The Evolution of Law Firm Compensation

Intersection

Law firm compensation plans are by and large unsophisticated, hard to administer, too subjective, opaque, and reward the wrong behaviors. As someone wise once said, "If your compensation plan is in conflict with your strategy, your compensation plan is your strategy." To generate maximum financial performance in a law firm, and achieve the highest level of client satisfaction, we need to re-align the incentives. I've said a great deal about the deficiencies of law firm compensation plans (here and here and here). A good plan should further the firm's strategy, be easy to administer, and both drive and reward the desired behaviors. Many miss the mark on one or more of these dimensions. Here are the typical challenges I observe:

No alignment with strategy. Our strategy establishes one set of goals; the compensation plan rewards other, often entirely opposing, activities. We're a full-service law firm for our clients, but we don't track or reward cross-selling. In fact, we create internal competition and ill-will by forcing partners to take a pay cut when they bring others into their relationships. We wish to expand into new practice areas and geographies, but we punish the partners brave enough to lead an expansion because their short-term economic contribution suffers. We want everyone to get out of the office and become a rainmaker, but we pay partners primarily to stay in the office and bill time. We promise clients seamless transitions when partners retire or depart, but we punish partners who introduce younger colleagues into key relationships by requiring them to split credit. We promote our client focus, but we pay for hours, not efficiency.

Limited transparency. Some firms share compensation amounts among all equity partners. Others share nothing. Some firms have lengthy compensation plan documents. Others make all decisions in a closed-door session involving a select few. Some offer helpful scenarios to guide partner behavior in matters such as fee-splitting. Others trust partners to figure it out. What most miss is that transparency is not the same as having an open or closed system (sharing, respectively, all or no compensation details). Transparency is about establishing clear direction as to which behaviors we reward, and in what proportion, and doing so well in advance of the desired behavior. More than one managing partner has been shocked to discover that many, if not most, partners are unclear on the firm's primary compensation drivers. This is management shortcoming, not a result of dim bulb partners.

Poor or insufficient metrics. Some financial metrics are easy to come by, such as billed hours or collected receipts. Others are more elusive, such as timekeeper or client profitability. Still other metrics are more directional in nature, such as cross-selling (we may know the client worked with another practice group, but we don't necessarily know whether the relationship partner drove that). Some behaviors have only subjective metrics: serving as a good mentor? community involvement? acting in the best interests of the firm? A solid plan has specific metrics tied to the desired behaviors, and a clear and sustainable methodology for measuring performance in more subjective areas.

Inconsistent or incomplete reporting. When the compensation drivers are established, they should be published and then periodically the metrics tracking performance should also be published. Why not monthly? It serves little purpose to provide no metrics until year end, or provide vague or incomplete metrics at uncertain intervals during the year. It's hard make a course correction if we have neither a map of our destination nor our current coordinates.

Failure to acknowledge self-interest. We all want to earn a healthy living. But just as partners are loath to discuss budgets with clients, many avoid compensation discussions until required to do so by executive or compensation committee fiat. There's nothing wrong with wanting to know what specifically I can do to increase my compensation -- especially if the management committee has aligned the comp plan to strategy, so maximizing compensation furthers the strategy! Also, far too often top rainmakers or management or comp committee members prevent meaningful discussions of compensation plan changes because they fear losing income. While a revised plan may indeed result in changes to some partners' compensation, if the outcome is improved financial performance for all (and improved client satisfaction), then it's bad form and quite possibly a breach of fiduciary duty for those at the top of the pay scale to refuse to review alternatives.

Pursuing a disruptive implementation. If we identify a better compensation approach that serves the partners' and the clients' interests, it's statistically improbable that everyone will make the same. The change may be good. Some partners who are more comfortable billing time might be quite pleased with a plan that offers more certainty but less potential. Rainmakers may enjoy growing their books of business without being tethered to the billable hour. But some change may be troubling: some may see a compensation decrease commensurate with a declining trend in economic contribution. But we don't have to make these changes all at once. We can establish the end-state and then migrate to it over several years, providing training or transition support to those who might be significantly disrupted by a new plan.

