The Lawyer’s Edge Podcast host Elise Holtzman is joined by law firm partner compensation expert Tim Corcoran of Corcoran Consulting Group to discuss how partner compensation models are being updated.
Read MoreAs professional services firms look to re-open offices, revisit long-standing operating models, and restore a healthy financial trajectory, the fastest and more effective approach is to combine forces, to break down silos, and for partners to engage with each other for mutual benefit. In our webinar, my colleague David Ackert and I will present several practical and immediately actionable strategies firms can use to generate new visibility, new opportunities, and new business in a much more effective manner than any one individual at your firm could hope to achieve.
There's no “I” in recovery. Collaboration is the way forward.
Discussion topics include:
• The importance of a cross-functional mindset during a time of great change
• The economic drivers of collaboration: revenue, profit, client retention, and compensation
• Designing engagements to generate new opportunities
• Building trust bridges to manage conflicts between individual and organizational interests
• Collaboration - is it a mindset, a process or a tool?
The webinar will be held on Thursday, 21 May, from 1-2 PM ET / 10-11 AM PT / 3-4 AM Oz.
Register for the webinar here.
Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Fellow, and a member of the Hall of Fame and past president of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. A sought-after speaker and writer, he also authors Corcoran’s Business of Law blog. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.
At a recent collaborative workshop between two camps -- in-house counsel and corporate procurement professionals on one side and law firm partners, finance and marketing professionals on the other -- we had a lively discussion about law firm profits. Most agreed generally with the view that a law firm has a right to profits, but the challenge arises when a law firm is extraordinarily profitable at the same time the client is extraordinarily unhappy with the value delivered. This scenario, one which resonates with many in-house counsel in recent years, leads to increased price pressure from buyers and over time this will depress law firm profits.
Predictably, in an effort to boost sagging profits some short-sighted law firm partners will make up for price pressure from one set of clients by raising prices for others, eroding the price-value connection for even more buyers, and accelerating this decline of profits. One in-house participant declared that he requires all outside counsel to submit profitability data and he'll decide what profit margin is acceptable! We can all empathize with buyers who are dissatisfied with the value received at the prices they pay for goods and services. But it's a stretch for the buyer to explicitly decide what profit the supplier should earn, in any marketplace.
So how can a law firm both enjoy a healthy profit and satisfy clients? If we adjust our lens a bit, it's not all that difficult - as with many commercial ecosystems, the pursuit of profit can best be maximized by delighting customers, and not as many assume by having one party win while the other loses.
Long Term vs. Short Term Profitability
Most law firm financial systems are structured to measure short-term profits, that is if there is any measurement structure at all. A surprising number of law firms do not explicitly calculate profitability, and many who do refuse to share these calculations with the partnership out of a misguided concern that it's divisive and corrosive to a collaborative culture. What's more divisive is a culture of not knowing -- which naturally leads to most parties making flawed assumptions about their performance relative to their peers. But the root problem is that without a clear understanding of what generates profits and what dilutes profits, no enterprise can sustain itself indefinitely because there will be too many factions working at cross-purposes. When everything supposedly makes money, then nothing makes money. And vice versa.
A focus on short-term profits drives and rewards the wrong behavior. Imagine a partner who sees an opportunity to bill a client $100,000 for a litigation defense matter, when that partner's experience could quite easily lead him to counsel the client that he's better off settling rather than defending, and thereby reducing legal costs by $50,000. Or imagine the partner who pads his own time and allows others to pad their time against the client matter, knowing the client will absorb some or all of these costs without complaint because, after all, "They hired us because we're the best and because we're thorough and they should expect to pay a premium for this." In reality, clients are rapidly becoming more sophisticated and can incorporate benchmarking data from other matters and other firms to help identify the "right" price for legal services, and increasingly they know when they're being overcharged. This isn't unlike purchasing an automobile before ubiquitous internet research, when price shopping was logistically challenging and buyers expected the dealers to take advantage... and they did. When a buyer discovers he's been overcharged, he doesn't return to that merchant. And therein lies the mathematical basis for focusing on long-term profitability instead of merely short-term profitability.
A law firm that calculates profitability as a function of maximum hours per engagement will, over time, as sure as the sun rises in the East, eventually experience client defections. Client defections (measured by retention rate) caused by over-emphasizing billable hours lead to three serious financial consequences:
The cost to acquire a new client is far higher than the cost to maintain or expand an existing relationship
The firm will price itself out of competitive bids
The firm will eschew efficiency and alternative fee arrangements and forgo potentially higher profits associated with these models. Success can't hinge on finding an endless supply of clueless clients, a task that gets harder every day.
