Compensation issues are a main reason that clients and prospective clients contact us. Our clients view business generation as a means of survival and want to reward heavily for it. The partners who make up our client law firms understand the transient nature of client relationships and want to realize a high return for their efforts during periods of success. Many partners took considerable risks to create new opportunities and expect fair compensation to parallel their success.
Understanding these dynamics, the most successful law firms focus on creating an environment where driven attorneys can thrive and see a direct benefit from their efforts. Compensation is a significant determinant in holding a successful firm together. Employing a system that encourages profitable behaviors and pays based on those contributions is essential. It is not that hard, but many just can’t get this part right.
We base our preference for a contributed profit approach to compensation on the following factors:
- Heavily incents the right behaviors;
- Enables transparency;
- Promotes accountability and empowerment; and
- Is field tested; our most successful firms have thrived and grown using these systems.
Data driven systems help our clients resist unconsciously falling victim to all of the weak arguments that enable unprofitable behaviors. We also understand that it is hard to address partner performance issues. But pretending they do not exist, hiding them with a non-existent or inadequate measurement systems, or simply hoping things will improve only leads to larger failures.
Measuring legal client profitability for the last 15 years has taught us many valuable lessons that could take up several pages, but here is an example of the power of a single report set.
This example includes a practice profitability report with matter level detail. Initially, we can review profitability at the timekeeper level. Starting with actual hours billed (not billable hours in WIP) and the amount charged to the client for these hours (revenue credit) we can quickly determine an average rate for each timekeeper.
Nothing new here, but averages can be misleading. We recommend looking to the matter profitability to ensure that the average rate is a good measure of a timekeeper’s performance. For example, reviewing Client 1’s result indicates that P2’s average rate is below the mean of all client matters for all clients.
Further, Client 1 accounts for only 20% of P2’s total revenue, which makes a review of additional clients and matters necessary. In this instance, assume that we are trying to determine if P2’s average rate has any predictive value or is it the result of a unique client or file result that is not likely to repeat. This same process can provide the same information for all timekeepers supporting P2’s practice.
Moving past the revenue metrics, we move to timekeeper payroll cost, which is a constant throughout all clients and matters. Peer comparisons of payroll costs and benefits can provide insight into timekeeper pay levels and production efficiency. In the same way, peer comparisons of overhead costs can provide insights into cost efficiency. Collectively, these data form a basis for analyzing pricing and staffing mix appropriateness.
Quickly reviewing staffing and overhead costs, staffing mix, rate realization, and billing rates are all possible with these data. Presenting AR Write off information at the matter level can reveal collection inconsistencies among timekeepers and matters. Enabling partners to quickly understand the impact of production, billing rate, write-downs, staffing mix cost and overhead costs will result in a more financially competent firm.
Unprofitable or struggling partners who have some business can use these data to understand and improve results. As most lawyers are afraid of upsetting a client relationship, the resist making necessary changes to improve profitability. Without compensation consequences, they have no real incentive to improve their results. I use the work consequences deliberately because struggling partners likely need better results just to stay at their existing compensation levels.
High integrity data-driven systems make all information available to all partners, which fosters transparency. Trained partners using quality data allow firms to work with truths rather than debilitating perceptions.
For example, partners often believe differently about the effect of cost on large books of business. We are also frequently asked if the partners with the most business should always receive the most compensation. Profit driven systems are not concerned with regulating how a particular partner or group ethically creates their profits. All profit dollars are valued the same in these systems.
A good origination sharing policy also facilitates collaboration. A system that allows for sharing at the matter level is ideal for partners who collaborate on a file by file basis. See the following report sample and please refer to our law firm best practice blog for more information regarding origination sharing.
Notice the Originating attorney percentage in the top right of the report and also see the allocations of origination profits in the four columns to the right of Client Net Income column. In this example, the originating partner has decided to share 10% of the profit on this client and matter with another attorney.
Compensation systems built on profitability raise the level of partner consciousness in the following areas:
- Billing Rates and Pricing
- Payroll Costs
- Overhead Costs
- Staffing mix
When every partner has a working knowledge of the impact of each of these elements on profitability, a high-performance culture can result.
For more information on implementing Data Driven Compensation Systems, please see our law firm best practice blog (CLICK HERE) and see our resources page (CLICK HERE) for client profitability seminar materials. See also our post on rewarding for training and leveraging (CLICK HERE).