the mailing list for firm announcements and determine whether it should be expanded or modified

8. To identify a specified number of potential referral sources and inform them about the firm

9. To identify seminars (including CLE, trade association, and client seminars) in which the firm's attorneys should participate and/or which the firm should sponsor

10. To develop and make effective use of a firm resume. In this regard, the firm may employ a general firm resume, together with resumes for its individual lawyers, its specialty groups, and its branch offices, the use of which is tailored to the perceived interest or needs of a particular client or prospective client

11. To identify and encourage participation in appropriate service, political, social, alumni/ae and similar organizations, where individual lawyer participation would be beneficial

12. To organize internal programs to keep the lawyers in the firm informed about marketing activities

13. To publish informational memoranda and pamphlets on new areas of law

14. Longer term strategies for accomplishments over three, four or five years

15. Periodic reviews of the effectiveness of the marketing plan should be scheduled and the plan should be revised in light of experience

Phase 4: Implementation of the Plan

The pay off for strategic planning is in the implementation of the plan. This is frequently the most difficult part of the strategic planning process. It is recommended that the plan be implemented through the firm's existing organizational structure, i.e., the managing partner, the strategic planning committee, heads of substantive practice areas and branch offices as required. Individual partners should be assigned responsibility and held accountable for the satisfactory implementation of each phase of the plan in accordance with an agreed upon timetable. Partners responsible for the implementation phase should report to the managing partner, strategic planning committee or other group designated to oversee the planning process. Problems and/or progress should be reviewed and assessments made to determine the most appropriate strategies to be followed. Status reports should be provided to the other partners on progress and/or problems in each phase of the plan in order to keep them apprised about the planning activities.

The implementation must be monitored to assess how effectively the plan is being implemented and corrective action must be taken as required.

Conclusion

Strategic planning is a dynamic process. If conceived properly and implemented effectively, the strategic planning process will provide information required for determining immediate and longer term goals and objectives.

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January 17, 2011

Is Your Firm's Culture an Asset or a Liability?

Recruiting and retaining top-quality rainmakers, as well as those myriad and influential attorneys who possess critical expertise in today's "hot" practice areas, are two of the most critical challenges confronting managing partners and executive committees in today's competitive environment.
In light of the numerous opportunities for such powerful and productive lawyers to join competing law firms, you and your fellow managers need to be especially cognizant of whether your firm culture, its management practices, and the presence or absence of appropriate strategic planning and marketing activities may finally drive lateral candidates to seek more lucrative and professionally rewarding opportunities elsewhere.
A firm's culture may be its greatest strength for determining and achieving its immediate and long-term objectives. However, that culture may be its greatest weakness if it is bound to: (1) outdated traditions ("because we have always done it this way"); (2) management styles that are dysfunctional and inconsistent with the desires and expectations of a majority of the partners and with the needs and priorities of the firm; or (3) outdated philosophies of senior or even departed partners that are inconsistent with the marketing and compensation programs required to compete aggressively with other financially successful, proactive law firms.


Danger Zone:
Absent the determined willingness of lawyer/managers to be sensitive to the changing needs of a firm, and the desires and expectations of its partners regarding the core values that guide the firm - including its methods for determining and implementing policies, as well as compensating its lawyers and engaging in strategic and marketing planning that will allow it to compete effectively with other law firms in its geographic area - the firm will have problems functioning in its practice environment. It may have difficulty surviving.

Among the warning signs:
(1) Partner complains or suggests that they are not being kept informed of matters that involve staffing, termination of attorneys, or specific developments that may affect particular partners or their areas of practice.
(2) Concern that they are being manipulated by lawyer management or a group of dominating partners.
(3) Exasperation at being assigned responsibility for performing administrative or substantive tasks without being granted adequate authority to accomplish them.
(4) Signs of unwillingness among the more influential partners to share the decision-making for the firm with other lawyers.
(5) Perceptions that, because decisions are being made by a select few, the partner meetings are essentially eyewash, as major decisions are made beforehand and that they are done deals in any event.
(6) Distress, exacerbated by this lack of open communications between the more influential partners and the rest of the attorneys, that they are always those other partners who seem to learn about decisions through the grapevine rather than from the decision-makers.
(7) The palpable sense that, since senior (or otherwise influential) partners consider the firm their private domain and take others for granted, there is simply a lack of concern about the status or feelings of other partners by some of these more influential partners.
(8) Resentment of a minority clique of partners who seem to see themselves as an entitled leadership elite, making decisions or engaging in activities that ignore or disregard the concerns, interests, wishes, or expectations of a majority of the partners.
(9) Built-up frustration at the perceived insensitivity to the personal and professional needs and priorities of partners, particularly as it manifests itself on a workaday basis, for example, delegating client matters at the last minute and expecting that the work be performed immediately or within an unrealistic time frame. Such expectations are especially infuriating when the matter has languished on the originating partner's desk for some time.
(10) Discontent with unfair pay plans that allow the more influential partners to greedily manipulate the compensation system to suit their own purposes.
(11) Evidence of a lack of adequate planning for transferring client responsibility from the more senior partners to mid-level and junior partners, which often reaches a head with a fall-off in business due to an unanticipated and unplanned-for client departure, or the end of a significant matter that has kept several attorneys and staff fully occupied but with no plans for how to replace that business.
(12) A sense of tangible inequity when the more senior partners reduce their active involvement in business origination, work production, or firm management, without an concession to receiving a proportionately diminished profit share.