If a law firm embraces a model in which long-term profitability is more balanced with short-term profitability, we will see changes in behavior and reward systems:
Matters will be priced more competitively, because the objective is not only to win the work, but to also win subsequent work
Matters will be delivered efficiently to maintain price competitiveness, and profiting from the learning curve is always more sustainable than profiting from high prices
Satisfied clients not only stay longer (leading to higher retention rates), they buy more services (a.k.a. cross-selling, leading to higher penetration rates at a lower cost of sales)
Satisfied clients insulate the firm from consequences of lateral partner defections. Even when a key rainmaker or service partner leaves, satisfied clients remain
Lateral hires and new offerings measured for their contribution to long-term profitability will insulate the firm from making hasty and dilutive decisions, such as recruiting a lateral partner with an alluring book of billable hours but with high service costs, non-competitive pricing, and clients evidently willing to change firms at will
Contributions from those involved with delivering high-quality legal services and managing valued client relationships will be more readily recognized, and the emphasis will shift from substantially rewarding origination to rewarding all steps along the supply chain. (Yes, it's hard to win new business, and this is why "hunter" salespeople are often highly-paid individuals in a corporate setting too. But those who make, manage and service the product lines are also essential to the sales and retention process. Missing this point is one of several extraordinary gaps in law firm management science.)
Organizational vs. Matter Profitability
To be clear, if we focus on long-term profitability and ignore the many short-term actions we take day in and day out, it's likely that we'll make many wrong and dilutive decisions. So there's nothing wrong with measuring profitability on a shorter time horizon too. Organizational profitability is typically the derived sum of individual matter profitability, often clustered within practices whose profit contributions are measured and compared.
Matter profitability, as we've described above, can be influenced by over-pricing. Is it acceptable if we achieve a 50% profit margin on a $100,000 matter, but in so doing upset and lose the client? Or is it better to achieve a 35% profit margin on a $50,000 matter, followed by a 35% profit margin on four subsequent matters, each acquired at no cost to the firm because a happy client simply assigned the work? Similarly, who should earn the higher reward -- the rainmaker who brings in a $100,000 matter at 50% margin that keeps 5 timekeepers at 60% utilization for 3 months, or the rainmaker and timekeepers who convert a $50,000 matter at a 35% margin that keeps 10 timekeepers at 40% utilization for 2 months into four more $50,000 matters, each at a 35% margin and that also keep 10 timekeepers at 40% utilization for 2 months?
I know, the math is getting hard to follow. The point is, sometimes the math is hard to follow so reducing everything to a single, simple point statistic like billed hours, and then basing all rewards and pricing on this one factor, is foolish. Running a business is a bit more complex. The many variables we've identified already include retention rate, utilization, realization rate, leverage, productivity, penetration rate, cost of sales, cost of goods sold, and more, and this is only a small subset of the variables available to managers who need to make rational decisions about the allocation of resources.
While we're at it, a few quick notes on the mechanics of matter profitability:
Matter profitability and even practice group profitability ignores cross-pollination. One of my clients recognized that the Trust & Estates practice generated a significantly lower profit margin per matter than other practices and considered shuttering the practice. However, deeper analysis revealed that T&E clients, many high-net worth individuals like CEOs, were feeders to the firm's other practices, like corporate, securities and litigation. On an isolated basis, the numbers suggest the firm's T&E practice should be closed, or at least starved of resources in order to focus on more lucrative practices. On an aggregate view, however, there may be more investment needed in this feeder practice if this can be done at a lower cost than alternative lead generation activities
Matter profitability often provides a false read because of improper allocations. One of the liveliest discussions in any business setting is how to allocate various costs to the business and to the various product lines. In a law firm, we can argue endlessly over whether to allocate costs based on headcount, or on a square foot basis, or on a consumption of resources basis, or other models. In many cases, the final tally isn't all that sensitive to modest tweaks in allocations, but the overriding imperative is to select a model and then stick with it for all, so it provides a sound and sustainable comparative measure
Matter profitability shouldn't be diluted by productivity. Matter profitability should balance the revenue generated against the hard costs to deliver the matter, including the compensation associated with the timekeepers billing against the matter. But the compensation should reflect target hours worked by associates, or associate bands. While associates are not truly fungible, in this case we should view their contribution as an interchangeable raw material, so if we replace Mary with Carlton, the underlying cost structure doesn't change. Why? Because if we price our services efficiently based both on our organizational learning curve ("We can complete this task in 5 hours") and the client's perceived value ("This task is worth $3,500 to me"), then an individual contributor's productivity shouldn't have a material impact on our costs of goods sold. Said another way, clients resist first- and second-year associates working on their matters because of the assumption that associates work inefficiently as they learn their craft. By basing the price on a standard cost, we remove the client's objection. Some will complain here that more productive associates are penalized because they're placed in a box along with less productive associates. But productivity is a management issue, not a pricing issue. We don't pay more or less for light bulbs or automobiles or haircuts or vaccinations based on the training level of the person making the product or delivering the service. And legal services shouldn't be priced that way either.