Incomplete modeling. By nature, any forecast is speculative. To change a compensation plan means applying numerous "what if" scenarios to current performance, with no guarantee that we will sustain our current level of performance. We also don't know if, or how quickly, an adjustment to, say, origination credit will grow the pie. We don't know for sure how many partners will defect if their compensation will decrease, because the market dictates whether their economic contribution is more valuable elsewhere than here. They may already have the greenest grass they'll ever see. So we must model numerous factors, using realistic variables, and then create a few versions of the future. Failure to do this may result in significant disruption and unrest, and risk-averse lawyers tend to become flight risks during times of uncertainty.

Big dog accommodations. Every firm has one, if not many, partners who are the top of the food chain and who are somewhat blasé or even outright hostile to firm policies. Nothing creates organizational turmoil than when senior leaders or big dogs are allowed to break rules that little people must follow. When a top rainmaker threatens to leave, sometimes the best response is to say goodbye. When new compensation policies are put in place, it may be reasonable to make certain accommodations for those who feed others. But there's a limit. The behavior we desire should be incorporated into the compensation plan, and there's no room for unwritten rules.

A compensation assessment or redesign can be an extraordinarily effective tool to improve financial performance, foster a client-focused and collaborative culture, reduce unnecessary distractions, and provide a roadmap for career success. Expecting smart people to somehow "figure it out" is lazy management. Build the future you want in your law firm. Start today.

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.

Useful Metrics & Benchmarking

The path to success in a law firm or law department has changed, yet many continue to rely on outdated metrics to track performance. Both buyers (law departments) and sellers (law firms) rely on billable hours as a proxy for productivity and value. This is silly. Sure, hours are a unit of production and law firm leaders should be aware of what it costs to produce the output of legal work. And yes, law department leaders should be aware of what they're purchasing. But if I visit the grocery store with a list of 47 specific items, I don't necessarily declare victory if I return home with 45 or 35 items, or 47 completely different items that cost less. I've also written previously about the lazy reliance on benchmarks -- relying on dissimilar metrics from dissimilar organizations in dissimilar markets with dissimilar characteristics is a recipe for mediocrity. A general counsel declaring that "We should reduce legal spend to 1.3% of revenues just like our competitors in the same SIC code" is as short-sighted as a managing partner stating that "We need to reduce our secretarial ratio to 4:1 to keep pace with more nimble competitors." There are a hundred factors in play that should be considered. Perhaps an investment in the legal department can improve organizational throughput, e.g., reduce the time negotiating contracts, accelerated IP review increasing our speed to market, so cutting funding harms the business. Perhaps a practice that derives profits from lower-cost paralegals and secretaries managing large piles of filing will come to a screeching halt when this work is pushed up to associates and junior partners, simultaneously eliminating the benefits of leverage and annoying clients who have come to expect lower rates.

On a recent speaking tour of regional educational conferences hosted by the Association of Legal Administrators, I asked audience members to volunteer the metrics they track. We captured pages and pages of performance metrics and the non-surprising results indicated that they vast majority are lagging indicators, e.g., "What happened last year, or last quarter?" and reflect short-term financial performance, e.g., "Was this matter profitable?" We need to evolve as a profession to also incorporate leading indicators and focus on long-term financial performance. As corporate guru Jack Welch once said, “You can’t grow long-term if you can’t eat short-term. Anybody can manage short. Anybody can manage long. Balancing those two things is what management is.”

My friend Silvia Hodges Silverstein, founder of the Buying Legal Council invited me to participate in recent conferences in London and Chicago, where rooms full of legal procurement professionals, in-house counsel, and law firm lawyers and professionals discussed the evolving world of legal metrics so we can find common ground in measuring and delivering value. For the Chicago session, I recorded my remarks, and you can view the session below.

My friend Greg Lambert, a leading information professional and co-founder of the award-winning 3 Geeks and a Law Blog, then riffed on my session to focus on metrics for a sub-set of professionals within law firms. After you view the video, you should read Greg's article. How can you incorporate better metrics in your organization?