What Can Be Done?
Even at firms where such symptoms have apparently progressed to an advanced stage, it is often not too late to begin to institute a corrective program. That program must be predicated on three key words: Communicate, Communicate, and Communicate! In particular:
(1) Lawyer management should take particular care to assess the needs, requirements, and expectations of all of the other lawyers.
(2) Lawyers should be given the opportunity to provide input on relevant governance issues and to be kept informed about those activities that will influence the firm's future.
(3) Have regularly scheduled meetings; announce the dates and times of these meetings far enough in advance to clear schedules; and hold them regardless of whether the more influential partners are present.
(4) Prepare an agenda for these meetings; request partners to contribute to the agenda; circulate the agenda prior to the meeting; provide background information when and where possible in advance of the meeting; prepare minutes or summaries of the meeting so that there will be a written record of the decisions reached; and finally, circulate these minutes to the partners for informational purposes.
(5) Encourage partners to speak out on various policy, financial, and operational matters that will affect the firm and its practice groups, presently and in the future, without fear of retribution by the dominant and more influential partners.
(6) Reach a consensus of a significant majority of the partners about the kind of culture that the want for the firm. Then, develop a plan detailing how to achieve these goals, with partner responsibility for putting practical components of the plan into action, along with designated dates for status reports and implementation.
(7) Ensure that the firm has a compensation system that is well-conceived and implemented and that rewards the positive efforts of partners and associates with incentives for them to perform those activities that will advance the firm in concrete and articulate ways.
(8) Provide all lawyers with the opportunity to grow, professionally and personally, by attending CLE, in-house training programs on substantive matters, and on a selective basis, by having them participate in administrative tasks in order for them to learn about managing aspects of the firm, consistent with the culture that has been formally articulated.
(9) Provide opportunities for the mid-level and junior partners (and associates) to participate in the orderly succession of firm management and to personally assume specific responsibilities for client development and retention. Be sensitive to the needs and concerns of the older lawyers and ensure that the current compensation system does not work at cross purposes with the firm's ability to achieve these immediate and long-term objectives.
(10) Follow up on the progress of the firm and its components to ensure that cultural innovations are being maintained and reinforced by all lawyers.
(11) Be sensitive to the need to tweak elements of the firm's culture in accordance with the priorities and needs of the partners, as required, to avoid problems down the road.
How effective a firm's lawyer managers will be in achieving the kind of culture needed to encourage the partners to identify objectives and to develop and implement strategies to accomplish these goals will depend on their willingness and ability to develop and articulate shared values.
In addition to benevolent and well-meaning comments by firm management about what should and should be the prevailing culture, the results will depend on the attitudes shown by lawyer management just as much in what they don't say. It will depend on how the more influential members of the firm respond to various situations with which they must deal. It will depend on how their interpersonal relationships with each other, members of the professional and administrative staffs, clients and the community at large, are perceived.
In other words, there must be change and the change must be obvious.

January 10, 2011

Nine Essential Billing and Collection Skills for Lawyers

In creating and managing a law firm's money pot, consider the following: What mix of ingredients will help the firm's lawyers successfully bill and collect? How about money as a factor? This ingredient is an important part of the mixture. You must also throw in peer recognition and evaluation. Most lawyers want the added spice that comes from working in a firm that knows its priorities and values. Add these ingredients in the right proportions and your billings and collections will flourish.

Motivation Essential:

Lawyers will flourish because they want to succeed, but your firm's culture must stimulate their motivation to succeed. Take away motivation and your billings and collections will suffer. The key is self-motivation, which is the fuel that drives most lawyers to succeed. Firm management should function primarily to protect and encourage each lawyer's self-direction. Managers should interfere only in exceptional circumstances.

How do you foster this sense of personal responsibility? The best way is to encourage your lawyers to know and understand what contributions they make to billings, chargeable hours, client development, outside activities and firm public relations.

Negative Success Factors:

Lawyers become better team players when they can control and influence firm policies that affect their professional, personal and economic success. They see their success as an integral part of their firm's success. Successful firms work hard to develop their success factors. These success factors are intangible and difficult to quantify, but when they are missing it is easy to identify their symptoms. Success factors are like good health, hard to describe -- but get sick and the symptoms become your medical diagnosis.

Diagnose a sick firm culture and you will find ten symptoms: poor productivity; lawyers who fail to bill and collect; high personnel turnover; hostility between individuals; low morale; out of control overhead; lawyers unwilling to change or consider new practice ideas; lack of initiative or creativity; apathy; and the inability of management to gain support for its decisions.

These symptoms, left unchecked, will destroy the self-motivation and productivity of any firm's lawyers and staff -- and eventually the firm.

Contrast these symptoms with those found in firms that work hard to build and maintain a team approach to practice. The five symptoms of healthy firms are effective communications; heightened self-motivation; increased productivity and commitment to billings and collections; low stress; and fewer sick days and other absences.

Nine Essential Billing and Collection Skills:

Motivation is essential to drive a lawyer's commitment to bill and collect. But, without the proper skills this commitment can lie idle. Billing and collecting is a skill and not a talent. What are the skills your lawyers must learn?

First, allow your young lawyers to bill small matters early in their careers. Make sure these young lawyers have mentors to turn to for billing and collection questions and discussions. A good young biller and collector will be a good old biller and collector.

Second, do not try to turn every lawyer into a biller and collector. Some lawyers can't do this work or they don't want to learn. I have seen lawyers who freeze when it comes time to bill and collect. Know who these lawyers are in your firm and give their billing and collection tasks to someone else. Make your good billers, young or old, responsible for billing your major clients. Remove billing responsibility from lawyers who are reluctant or refuse to send out timely bills. A manager who detects an inability in a young lawyer to bill should act quickly to find the cause. Without proper training, young lawyers retain bad billing habits to the end of their legal careers. It takes training to develop good billers and collectors.

Third, every firm should set sensible written billing policies and procedures. Regularly bill every possible transaction, for example, monthly. Most midlevel managers have a limit on the amount of a supplier's invoice they can authorize for payment. Know the amount, because if your monthly is under the threshold it will get paid. Some firms consider it good practice to bill a transactional matter-in-progress before closing, especially one that takes many months to complete.

Fourth, if you want to turn receivables into cash, follow-up is essential. Send a new statement when the first one is more than 30 days old and further follow-up letters at 60 and 90 days. At the end of 90 days, remove the account from the billing lawyer and turn it over to someone else for collection. Billing lawyers are reluctant to aggressively pursue their slow paying clients. If a client tenders a reasonable partial payment on an old account, take it and run. Law firms spend too much time pursuing deadbeats. Lawyers forget "a bird in the hand is worth two in the bush" when they go to collect their own accounts.