Matter profitability shouldn't be diluted by equity and bonus compensation. Partner time can be billed at actual rates rather than a target, if we choose, under the assumption that their variable billing rates already reflect experience and an experienced partner will bill 3 hours at $650 for a task that an inexperienced associate might bill 10 hours at $275. So a pro rata portion of the partner's compensation based on hours billed is a sensible cost to accrue to the matter. But it would be foolish to add in partner equity compensation, or bonuses for either partners or associates, as these costs have nothing at all to do with the matter! In fact, these costs would force the matter profitability to plummet, requiring the firm to significantly increase prices to make it profitable, which as we've described above serves to provoke the opposite effect, namely that no clients will buy any of what the firm is selling. Consider lawyer bonuses and partner equity compensation as SG&A to be addressed elsewhere.
Managing a law firm or a practice group is challenging enough without adding a lot of financial math to the mix. But the reality is that no law firm manager should be operating without a clear sense, or hopefully a directional sense, or at bare minimum a vague idea, of how resource allocation and pricing can influence the financial health of the business. Long-term profitability vs. short-term profitability, matter profitability vs. organizational profitability, allocations and overhead and leverage, oh my. Yes, it's hard. But I'm willing to bet that you have a resource on staff, or a phone call away, who can help you sort through these issues. The key is to establish a consistent approach across the firm based on the ideals of firm management. And these ideals should be established based on a fully-informed view of the alternatives and consequences. Welcome to management. No one said it would be easy.
For more information about the evolving state of law firm pricing, see Toby Brown's excellent "The State of Legal Pricing 2013."
Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Research Fellow, a Teaching Fellow at the Australia College of Law, and past president and a member of the Hall of Fame of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.
Anyone following the large law firm marketplace knows of the impending demise of another big law firm. This time it's Dewey LeBoeuf, the several-year old combination of Dewey Ballantine and LeBoeuf Lamb Green & MacRae. At the time of this writing the firm is not, technically, dissolved. But by the end of this week some action or combination of actions by the firm's bankers, creditors, partners or departed partners will put the final nail in the coffin.
Yes, large law firm lawyers earn a lot of money, and yes we have an oversupply of large law firm lawyers, but it's nonetheless extraordinarily sad when law firms implode. Presumably, the remaining partners, even those who haven't yet found a new home, have saved enough money over their careers to tide them over until they join a new firm. But it's a terrible and swift blow to the many staffers and associates who almost overnight will be left without a paycheck, probably without health insurance, and perhaps even stripped of some portion of retirement funds.
I've had multiple conversations with large law firm lawyers in recent weeks about this episode, and without exception all feel their firm is uniquely situated, collegial and immune from the sorts of shenanigans that led to Dewey's demise. Sadly, this isn't true. I don't have specific insights into this collapse, as the firm is not and has never been a consulting client of mine and I'm not privy to its banking or financial records.
As a vendor, some years ago I did engage in a protracted and messy negotiation with the Executive Director when he was in a senior role in a prior firm, and my primary takeaway is that his extraordinary arrogance masked his limited intellect. Still, one blithering idiot who has bullied his way to a position of influence isn't typically enough to take down an entire large law firm. So what are the likely and repeatable root causes of such a debacle that other law firms should monitor?
When it comes to law firms, bigger is not necessarily better. Sometimes it's just bigger. Dewey's now embattled chair offered a revealing insight when justifying the Dewey and LeBoeuf merger, insisting that the firm needed to get bigger to compete in a global economy. I spend a lot of time educating law firm partners about the fundamental financial drivers of their law practice, and I've learned that many are unaware of the hard cap on revenue that the hourly method of billing imposes.
