law-firm-compensation-small-mid-sized-firmsThere are a lot of small and mid-sized law firms that rely on relatively few clients.  These client relationships are typically consolidated among an even smaller subset of top performing lawyers. It is not unusual for us to  encounter a firm of twenty lawyers serving less than 20 or 30 clients that are managed by three or four partners. We have also worked with firms of more than 50 lawyers working for 6 or 7 groups of clients controlled by as many partners. In these instances, the loss of a client or a partner is potentially a destabilizing event.

Compensation Challenges

Compensation in these environments can present real challenges. Many of these firms, despite their longevity and history, are one or two client losses away from instability. This insecurity can permeate the thinking of law firm partners, causing them to have a short-term approach to organizational development and compensation.

Dominant Instincts

The dominant instincts present in many of the top performers in these firms include the following:

  • Business development is a priority;
  • Business development carries the highest reward;
  • Personal billable contributions are important but secondary to attracting new work;
  • Attorneys must maximize compensation while they have the clients;
  • Disruptions in client relationships can cause more stress than the legal work;
  • Others don’t appreciate the effort it takes to develop, keep and grow a client base;
  • As attorneys, we feel threatened all the time; and
  • With so many incomes reliant on relatively few books of business, it is difficult to relax.

Top Performer Power

As a means of survival, a firm’s culture often bends around the immediate needs of a small but powerful group. As a result, unintended consequences can occur. For example, top performers may appreciate that another partner is succeeding, and even might take less short-term compensation to support their growth, but also might not like the potential shift in the future balance of power.

Small entrepreneurial firms that were created by a few high energy producers can pay better than market compensation for many years. By staying lean and making only long-term investments that support the practices of the top performers, these firms can generate high profits. Managed properly, the partners in these firms can amass a nice retirement, and some even become wealthy. In many ways, partners in these firms accomplished what they set out to do when they took the risk of starting the firm.

Law Firm Transition Process

At some point, however, small firm partners reach retirement age or their practice starts to diminish and many begin to focus on transitioning the firm or creating a more viable institution. Because of their immediate profit generation focus, these firms generally do not have the infrastructure or the necessary junior partners who are capable of perpetuating the firm.  And when there is a transition path, splitting the origination portion of the compensation pool becomes a challenge. If the compensations issues are not addressed, any attempt to transition or transform a firm may be derailed.

Forward-thinking partners start the transition or transformation processes well in advance of retirement or foreseeable client losses. A transformation process starts when the current partners who make up the power structure of the firm desire to change or transform the firm’s strategic vision and operating model. Since most clients buy first from lawyers and then from firms, it is easy to understand why most  firms find it difficult to transform from a collection of individuals to a branded offering . Most successful small and mid-sized firms focus compensation on keeping originators happy first, followed by high producing lawyers and those with unique skills sets, with everyone else falling to the third tier.

Stability Factors

Organizational development that includes advanced compensation concepts comes from stability.  This requires time and means that high producers must embrace the transformation. A firm can find itself in between what is good for current profits and what is best for the long term. Highly productive partners (enabling partners) are called on to invest more income into a strategic initiative than under-performing or new partners. As the new partners or previously under-performing partners become more successful and demand more in the compensation formula, the enabling partners’ incomes can decline, and their prior strategic investments of current income are potentially lost forever.

Analysis and Tools

One way to deal with this is to use a rolling average of results in the compensation formula. For example, a firm that uses a 3-year rolling average of results can allow productive partners to participate in the future uptick in earnings resulting from a successful strategic plan implementation. Some of our clients refer to this as a “slow up/slow down” approach. The slow up/slow down approach is not without issues. Declining partners can “hide” in the formula for a couple of years. While these declining partners deferred income in previous years, it often creates tension when nonperforming partners draw a disproportionate share of current year earnings.

Recognition of where a firm is in their life cycle is also essential. A compensation plan for a young firm that has not fully passed through their start-up phase is likely to differ from a firm that is approaching the transition stage. In our experience, there are several best practices that support stability at all stages, but variations of the application of these best practices is often required. For example, moving from a one-year results approach to a rolling two or three-year results approach.  Another example includes the level of profits apportioned to objective, equity, and subjective pools.