Fifth, make sure your bills describe your services. A client who can easily understand the work you did is likely to find your fee acceptable and pay promptly. Most computer programs allow you to enter the details clients want on their accounts. Make sure you have such a program, because without it you need to spend more time editing your draft accounts. These new programs eliminate the old excuse "not enough time to bill." In many well-managed firms, secretaries input time and service descriptions into their personal firm computer. This practice reduces errors because secretaries know their bosses' files better than someone in accounting. Also, secretaries are better able to pick up on errors when lawyers make dictated time records. This practice will streamline your billing process.

Sixth, remember that effective collections require timely billing. The sooner you send your bill after completing client work, the faster the client will pay. Different types of cases require different billing strategies. Bill transactional matters at or before closing because clients quickly reinvest the proceeds of many closings. Bill your litigation files at least monthly. Some firms now bill on a continuous monthly billing cycle. It is considered a poor practice to wait until the end of the month to bill all matters.

Seventh, ask for cash retainers. Cash retainers are essential when you deal with an out-of-state or small local company. Some firms are experimenting with refundable advance retainers. These firms refund this type of retainer at the end of a matter, provided the client has paid all outstanding bills and expenses. It is odd how some clients expect you to defend or prosecute a "great case" but are unwilling to advance you $2,000. Are you not better off without these non-advancing clients?

Eighth, let clients pay all larger disbursements directly to outside suppliers. Wise lawyers know that outstanding disbursements are merely interest-free loans to clients.

Finally, use financial reports to help stimulate better billing and collections habits. All partners and their associates should receive each other's work-in-progress and aged accounts receivable lists. Your managing partner or director of administration should review these reports with lawyers who are behind in their billings and collections. But the publication and circulation of these reports is the most effective way to prod lawyers into action. You should not overlook the power of "the fear of a sneer from a peer."

Aggressive Billing and Collection:

Don't give up if your firm's culture does not support and stimulate a team approach. Instead, use one or more of these seven aggressive collection options.

• Hold monthly Saturday billing meetings.

• Withhold the draws of partners who do not meet their billing obligations.

• Charge clients interest for late payments, using appropriate truth in lending forms signed by clients.

• Insist on advance cash retainers.

• Bill weekly.

• Sue deadbeat clients.

• Have the managing partner, an executive committee member or the marketing committee approve the acceptance of new clients or work.

Execute these practices in a firm culture where team play and individual responsibility reign and you will have cash, not work-in-progress and receivables.

November 15, 2010

Motivating Partners to Attract Business, Delegate Work and Manage the Firm

A partner compensation system should reward partners for their total contribution to the firm and serve as a management tool to motivate them to perform those fee producing and non-billable activities to progress the firm.

However, when creating or revising (and administering) a compensation system or components of the system, be cautious about what partners will be motivated to do. Understandably, the emphasis of the compensation system, and it's administration, will ultimately determine the direction and culture the firm will take. For example, do we want to encourage, i.e., business production, new business, hours, delegation to others, management, a combination, etc.

As the result of strategic planning studies undertaken for numerous law firms, it is a generally accepted fact that lawyer management will not be successful moving the firm in a particular direction unless the compensation system goes in that direction too. Also, tensions among partners develop when lawyer management only pays "lip service" to articulated compensation criteria designed to establish the firm's direction and reinforce its culture. Sources of such conflict, results from contradictory values when compensating partners for: delegation of work vs. revenue from personal working hours; origination credit for joint business development vs. individual origination; credit given for consequential non-billable time vs. time devoted to producing client work, etc.

Origination of Business:

In today's business climate, the firm that does not recognize client origination, one way or another, will probably not prosper and may not even survive.

Business origination from new clients is of major importance when setting partner compensation. However, there must be adequate recognition for the retention and expansion of existing client relationships. Recognizing the importance of origination of new business, even if that attorney does not perform the work, encourages attorneys to participate in business development activities and discourages hoarding of files.

When allocating origination credit, a critical issue that needs to be determined is, whether it will be permanent or for a designated period of time.

Permanent origination credit is easy to understand and lasts as long as the client or the originating attorney remains with the firm. If the originating lawyer retires or leaves the firm, origination may become a "firm client," with no individual attribution, or may be reassigned to the lawyer(s) most closely identified with the client, thereby providing incentive to the lawyer(s) responsible for the client relationship. If there is a subjective compensation system in place, new business and retention of significant clients may achieve comparable importance as long as the attorney's efforts are apparent and consistent with the firm's goals and objectives.

Origination credit for a defined period of time only, requires "rainmakers" to develop new clients, i.e., five or seven years for total fees. At some point, new business credit may cease for a given client (then that client becomes a "firm" client), but not cross-selling credit.

Shared origination credit, which gives credit to attorneys as the result of their marketing efforts, acknowledges the importance of their value to the client initially or to the recognition of their immediate assumption of client responsibility to retain and enhance the volume of profitable business from that client. This becomes especially significant in order to assure that lawyers will not ignore clients originated by others while they pursue new origination.

Implementing a system for allocating business origination credit will require a tracking system that tracks new business developed by each attorney. Typically, such a system includes information called for on the new file opening form. It is also suggested, in order to limit any misunderstanding between and among partners, that the firm define criteria as to what constitutes a new client.

Client information regarding new business files should be published so all attorneys may periodically review the list of clients for which new business credit is being given. Further, the tracking system should track all cross-selling credits. This credit should be allocated whenever an attorney develops new work from an existing client, since this is probably the best source of additional business for the firm.

It is recommended, that credit for cross-selling business be equal to that of new business. Further, when administering the tracking system, it is recommended that partners be generous in determining what is "new" business to keep the partners' level of interest in business origination high. However, be cautious that attorneys do not "play games" with the system.

How to allocate credit for new business/cross-selling will depend upon your firm having a formulaic compensation system or a subjective system. With a formulaic system, the percentage should be sufficient to provide an incentive to develop business, but not so much that there is no incentive for others to work on the files. With a subjective system, be sure the results make clear that significant credit is being given for business development. In either case, a compromise will have to be reached between the client producers and the work producers.

Billing and Collections:

The compensation system must make abundantly clear the importance of billing and collections.