At any point in time, I can calculate the firm's maximum potential revenue by multiplying the number of timekeepers by their established hourly rate and then multiply this result by the available billable hours. From this max total, we start deducting unbilled time, unrealized billings, overhead and expenses, interest lost through slow collections, and so on, until we derive a final profit, which we divide over the number of equity partners to find the much heralded PPeP (profits per equity partner).
Given these constraints, most law firm leaders believe the primary way to increase revenue is to increase the number of timekeepers. But savvier leaders know that revenue is not the same as profit, and there are more lucrative approaches to generating profit than by taking on the huge overhead associated with adding timekeepers through a merger. (For example, embracing alternative fee arrangements that ensure a project fee while reducing the cost of legal service delivery through better project management.)
If the goal is to generate profits -- which is a lesson every MBA student learns on day one -- then firm size is just one of the many factors to explore. An examination of numerous law firm combinations that were predictably dilutive suggests that the real catalyst for growth was ego and a poor grasp of what drives profits.
Owners should own, workers should work. In my consulting practice I spend a lot of time reviewing practice group strategy and finances, and quite often I'm advised not to share these confidential data with partners (partners!) in these practices. It's startling how many law firms still embrace a closed system in which many if not most of the partners are excluded from the financial operations of the firm.
In today's modern large law firm there is a distinct prestige associated with the title "partner" but in many cases the underlying fiduciary responsibilities of the partnership business form have been lost. In fact, as Dewey's situation has revealed, many partners are quite content to not get involved in administration and prefer to merely pocket a rich paycheck, which is a shocking abdication of their fiduciary responsibility and poses a significant risk -- if not to the firm, then to their personal net worth!
So why kid ourselves that every pre-eminent lawyer should also have a vote in the firm's operations. There's a much simpler approach: When a lawyer has achieved a certain level of success, give him or her the title of partner and provide a rich compensation package that includes profit sharing, but leave firm management to those qualified to do so, or at least those appointed or elected to the role. There should be far more lawyer employees and far fewer law firm owners once a firm reaches a certain size. Why lawyers adhere to the inefficient partner business form when there are other options offering the same tax and liability benefits is baffling. Some will argue that the non-equity partner approach has been tried and has failed, but in its prior incarnation it was merely a tool to recruit worthy service partners and not a shift in governance.
Building, leading and sustaining a successful business shouldn't be confused with falling first in an avalanche. Law firm leadership is hard. So is law firm management. Nothing reveals management incompetence moreso than watching the flailing that occurs when a business enters a new and predictable phase of the business cycle. Corporations are not immune: many founders have had to give way to experienced managers once a certain scale is reached, and others who have successfully led in boom times are incapable of making tough decisions in bust times. It takes different skills to to manage a law firm when demand is no longer a constant, when unfettered pricing discretion gives way to increased buyer leverage, when critical raw materials become commodities, than the traditional political and consensus-building skill set of past law firm leaders.
I held an in-depth one-on-one conversation with a newly-elected law firm chairman several years ago in order to help him write his remarks for an upcoming all-partner meeting. He had no platform, no strategic plan, no vision for change, no understanding of the firm's financial position beyond the annual report highlights and he was elected after a contentious and lengthy process in which multiple more qualified but polarizing candidates were unable to garner sufficient support.
So his greatest asset, apparently, was that he was disliked somewhat less than others. And yet this chairman enjoyed a couple years of success, years that looked a lot like the years prior to his arrival, and probably similar to what would have happened had the firm's partners elected a potted plant to the role. Until the economy collapsed and he floundered helplessly. A ceremonial position riding the tide of a generation-long run of near-unlimited demand for legal services is distinctly not what is needed today, and this applies at both the firm and practice group level.
Rather, leaders must be "consciously competent" and know why the firm or practice is successful, what levers and options exist to sustain or generate growth, what pitfalls or costs are associated with each alternative and the risks posed by the competition -- traditional and non-traditional.
It's not "too big to fail," it's "too big to trust." An unwritten but assumed aspect of the partnership business form is that partners, by and large, know each other and consciously choose to throw in their lot and do business together. As law firms have skyrocketed in headcount, it is literally impossible to know every other partner, certainly not at a personal level that leads to mutual respect and trust. If that were true, partner meetings would have 100% attendance, cross-selling would come naturally to those who want their colleagues to succeed, sharing client contact information and evolving single-engagement clients into firm institutional clients would be automatic.