Putting It All Together

Properly designing and administering small and mid-sized law firm compensation systems requires a process-oriented approach, experience, analysis and tools, and an understanding of the factors that contribute to stability. A sense of the firm’s economic, political, and market factors contributes to the development of an effective compensation plan. The capability, capacity and commitment of the firm’s revenue-generating staff to achieve strategic goals and produce a market competitive profit are equally important.

Read more about developing a more effective compensation system at your law firm.




Pricing, law firms, RFP, Client DevelopmentBefore responding to an RFP or a proposal for legal services outside of a formal bidding process, you must first assess the likelihood of winning. Lawyers usually have a good sense about their chances of succeeding in a bid process. If you have never succeeded in bidding for the prospective client’s work,  have never represented them, or have never made a concerted effort to marketing to this potential client, your chances of winning are slim.

Why then should a firm bid at all?

Why not just concentrate on current and prospective clients who are better bets?

To answer these questions, a firm must decide whether the impact of representing the seemingly out of reach client is material enough to warrant a long-term bid process. For example, responding to a an RFP in such a way that it shapes future RFP’s resulting in an advantage to your firm.

Before going for a strategic win, honestly assess the following factors:
• Your firm’s qualifications to excel at solving the client’s legal problems;
• Your firm’s demonstrable track record in the relevant practice areas or skill sets;
• Your firm’s relevant available capacity to dedicate to the client’s account;
• Whether you can offer a unique qualitative advantage to the client;
• Whether you can gvie a real price/cost advantage;
• Your plan for addressing your firm’s perceived weaknesses on the client’s part;
• How you can best remove any perceived risk on the part of the client associated with giving your firm an opportunity.

Carefully articulating each of these points may not win the business. But if the answers to these questions are compelling enough, it may spur a deeper evaluation of existing counsel and may inform future bids.

Many solicitations (RFP’s, formal bids, panel applications) require strict adherence to the form of the proposal or bid documents. These documents often favor incumbent firms for, no other reason than, prior experience with the prospective client’s cases.  Clients may try to compare submissions, making it difficult to evaluate and compare proposals that do not follow bid guidelines.

Enlightened clients may allow for alternate submissions in addition to the proforma bid or proposal response. In these instances, it is much easier to affect the bidding process strategically. Clients who allow additional alternate submissions suggest that they are open-minded to creative approaches and want to learn from their own processes.

Clients who do not solicit alternate responses may not appreciate a firm’s efforts to include an alternate proposal option. Just because they don’t ask, however, does not mean someone who can influence future decisions won’t read it.

Taking this down to a more practical level, you can apply these same concepts to smaller opportunities and clients, or clients that do not have a formal procurement process.  For example, if you have cultivated a great relationship with a prospective client, but your competition is strong and has a long-standing relationship with the desired client. Or if a client has a difficult time adding new law firms a list of approved counsel. In both cases, immediate success is not likely. However, if you can change the conversation to an innovative pricing strategy, a technological advantage, or a forward-thinking approach to the legal work, you may create an advantage for yourself.


Before bidding or proposing on new legal work, give an honest assessment of your firm’s chances of winning. If the existing process favors you firm, comply with the requirements of the bid and submit your proposal.

If winning the new work is determined to be a long shot,  comply with the proposal requirements, AND consider an alternate submission. An alternate approach is more likely to succeed if your firm can convey its real advantages that may create future opportunities.

Strategic approaches take time and often don’t pay off, but they are often the only chance a firm has to secure a prospective client’s work.

Pricing legal services is a complex and evolving topic. PerformLaw posts have recently covered the following points:

Please look for our future posts on the following topics:

  • Contract General Counsel services
  • Technological value adds to build client loyalty
  • Effectively communicating cost savings related to various billing approaches
  • The impact of pricing and cash flow considerations on pricing

law firm, flat fee, fixed price, alternative billingThe demand for value-based billing options presents law firms with opportunities to propose a flat fee approach for their legal services.  Law firms can improve their chances of success in developing this sort of approach with a full-featured model.  Larger firms may have the benefit of in-house pricing professionals, but smaller firms may need outside support. Regardless of who is supporting the data analysis process, a comprehensive approach is necessary.