Compensation systems that reward billable hours billed and collected will likely lead to the increased delegation of work. If origination credit or client satisfaction are measures of value for compensation, delegation will more likely fulfill both criteria.

It has been our experience that the collection of billed hours is a far more significant measure of productivity, since billable hours alone will not benefit the economics of the firm and, if used as a paramount standard of worth, will less likely lead to delegation unless more working time is not possible/practical.

Delegation:

Although partners in most firms recognize the importance of delegating work to others, such delegation will only take place if the proposed delegator has: (1) more than enough work to do; (2) more important/profitable work that can be provided to him/her; (3) other responsibilities which require that others do the work; (4) if the work in question should, for the economic efficiency of the client, be done by others; or (5) if the work in question falls within a defined area of concentration which necessitates its transfer.

If billable hours are a substantial measure of performance, delegation is less likely to occur, except when more working time is just not possible/practical. If billable hours billed and collected are utilized, it is a fairer and more significant basis for reward and is probably more likely to lead to delegation. Lawyers will have a difficult time collecting for work which should/could have been performed less expensively and more expeditiously by lower paid attorneys who are competent to perform the work and/or those attorneys who possess greater expertise in that substantive practice of the law. Therefore, if origination credit or client satisfaction are measures of value for compensation, delegation will more likely fulfill both criteria.

It is suggested that guidelines be established to assure that work is assigned within the area of law required and departmental/firm supervision is needed for compliance. If origination credit is involved, and is properly rewarded, the partner will be less likely to abide by the "eat what you kill" principle.

Management:

Management matters, whether as to the firm generally, practice areas or other defined responsibilities, should be given credit.

Management hours for specific tasks, i.e., managing partner, department chair, etc., so as to be able to identify quantitative and qualitative goals by which management performance may be measured. Also, if the management task assigned and ultimately evaluated results in heightened efficiency, cultural betterment and/or increased profitability, the firm should consider rewarding the responsible partner(s) with incentivized compensation.

Since high quality leadership cannot as easily be replaced as retained, the firm must be prepared to deal with rewards for success. To the extent that it does not do so, and proposes nonetheless to retain its leadership, current management will be disincentivized to continue its efforts, since meeting other criteria of the compensation plan will undoubtedly lead to more dollars for others.

Time devoted by lawyer management is frequently acknowledged by: (1) reducing the targeted billable hour goals for managers, i.e., lawyers with heavy management responsibilities should be given lower billable hours goals without worrying about taking a compensation hit; and (2) paying a fixed stipend for certain management roles. Some firms, rather than adjusting work goals, assign a fixed amount for certain management work, such as $25,000, $40,000, etc. for service as the Managing Partner, member of the Executive Committee and/or head of a practice area.

November 8, 2010

Transforming Practice Areas in Profit Centers

Many larger firms have had more than enough experience in systematically managing practice areas, and are now focused on optimizing profitability from each area with the aid of enhanced benchmarking tools and business intelligence software. But, for many mid-size firms, practice area management has not expanded beyond its original quality-assurance role, leaving its potential for improving firm profitability largely untapped.

Transforming Practice Area Management:

Managing partners in many firms have historically relegated the practice of law to individual partners and have been reluctant to impose their judgments on how individual client matters were being performed. This resulted from the belief that lawyer management should not have to follow-up on partners responsible for performing client work or for managing substantive practice areas.

The extent to which a firm's laissez faire management can be transformed into active practice area management depends on lawyers' personalities and abilities, and partners' attitudes toward "being managed" - in particular, their willingness to relinquish professional and personal autonomy.

Often practice management and firm management start to interact more closely, however, when revenues decline - so does net profit per partner. As partners feel the economic pinch, there is greater willingness to view practice areas and individual attorneys as profit centers. Lawyer management now needs to review all factors contributing to profitability and to address the following questions:

(1) How profitable are our practice areas?

(2) Should the firm continue to practice in these areas or redirect its efforts to other areas?

(3) Can certain partners and associates be reassigned to other more profitable practice areas? If so, what training will be required to bring these attorneys up to speed in these areas? If not, what should be done with these attorneys?

(4) Should certain partners be assigned accountability for managing particular practice areas?

(5) What should be the role, responsibility, and level of accountability of the heads of practice areas?

Coordinate Roles in Practice Area Management:

The generic functions performed by each coordinating partner should be determined by the managing partner for the major areas of the office's work in terms of managing problems in work assignment, coordinating staff, setting objectives and reviewing data to appraise results, ensuring ethics and quality control, and cooperating with the executive committee. Each coordinator should be encouraged to develop his or her own style in accomplishing these objectives within the general guidelines of the office.

Quality and Cost Management of Work-in-Progress:

Generally, under plans and policies established by the managing partner, each practice area's coordinating partner is charged with planning, organizing, and overseeing work in the practice area. Central to this activity is the assignment of work to associates or other partners, based on their fields of law, availability, and levels of expertise.

Each coordinating partner should be responsible for implementing the firm's policies on quality control and cost effectiveness of work performed in the practice area. For example, he or she should ensure implementation of the firm's policies on retention and indexing of legal forms, memoranda, opinion letters, and other important legal efforts.

As required, each coordinating partner should briefly meet with partners and associates working on matters within the practice area to discuss individual workloads, problems in producing work in a timely manner, schedule conflicts, etc. To facilitate this review, each coordinator should access the calendars and dockets for statute of limitations dates, other key filing dates, status reports, and other records kept for each matter by its handling attorneys.

If the coordinator has doubts about the ability of an originating attorney to perform specific work (within the coordinator's practice area), whether due to a lack of expertise or work overload, the coordinator should discuss the matter with the originating attorney. The practice coordinator should also review lawyer production reports monthly, or more frequently as required, to determine the extent to which lawyers are maintaining work schedules and quality. Following this review, the coordinator may assign or suggest reassignment of work to other attorneys who are not being utilized effectively.

In pursuing cost-effectiveness, the coordinating partner should also be available to discuss fees, and oversee attorney billing and collection activities (as requested, within the framework established by the managing partner). It is especially helpful for the coordinator to review the reasons and justifications for write-downs and write-offs (of time and accounts receivable, beyond certain dollar limits); if billing attorneys are writing off too much time, it should be questioned.