But what every law firm implosion has shown us is that many partners have joined a firm in order to benefit from the brand strength, but have no interest or incentive in sharing clients or helping the firm as a whole succeed. Too many partners "protect" their clients in order to retain maximum portability should a better offer materialize elsewhere. And this lack of a common bond poses a challenge in a troubled business climate when the bankers come calling and ask partners to provide personal guarantees to secure lines of credit.
As one DC-based partner spat upon learning he lost an industry accolade to a NY-based colleague, "I'll be damned if I work with let alone congratulate that overpaid clown." You don't have to like all of your partners, but if you don't trust them enough to effectively cross-sell and collaborate to your mutual benefit when times are good, the likelihood of standing shoulder to shoulder to face a common threat when times are bad is non-existent.
Timothy B. Corcoran delivers keynote presentations and conducts workshops to help lawyers, in-house counsel and legal service providers profit in a time of great change. To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.
There was a recent request on the Legal Marketing Association's discussion forum, for benchmarking data for paralegal and legal secretary staff to lawyer ratios. There are a number of good sources for this sort of thing, which savvy readers submitted. However, I was compelled to provide a contrarian response.
I question the validity of benchmarking data like this, particularly in today's economy.
Human nature generally nudges us toward safe choices as defined by how many others have made similar choices. In many law firms, precedence is the dominant method of decision making mostly because it's the method learned by lawyers in the practice of law. But those of us tasked with bringing sound business practices into today's law firms have an opportunity to introduce more rigor into the discussion. This applies to many areas of practice management, but in light of the recent law firm layoffs and downsizings, it seems even more poignant when applied to law firm staffing.
I'd like to hypothesize why staffing ratio benchmarks might be a hot topic lately:
A benchmark for paralegal/secretary to lawyer ratio is undoubtedly of keen interest to law firm leaders entertaining the question, "Which staff positions can we eliminate to reduce our cost base?" The problem is, the ratio is a function of the nature of the practices, the current workload, the culture and productivity levels.
Practices that rely heavily on paraprofessionals, e.g., real estate, litigation, will carry different ratios than other practices. Some practices are busier than others, for example those addressing counter-cyclical client work. Those that aren't busy tend not to delegate work downward, so partners are doing work today that a year ago a mid-level associate might handle. And some cultures better exploit technology and knowledge databases to improve productivity levels, so their ratios will differ from competitors in the exact same practices.
In this light, it’s presumptuous to believe that much value can be derived by examining staffing ratios compiled by surveying dissimilar firms in dissimilar markets comprised of dissimilar practices and targeting dissimilar clients.
Unfortunately, it's hard work for leaders to examine the organization's business processes and culture to determine the appropriate staffing ratios for their firm. But if the objective is to recalibrate capacity so it's aligned with current demand levels, with enough flexibility to adapt as demand returns, then it's sensible to roll up the sleeves. Too often, however, the objective appears to be to find a quick and easy rationale to lower costs by "bringing our staffing ratios in line with industry standards."
Cost cutting in an enterprise impacted by a recession is by definition necessary. Tough decisions have to be made. The law firm leaders who assess their enterprise in light of its long term outlook and make specific adjustments based on sound business rationale will have an easier time ramping up when demand increases than those firms using imprecise benchmarks to simply lower costs today without regard for tomorrow.
Business process re-engineering and improvement programs are more effective in the long run for aligning staff to workloads. These processes generally result in cost savings and are, therefore, often self-funding exercises. And we shouldn't have to repeat the growing theme (but we will) that law firms that find more efficient ways to deliver legal services are better positioned to implement alternative fee arrangements, which in turn lead to increased client retention.
These are not just good ideas for today's law firm leaders. They are essential.
Timothy B. Corcoran is principal of Corcoran Consulting Group, with offices in New York, Charlottesville, and Sydney, and a global client base. He’s a Trustee and Fellow of the College of Law Practice Management, an American Lawyer Fellow, and a member of the Hall of Fame and past president of the Legal Marketing Association. A former CEO, Tim guides law firm and law department leaders through the profitable disruption of outdated business models. A sought-after speaker and writer, he also authors Corcoran’s Business of Law blog. Tim can be reached at Tim@BringInTim.com and +1.609.557.7311.
Guiding law firm and law department leaders through the profitable disruption of outdated business models.
Charlottesville, VA +1.609.557.7311
read the #1 download HERE!
Privacy & Security | Speaking Policy | Conflicts & Ethics Policy | Fee & Billing Policy | Contact
©️2026 Corcoran Consulting Group, LLC. All rights reserved.
Brand and website design by Cyentist™