We recommend building a model that contains the following features:

  1. An estimated hours distribution by timekeeper type for a typical case;

  2. A frequency component that allows the testing of several assumptions;

  3. Historical data for comparison to assumptions;

  4. Volume assumptions;

  5. Capacity analysis;

  6. Payroll and overhead cost per hour;

  7. Contributions to overhead and profit; and

  8. Before and after rate comparisons including a rate uplift feature.

  1. Estimated Hours Distribution

We suggest creating a chart with a vertical listing of all the elements of a typical case and a horizontal listing of either the assigned timekeepers or timekeeper types used in a typical matter.  Next, fill out the grid with the estimated timekeeper hours assuming that all cases run entire indicated the course to conclude.


  1. Frequency Component

When determining price, law firms should also include a frequency component that estimates how often a particular element of a case may happen.  Estimating frequency is important since it introduces the element of risk into the model. For example, if a firm simply prices work based on the maximum estimated hours per case, clients will likely oppose the proposed price. With good data, experienced and skilled lawyers can more accurately assess the likelihood of certain events happening, resulting in more risk tolerance.

  1. Historical Data

In an optimal situation, firms can test assumptions based on real case data. An experienced firm can use historical case data to run scenarios to find opportunities to improve. This firm will have a pricing advantage. If a firm has no historical data, a client may offer some help or suggest using certain assumptions, but this is less than optimal. Another idea is to consult with a peer firm or colleague in another state or jurisdiction for insight.

  1. Volume Assumptions

Understanding the impact of volume on the firm’s cost per hour is important. Volume can temporarily reduce cost per hour. Eventually though, continued volume increases will encounter rising costs and declining profits. Alternatively, too little volume may also cause cost per hour to increase and profits to decline.

When compensation plans pay on gross fees and not contributed profit, additional issues arise. Developing a profitable pricing strategy requires a true comprehension of the impact of volume at an indicated price point.

  1. Capacity Analysis

Considering the firm’s available capacity is another component of pricing. A firm with a lot of available relevant capacity may choose to price more aggressively. The reverse is true for firms that have minimal capacity available. Firms should consider that not all hours are the same. For instance, a firm may bid more aggressively bid on a certain type of work if its potential is better than existing work.  Additionally, some firms may try to cure a work slow down with a short-term strategy of picking up filler work.

Here is an excerpt of a simple capacity analysis, which only indicates available capacity and does not consider skill set matches to the proposed work. We consider skill set matches separately.

Regardless of strategy, firms should carefully consider the impacts on available capacity in the short and long term.

Non-hourly fee arrangements can transform a firm for better or worse.

  1. Payroll and Overhead Cost Per Hour

Testing the impact of any new work on payroll and overhead cost per hour is an important element of creating a profitable non-hourly billing proposal. While predictability and simplicity of billing are attractive elements of non-hourly billing agreements, the burden of efficiency falls to the law firm.

Sophisticated clients will compare their ultimate cost of hourly and non-hourly billing agreements. While inefficient firms who bid too high may win in the short run, they eventually sacrifice the entire client relationship. Firms with efficient cost structures are better suited to non-hourly billing approaches.

  1. Contributions to Overhead and Profit

When building a pricing model, a firm must first identify the direct costs associated with any proposed work. Covering direct costs enables a contribution to overhead and profit. Many firms fall into the trap of believing that covering direct costs adds to profit. On the weakest of levels covering direct overhead helps, but firms that price this way have no future. Firm’s that do not account for overhead in their pricing models run the risk tying up their available capacity on unprofitable work, which can transform a firm for the worse.

  1. Before and After Rate Comparisons and Rate Uplift

Law firms sell solutions to legal problems. Solving legal problems takes time. Law firms have limited time to sell and should maximize the return on the time they expend. An hour is a common unit of measuring time and should inform a non-hourly billing analysis. Accounting, finance, economics, marketing, and good instincts all important tools in the pricing process.