Questions between the practice coordinator and the originating attorney that cannot be resolved by the coordinator should be referred to the managing partner.

Business Development and New Business Approval:

The coordinating partner may also be responsible for the area's business development planning and for systematic sharing of client relations within the practice area. On a weekly basis, coordinating partners should receive a written notice from the office administrator describing every new matter within the practice area that has been accepted during that week. These reports will advise the coordinator of the existence of new matters within their jurisdiction, along with the identity of the originating partner.

When the practice area considers accepting new business that is out of the ordinary, the coordinator should have an advisory role in assessing conflicts of interest, ethics, merit and strength of the case, time required, ability of lawyers to handle the work, economics of the case, and its value to the office. If uncertain whether to accept a case, the coordinator should consult the managing partner.

Lawyer Training and Performance Reviews:

The coordinating partner also should be consulted on, and should direct as may be required, continuing legal education efforts for the work under his or her jurisdiction. Each coordinating partner should communicate with the executive committee about the quality, client service, and economics of professional services rendered by the attorneys within the practice area, and recommend needed improvements of such services.

Conclusion:

Mid-size law offices have been showing increased interest in strengthening practice area management to ensure partner coordination, control, and accountability over their fields of law, areas of practice, and client matters. In doing so, the needs of attorneys for professional and personal independence must be balanced with the firm's need to maintain effective organizational patterns and policies. A firm's reward for effectively striking this balance is access to powerful new organizational methods for enhancing profitability.

November 1, 2010

Admitting New Partners, Classes of Partners and the Feasibility of Part-time Partners in Less Than Profitable Times

There certainly is no conventional wisdom in today’s economy on the depth, length or severity of the current recession. Firms are actively engaged in significant analysis of economics and profitability management, expenses, marketing and personnel.

Many law firms have announced and implemented cuts in both lawyer and staff personnel and there is reason to believe that our economy may well worsen. In addition, as to existing lawyer populations, firms have had to arrest or diminish associate bonuses, freeze salaries, cease or modify otherwise usual and customary hiring, delay start dates for associates to whom commitments have already been made and generally reduce the scope and magnitude of all lawyer-related expenses.

However, many firms have used the recession as an excuse to review the breadth and depth of the expertise in practice areas and aggressively recruit as equity partners attorneys (who may or not be equity partners in their firms) who possess expertise and/or control work of clients in practice areas that are strategically important. Similarly, many smaller and mid-size firms have successfully recruited attorneys from larger firms (who typically were not partners), who controlled a certain amount of client business that was insufficient to become a partner in the large firm, but more than adequate to become an equity partner in a smaller and mid-size firm.

Examine the Wisdom of Creating New Partners:

Coupled with all of the issues with which law firm owners have to deal relating to the operation of their firms is the fact that even with careful management, there is increasing evidence of reduced partner income in many sectors of the legal marketplace. Firms must therefore examine the wisdom of creating new partners.

It is vitally important that lawyer management:

1.Examine the culture of the firm before making “blanket” modifications to the partnership structure/admission practices simply to satisfy the current, and perhaps short-term economic issues,
2.Assure the partners that the firm has carefully analyzed the various components of the firm’s economics and taken appropriate steps to better health, and
3.Conclude whether the firm’s partnership structure/admission practices are a root cause of the economic problem.

What alterations to partnership admission may be beneficial?

Lawyer management should consider modifications to the existing criteria established for partnership admission and an increased length of time to partnership.

It might be advisable to review associates with a more critical eye, so as to determine more quickly the lawyer’s suitability for continuation. This will probably lead to increased terminations but also avoid dealing less objectively with associates who have expectations based in significant measure on longevity. Also, during difficult times, lawyer management should ascertain whether it is timely to seek withdrawal of uncooperative/under-productive and under-utilized partners and/or whether they are candidates for early retirement.

Adverse effects may result from seeking modifications to the existing culture:

A firm’s historic culture may have been its greatest strength for determining and achieving its immediate and long-term objectives. However, in times of uncertainty, elements of that traditional culture may be its greatest weakness, if it is bound to: (1) outdated traditions (“because we have always done it this way”); (2) management styles that are dysfunctional and inconsistent with the desires and expectations of a majority of the partners and with the needs and priorities of the firm; or (3) outdated philosophies of senior or even departed partners that are inconsistent with the marketing and compensation programs required to compete aggressively with other financially successful, proactive law firms.

Before making significant changes to a firm’s culture for economic reasons, it is important that lawyer management be sensitive to the fact that some short-term adverse effects may occur. For example, some associates who are displeased over the changes in required service or protocol and feel that their trust in the firm has been misplaced may resign; the firm may not be able to replace defections in a timely enough fashion to provide continuity of service; the firm may risk losing some revenue; also, the firm may be able to halt work for some of its clientele (who are seriously in arrears in paying their bills). Further, there may be some morale depression as a result of changing the firm’s traditional culture.

To minimize the undesirable effects from seeking modifications to the existing culture, the firm’s lawyer manager must examine the process as well as the criteria for partnership carefully and, before modifications are made of any sort, a consensus should be had.

There are issues to be considered and addressed by all partners; they will undoubtedly view them in part on behalf of the firm and in part as potentially affecting each of them.

Criteria must, for each potential partner, include:

1.The quality of work done.

2.Origination, retention and cross-selling of clients.

3.Reputation within the legal and general community.

4.Contribution to firm management.

5.Contribution to the community and to the profession.

6.Compatibility within the firm and demonstration of admirable traits such as dependability, cooperation and sensitivity.

7.Years of experience.


Classes of Partners:

Given the need for more careful analysis before making new partners as a result of the depressed economy and shrinking profits, it is also timely to give thought to different classes of partners

1.Non-equity partners:

Current law firm economics have caused partners to consider a two-tier partner law firm model. Historically, the conventional pyramid structure assumed partners are on top and associates are on the bottom. This structure was based on the assumption that an associate produces sufficient income to pay himself or herself, defray his or her costs and generate a profit for the partners. Associates were recruited with the expectation that over time, if they remained with the firm, they would become partners. The “up or out” philosophy flourished.