Timothy B. Corcoran was the 2014 President of the Legal Marketing Association and is an elected Fellow of the College of Law Practice Management. He delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments and legal service providers on how to profit in a time of great change.  For more information, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Random thoughts on the future of law and technology

I have the good fortune of meeting and collaborating with some pretty influential players in this cozy little global profession of law practice. Monica Bay is one of those with whom, and from whom, I've learned a great deal. While it's shocking to comprehend the passage of time, I first worked alongside Monica over 20 years ago when we were colleagues at a spunky little technology startup called Counsel Connect, a division of American Lawyer. You can probably google the history somewhere, but essentially Monica and I were part of an effort to bring social media and technology to the mainstream legal profession long before it was cool to do so. I played a minor role in comparison to the other staff members and volunteer contributors, many of whom continue today as thought leaders in this field. But over time I've gained a few insights of my own, and I've had the luxury of sharing my learnings and wisdom, such as it is, as a leader, manager, mentor, and now consultant, where I regularly offer insights at law firm and law department retreats, at conferences, and, of course, on this blog. I was delighted when Monica, in her role as roving reporter at the recent ILTACON15, asked me to spend a few moments reminiscing on what we've seen transpire in this profession, and what we see coming in the near and long-term. We touch on the role of technology, the demise (?) of the billable hour, project management, process improvement, change management and how incentives influence the pace of change, and what's next. I hope you enjoy watching and listening to our conversation as much as I enjoyed having it.

ILTACON 2015 - ILTA TV - Monica Bay interviews Timothy Corcoran from ILTA on Vimeo.

Upcoming Legal Lean Sigma Certification Course in Project Management and Process Improvement

What is it? The Legal Lean Sigma Institute is hosting another of its popular "open enrollment" white belt certification courses in project management and process improvement. Join us in Chicago on November 11 for an in-depth dive into PM and PI. We combine lecture and interactive exercises to help attendees understand and then apply PM and PI concepts adapted for implementation in the law firm and law department settings. We cover a lot of ground in a short amount of time, but participants will leave with a solid understanding of both the fundamentals and how they can be applied.

Who should attend?

The white belt certification course is ideal for those who are ready, or getting ready, to embark upon a continuous improvement initiative within their organizations. It's also a great refresher for those who have had some exposure but haven't had much opportunity to engage. We held a standing-room only session earlier this year exclusively for in-house counsel, so those who were unable to join us are welcome. We've also held a number of private white belt and yellow belt certification courses for clients in the US and Canada, so this session is ideal for team members who have joined your continuous improvement initiatives but weren't at the initial training. This is also an ideal session for law firm and law department leaders who don't expect to personally dive into the details, but need to know enough about these concepts to establish a vision for continuous improvement and then supervise the effort. Of particular interest to senior leaders are the modules on understanding the economics of continuous improvement. Think PM and PI are bad for law firms, because efficiency doesn't pay as well as inefficiency (even though it's not cool to say that out loud)? We'll show how law firms can generate greater profits from PM and PI while improving client satisfaction. Think your law department is too complex to "routinize" all of your legal matters? We'll show you how to better link upstream your business management's needs with your law department resources and mission.

How do I enroll?

The event is produced by our friends at the Ark Group, so visit their site here to register. As of this writing, there are individual seats available and a few slots for teams.

Working Smarter, Not Harder

As they say, a picture paints a thousand words. Today's Dilbert comic poignantly illustrates the disconnect between lawyers who bill by the hour -- and who believe the quantity of hours is both a measure of quality and a measure of financial success -- and the rest of the business community, in which making money while you sleep is the true measure of success.

Lest this come across as some sort of new age anti-work philosophy, the concept is really quite simple: Successful businesses embrace the learning curve business model, in which efficiency gained from prior experience provides a competitive cost advantage. Business leaders with a continuous improvement mindset don't value workaholics who toil furiously and endlessly at a task and generate high volume as much as they value those who can do more with less, exploiting experience to find more effective ways to generate similar or better results in less time. This excess capacity is then deployed against new projects, in turn generating new financial returns. So the true measure of success is making more profit in less time.

As the legal profession evolves, a necessary outcome is moving away from the silly notion that hours are a measure of anything other than cost. When we decouple hours from compensation, or more accurately when we begin to pay more to those lawyers who can generate comparable revenue and profits in less time, and when clients shift to paying for outcomes rather than for production, then innovation in the legal profession will accelerate.

Think about all of this after you've finished billing your time today. We'll be at the pool with a cold daiquiri waiting for you.

Timothy B. Corcoran is the immediate past President of the Legal Marketing Association and an elected Fellow of the College of Law Practice Management. He delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments, and legal service providers on how to profit in a time of great change.  To inquire about his services, contact him at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.