Including a rate uplift feature in a pricing, analysis can help reverse engineer a process to achieve a targeted revenue. For example, a smart firm that sets a target rate for a particular type or piece of work can work backward through the process to find cost efficiencies, some which may add value on the client side. Consider the savings that come from eliminating bill audit or the value to the firm of stable and predictable cash flow. Smart firms look for value everywhere.


A simple, well-built pricing model can offer true insight into a firm’s ability to compete for non-hourly billing opportunities. In some instances, a creative billing approach can be the only the chance a firm has for securing desired work.

Invest the time in creating a pricing template for your firm. If the resources are not available in-house, look to the outside for support. Subscribed PerformLaw clients should know that these templates and services are available to them at no additional charge under most pricing plans.

Close enough may work in a game of horseshoes. Miss the mark by 5% – 10% in a pricing decision, and your firm may not get the work. Or worse,  you may win the bid and suffer the loss.

  Thinking about a non-hourly billing approach

or have a proposal opportunity?

PerformLaw can help. We offer basic templates, analysis support and pricing advice starting at $750.00.*


* These templates and services are available to subscribed PerformLaw clients at no additional charge under most pricing plans.



Law firm, bidding process, client development

Our law firm clients report an uptick in their requests for non-hourly billing agreements. Requests range from phased approach flat fees to a per case flat fee for similar cases.  Other requests include a bid document in which the lowest bid in the first round only meant you earned the option to submit a lower bid in a successive round.

In other instances, the prospective client reserves the right to compare the firm’s actual effort expended to the agreed upon fee.  Typically, however, there is no corresponding provision that allowed the law firm to request additional fees if a phase was higher than anticipated.  This provision essentially equates to hourly rate competition in disguise.

I believe most clients know who they want to win.  I’m not suggesting nefarious, just that the legal service relationship is very personal.  When clients include current firms in their bidding process, red flags should exist for the other firms. A client’s existing lawyers are familiar with the client’s approach to case management and likely have strong relationships with the primary decision makers.  While a uniform set of assumptions for all bidders to follow makes the process fairer, the veteran firm will still have a better sense of the complexity and duration of the requested services.

Too high, too low, or just right

Bidding for legal work is a much about data and numbers as it is about a firm’s experience and instincts. A firm bidding for client work must review all relevant data and decide to bid a certain amount, which is ultimately a judgment call.  If a firm or lawyers are risk averse, a maximum possible fee offering is typical, which is not likely to succeed unless the firm’s implied hourly rates are substantially less than the other bidders.

Bidding the work too low can also lead to poor results.   A client may attribute a firm’s low bid to a lack of experience and reject it to avoid the possibility of poor representation. On the other hand, if a client happens to accept a firm’s low bid, the firm may get a poor return for the resources expended or even end up with an actual loss of money.

It is important for firms to understand the difference between a reduced realization on a standard hourly rate and an actual loss of money.  Many lawyers define losing money as the difference between their standard hourly rate and the realized rate on a matter. In a sense, this is true if the firm or the lawyer is at full employment and would forgo work at standard billing rates.  If the firm or lawyer is not at full employment, a reduction in hourly rate is not likely an accounting loss, which occurs when the actual cost (payroll and variable overhead) is greater than the revenue received.

Behind the scenes

Law firms must also recognize when a client is just fishing for a better effective hourly rate. If a client’s RFP instructs bidders to price matters based on identified levels of hours per phase or task, there is very little room for differentiation except on rate.

A firm should also consider the reasons for its inclusion in the bidding process. Is there a previous relationship?  Has there been any targeted business development with this client? Does the firm or lawyer have high profile expertise? Does the firm have a solid reputation for handling similar matters? The list could go on, but understanding how the client perceives the firm or its lawyers value can inform your response.  In many bidding situations, firms are included to set the upper and lower ranges. Knowing where your firm fits in the bidding process will allow you to create a more relevant response.

Please look for our future posts on the following topics:

  • Actual win versus strategic win
  • Advanced bidding features
  • Pricing designed elicit more information
  • Contract General Counsel services
  • Technological value adds to build client loyalty
  • Effectively communicating cost savings related to various billing approaches
  • The impact of pricing and cash flow considerations on pricing