Today, new dynamics to law firm economics have evolved, and the historical assumptions no longer apply. Law firms are unable to continue to admit as many equity-holding partners and not dilute the earnings of current partners. Therefore, to continue to attract, motivate and retain experienced associates and recent law school graduates, law firms have had to create alternative approaches to develop, retain and promote associates in a relatively slow growth environment, while preserving the relative income levels of current partners.

Given today’s current economic conditions and some firms’ recent slow growth rate, even excellent contributors may not be able to count on making equity partner. Therefore, the non-equity partnership structure provides an alternative approach for those who wish tenure with the firm and can continue to contribute in a significant way. The non-equity partner position retains people with strong technical skills and reduces the turnover of attorneys in these positions who may be hard to replace.

Many firms promote associates to non-equity partners in four to six years, or longer. After a partner is promoted to the non-equity category, there is an additional observation period of four to six years, or longer, before considering his or her candidacy for equity partner. The non-equity partner position is compensated by a salary with limited upper ranges and may receive bonuses, based upon origination of business, extraordinary performance, etc.

To the outside world, those who progress to non-equity partner are considered to be partners. Within the firm, however, the equity/non-equity distinction is made in terms of voting rights, liability, functions performed and compensation. Non-equity partners, generally characterized by a “guaranteed” draw but with no right to share in the firm’s profits, may be potentially beneficial in the short term, issues which can arise relate to the partner’s desire and expectation that there will be an opportunity for advancement to equity status. So as not to dis-incentivize further initiative, clear criteria must be established which identify the basis for equity status.

2. Contract partners

Contract partners, may be are similarly salaried, perhaps with bonus arrangements predicated on performance, may be lateral partners, whose attraction may be an existing book of business or a needed expertise in a particular field of law.

Some firms have trepidation about engaging contract partners, since they may, without qualification, be inclined to move for more money, made easier by their not having been inculcated into the firm culture.

3. Part-Time Partners

Many attorneys are concerned about whether/how to advance the careers of less than full-time lawyers. There are still many law firms who would find it problematic to consider part-time lawyers for partnership, irrespective of their age, experience and/or the quality of their performance.

The long-held view by many law firms that a part-time lawyer lacks commitment, coupled with the fact that part-time work is not often well-defined, results in a perception that less than a 24/7/365 involvement severely limits advancement and career options.

Adverse Effects of Not Considering Part-time Partners:

Factually, surveys have shown that flexible work arrangements are sought and considered to be more desirable for women (and some men) lawyers. If women are not encouraged to balance their family and personal lives with their careers, there is a far greater likelihood that they will seek other opportunities, resulting in very expensive attrition.

In today’s legal marketplace, by not considering the feasibility of part-time partners, replacing a seasoned third-year associate will cost hundreds of thousands of dollars in training and indoctrination. Further, firms face increasing pressure from clients and lawyers alike to maintain a diverse workplace.

Client relationships may be adversely affected as well, particularly if the departing lawyer has had positive experiences with the client, and a firm which is unwilling to address a more heterogeneous work environment will likely not be attractive to future hires ~ “word gets around.”

Based upon the author’s experience, it is recommended that details of a part-time partnership should be in writing and made known to associates who identify their need for such consideration on a going-forward basis. This would clarify: expectation of and commitment to a predetermined number of both billable and non-billable hours; and base compensation which is consistent in its comparison to full-time partners, with the difference in required annual hours. Also, incentivized bonus compensation similarly must be addressed but may be more subjective in its determination.

Conclusion:

Even though partners in law firms try to instill in their associates the importance of providing clients with high quality work product in a timely manner, at fees that are fair to the client and the firm, during these less than profitable times at most law firms, quality performance is no longer the single most important issue in deciding whether to promote associates to partner status. During less than profitable times, the firm’s economics, available workloads, whether the practice area can support another partner, the extent to which the associate can keep himself or herself busy doing profitable work and who else is a candidate for admission to partnership next year and two or more years down the road, all play an important role in determining who will become admitted to partnership in a law firm.

October 25, 2010

Realistic Expectations of a Well-Conceived Partner Compensation System

The below question was asked by a member of the New York State Bar Association.

Question: Some members of our firm have asked, "What should be the expectations of a well-conceived and implemented partner compensation system? As managing partner, I have responded to this question on several occasions. However, since a few partners continue to ask the same question, it would be appreciated if you provided your response."

Joel's Response: A well-conceived and implemented compensation system must meet the needs of its law firm as it exists today and looking forward to the next year or so. Further, the compensation system must be fair and reward partners for their total contribution, and it should encourage by incentives, those behaviors/activities the firm wants to encourage, and then “correct” those it wishes to discourage. I am firmly convinced that a firm cannot move in a particular direction unless the compensation system goes in that direction too.

Activities that most financially and professional successful firms wish to promote through their compensation system include the following:
•New business development;
•High hourly production;
•Emphasis on increasing firm revenue;
•Maintaining key client relationships;
•Delegation of work to others in the firm;
•Assuming management responsibilities on the administrative and substantive sides of the practice;
•Training associates;
•Marketing the firm; and
•Encouraging the senior partners to transition their clients to other attorneys.

Tensions can develop when the direction of the firm’s compensation system is unclear, or only receives “lip service.” Examples of these tensions surface most frequently when:
•The firm verbally encourages partners to “delegate client work to others within the firm,” but in practice, it over-compensates for revenue collected from partners’ personal production rather than delegation of work.
•The firm verbally encourages partners to work together to develop business from existing and potential clients, but rewards individuals at the expense of joint origination credit; and
•The firm verbally encourages partners to perform consequential non-billable work to progress the firm, i.e., marketing, enhancing the firm’s image, training, management of the firm and its substantive practice areas, etc., but rewards those activities marginally in favor of billable hours/revenue from personal production.

Administering the System:
The great majority of growth oriented, entrepreneurial type firms set their partners’ salaries/draws/percentages/units prospectively and allocate bonuses retrospectively.
Compensating partners prospectively usually results in a greater tendency to make the firm more profitable so that everyone benefits. It values a partner’s contributions over a period longer than the current year. A three year window is usually considered, with firm’s placing a somewhat heavier value on the contributions during the current year.

Using a three year performance history to assess a partner’s total performance before increasing his/her salary/draw/points/percentages may increase that partner’s compensation more slowly than by utilizing a retrospective system that rewards a partner for results achieved during the current year. However, the overwhelming majority of firms address this issue of “immediate gratification” by retrospectively allocating bonuses to deserving partners for their contributions for the current year.

Partners in many firms employing subjective and retrospective compensation systems loathe to reduce a partner’s compensation level from one year to the next, even if that partner’s contribution is lower.

Distributions:
Further to compensating partners prospectively, here are three parts of a compensation system:

1. A Salary/Draw: The amount of money each partner will draw throughout the year (on a cash available basis) against his/her anticipated earnings based upon the firm’s income budget for the current year. A partner’s draw is the dollar amount of his/her bi-weekly or monthly pay based upon the firm’s anticipated income budget. The ultimate value of a unit or point varies with the firm’s actual distributable profits. To equalize cash flow, the total amount of draws are usually calculated as a percentage of the anticipated profits as shown on the income budget.

This is accomplished in one of two ways:
a.Draws for individual partners may be set on a sliding scale, depending upon the compensation level of partners; and
b.Draws for individual partners are based upon the same percentage of their anticipated compensation.

2. Quarterly Distributions: This distribution is the difference between the draws and anticipated compensation. These distributions are paid quarterly, if funds are available. Since in the above example, the most highly compensated partners receive a lower percentage of their compensation as a draw, distributions up to the project income budget are usually based upon the percentage being deferred.

3. Extraordinary Pool: Amount set prospectively, awards determined retrospectively, based upon each partner’s performance for the current year. This bonus pool is to provide an incentive for each partner to perform beyond the acceptable minimum contribution level (of partners). A partner who does not meet his/her expectations will not participate in this fund. For this fund to be meaningful, the minimum level is usually 10% of compensation. Further, since this extraordinary pool is reserved for extraordinary performance, it need not be rewarded. Any of the funds not rewarded would be distributed to all of the partners based upon their unit/point allocations.

Personal Business Plan:
I recommend using a personal business plan of expected performance for each partner to define his/her minimum acceptable contribution. In effect, each partner “contracts” with the firm for what his/her contribution for the following year will be. Establish minimum billable and nonbillable hour and production expectations (collections at standard rates) for all partners. Different partners may have different goals based upon their interests, talents, abilities, etc.

Each partner’s plan should:
•Customize his/her billable and nonbillable hour and production expectations prospectively;
•Recognize extraordinary management, marketing, training, etc. hours;
•Recognize only quality time, recording time is not enough; and
•Include a projection of production (collections at standard rate), billable hours, specified nonbillable projects, and extraordinary origination expected.

Allocation of Credits:
An origination credit of 20% to 25% is within the range paid by many firms. However, some pay as low as 15% and others as high as 30% to 33-1/3%. The amount of available cash, along with what percentage will motivate partners determines the appropriate percentage.
Most firms that place a premium on revenue from partners’ personal production find that partners tend to hold their client relationships too close to their vests; they frequently hoard client work rather than spread it around to other partners – because the former wants to receive full credit; partners perform work that could be performed by associates because the former wants to receive full credit; partners do billable work when their higher and better use for the law firm is to generate additional business from existing and potential clients; and lawyers may perform work outside of their principle areas of expertise that others in the firm could perform more effectively and efficiently.

Rather than placing as high a priority on rewarding collections from personal time, partners
should be rewarded for billing and collecting for the work for which they are the responsible or billing partner, if this partner is not the originating partner. This designation motivates partners to develop and delegate client work to the others within and outside of their area of expertise.
By doing this, partners will be motivated to focus their attention on increasing firm revenue and profitability, thereby enhancing the value of each point/unit, rather than on maximizing their personal income by emphasizing collections from personal time. This being said, 45-50% of collection credit is within the range paid for the responsible or billing partner.

The firm should define the expected intangibles for each partner, as described above. Also, very few entrepreneurial type firms pay much for seniority. In most entrepreneurial type firms, seniority is not age alone, nor is it only the number of years a partner has been with the firm. Rather it means the number of years the partner has spent developing and maintaining clients, building and enhancing the firm’s reputation and participating in the training and developing of a cadre of younger and mid-level attorneys who produce for the benefit of all of the partners in the firm. That being said, 25-30% paid for the listed intangibles are within the range paid.

Conclusion:
When considering various types of compensation plans, partners are cautioned that the lawyer compensation practices of other firms may not be satisfactory for their own offices. The fact that certain plans are in use does not indicate that they may be suitable elsewhere or even that they work well for the offices that use them.

As any firm evolves, time will bring changes in its personnel and in the values and goals of the partners. What pleased the founding partners may not necessarily be welcomed by the new order. This is a natural and inevitable course of events. The firm that succeeds in establishing a sound compensation plan is one in which partners view decision-making as a dynamic process and understand that the plan is not etched in stone.

October 18, 2010

Making Merged Firms Work as One

WHY LAW FIRMS MERGE:

Law firms merge for the below reasons:

*To increase their opportunities for retaining a client base;
*To enhance their capacity to serve larger and more prestigious clients;
*To broaden the geographic area(s) served by the merged firm;
*To derive benefits not otherwise available, i.e., the synergistic effect;
*To strengthen or add specialty areas to satisfy requirements of present and future clients; and/or
*To correct structural imbalances, i.e., to offset the departure of partners, the experience level of attorney personnel, etc.

Finding a merger candidate can be a daunting process. However, integrating a merged group of attorneys into a "new" firm's culture, practice environment and organizational structure so that attorneys from both firms work as one, may be a greater challenge.

The potential problems that may occur after the joining of two firms are infinitely complex. Such a merger will call for a change in the manner by which the attorneys in the newly merged firm currently practice law and manage their business. It will potentially require different approaches to management and compensation, but will open numerous new opportunities, especially with the enhanced professional, substance and economic objectives of the newly merged organization.

A segment of our consulting business is derived from assessing the feasibility of law firm mergers and assisting partners integrate the merged firms' cultures and governance, methods for delivering legal services, enhancing interpersonal relationships between attorneys within the same and different practice areas and building a unified administrative and support structure to support the attorneys in the merged firm. Partners in many of the firms we work with raise the same concerns that the miscarrying of a merger provides more problems in the disentanglement of the firms than the original bringing together of these attorneys. This article is intended to identify those areas to be integrated and to discuss approaches to achieve the effective integration of attorneys into firms that have merged so that all parties may realize the anticipated benefits of the combination, immediately and over the longer term.

GENERAL AREAS FOR INTEGRATION:

There are at least seven general areas for integration that need to be considered: These include:
1-Culture(s);
2-Governance;
3-Performance standards, expectations and billing rates;
4-Practice areas;
5-Clients;
6-Internal communications and development of personal relationships; and
7-Administration.


Culture:

The integration of cultures calls for meetings and exchange of materials designed to introduce partners to each other and to enable attorneys in the merged firm to gain an understanding of the culture(s) of the respective firms. Notwithstanding that one of the firm's culture(s) may be predominant, the fact that partners in both firms make an effort to better understand the guiding principles and values of the partners in each firm is important for partners in both firms to better understand the reasons that partners adhere to certain values.

Governance:

Our experience shows that it is beneficial to develop concise descriptions of the governance including how policies are determined and implemented for both firms. The development of a plan for the integration of Firm #1's governance into Firm #2's governance scheme, including any appropriate modifications of Firm #2's governance scheme will be beneficial.

Performance and Billing Rates:

Even though performance standards, expectations and billing rates may be discussed during the pre-merger due diligence process, it has been our experience that it will be beneficial to develop and articulate performance standards and expectations of partners in the merged firm. Also, it is worthwhile to develop a strategy for integrating the billing rates of the various levels of partners and associates from both firms. In the event the hourly billing rates of particular partners and/or associates in Firm #1 are higher than the hourly billing rates of their peers in Firm #2, it may be desirable to phase in higher hourly billing rates of partners/associates over a two year period.

Practice areas:

The development of concise descriptions of practice areas and specialty groups in both firms is recommended. Developing outlines for meetings between Firm #1 and Firm #2 partners in the same or related practice areas will foster a greater sense of cooperation between and among the two groups. Further, the opportunity for partners in the same or related practice areas to begin to identify the best opportunities for the immediate expansion of Firm #1 and Firm #2 practice groups, the development of joint marketing plans and materials for industry and specialty groups and the development of strategies for promptly exploiting such opportunities frequently produce the desired results.

Clients:

Communications with clients about the merger is the lifeblood of the merged firm. Partners in each firm should develop strategies for communicating with those clients (and lawyers) who may feel threatened by business conflicts resulting from the merger. Personal one-on-one meetings with key clients are essential, and recommended before the merger is consummated. Strategies should be developed for communicating with common clients. The identification of existing clients where cross-marketing can be done profitably should be undertaken, and strategies should be developed for the exploitation of high priority client development opportunities. Firm brochures, modifications of Web sites to reflect the combination, preparation of additional newsletters, client alerts and other communications will be beneficial for the integration process.

Internal Communications:

All lawyer meetings should be scheduled with particular emphasis on immediate opportunities for leveraging the strengths of Firm #1 and Firm #2 in their served markets. Our consulting firm has had particular success when retained by merged law firms to design interactive relationships building activities to enable partners from both firms to get to know each other, learn about each other, have some fun while spending time working together on a joint project(s) while getting some important work done growing the firm's practice(s) and integrating the partners of the combined firm. Such activities, when properly conceived and implemented begin to enhance the development of trust and personal relationships among and between partners in the same or related practice areas.

Presentations by specialty groups and the identification and development of cross-marketing strategies and opportunities have proven to be extremely beneficial.

Administration:

Action plans for integrating the administrative functions need to be development after analyzing the support requirements of attorneys in both firms. The administrative organizational structure of both firms that identifies each of the administrative functions, the supervisory complement, staffing and reporting relationships for personnel in each firm must be analyzed to determine the most appropriate staffing requirements and structure for the merged firm. To accomplish this, a position description should be drafted and reviewed for each position that lists the functions, responsibilities and reporting relationships for each position. This will allow the development and implementation of action plans to insure the integration of Firm #1 into Firm #2. Creating such an integration plan calls for the determination of the most appropriate staffing ratios. One major concern is the extent to which the current administrative support staff will be willing and able to integrate into the new structure within the merged firm. This is a key issue that should have been addressed by the partners early on during the due diligence process.

Time and billing and practice/litigation support technology, and communications technology and intranet systems must be integrated. Hardware and software have to be inventoried to determine whether the current systems are compatible and if either system has the capacity to handle the volume of additional work required for the merged firm. If not, the decision has to be made whether additional or different hardware and/or software will be required, and which vendor(s) will be best suited to be of service to the increased processing requirements of the merged firm. In addition to analyzing the hardware and software, the technological and organizational skills and know-how of the IT staffs of both firms must be analyzed to determine the most appropriate IT supervisory and staffing structure for the merged firm.

Human resources hiring, training and evaluation activities need to be planned and coordinated. The compensation structure must be explained to the members of the administrative support staffs. Benefits administration for insurances and retirement issues must be addressed.

Operational and human resource manuals have to be updated and distributed to attorneys and members of the support staffs. Common hiring and advancement policies and the development of an integrated compensation program for the partners, associates and members of the support staffs needs to be articulated. Training and development programs for attorneys and members of the support staffs have to be developed and implemented to insure consistency among all personnel who are working at comparable levels. Professional development and pro bono activities for the firm including bar activities, pro bono legal practice, community service projects, charitable contributions, etc. have to be articulated.

In conclusion, for partners in an increasing number of law firms, merging with another organization may be the only way to accomplish rapidly, or at all, their professional and organizational goals and their desired continuity of existence. However, integrating a merged group of attorneys into a "new" firm culture, practice environment, organizational structure for the business, substantive and administrative sides of the merged firm's practice so that attorneys and members of the support staff from both firms work as one, may realize the anticipated benefits of the combination, immediately and over the long-term.