Make More Rain : law firm bus model, compensation

Using the Recession to a Law Firm's Advantage

BrianTaaffe — Wed, 29 Jul 2009 16:09:00 GMT

With the economy in its current state, and the legal industry perhaps not as recession proof as previously thought, law firms are looking into ways to cut costs in order to improve profits. Previously I suggested ways to improve margins through cost cutting and other options, but another point that has been getting a lot of press is first years' salaries. Where they currently stand, first years' salaries are probably higher than they should be. Law firms are not getting value out of their new recruits at current salary levels. Their costs are high, and the revenue they bring in is low - largely due to inexperience. First year associates do not have the knowledge or expertise to produce the same quality of work as a senior attorney. To top it off, first year associate rates are often much higher than a client is willing to pay. From what I have seen in working with law firms, in many cases a first year associate's work is being discounted heavily at the time of billing, or is being written off. Clients do not want to pay for second rate work - they come to big law firms to get the best talent and legal services; first years do not have the ability to produce the work that the clients would expect from the rates they are being charged.

So why do firms pay first years such high starting salaries...

...(read more)

Merit Based Systems?

Admin — Fri, 20 Feb 2009 00:37:00 GMT

The recent NYT article, “Chill of Salary Freezes Reaches Top Law Firms”, once again highlights that the recession is causing many firms to rethink their compensation structure. In the short term that means freezing salaries. “There is this sense that firms didn’t act prudently during the boom and now they are getting religion, and that it’s better late than never…Many associates we have spoken to think the freeze probably saved jobs.” In addition, many firms are also taking the long term approach of moving to a more merit-based compensation and advancement system. David Lat, founding editor of AboveTheLaw.com, suggests “I think some breakdown in the lock-step mentality might actual stick. Firms are recognizing that on a certain level, it makes sense to pay people in a way that reflects their performance”

But can merit based systems become a reality in a profession steeped with tradition and typically averse to change? For Henry Bunsow, a partner at Howrey, the answer is yes. Bunsow states, “I would say the leaders of Howrey are very concerned about client perception and the cost of legal services and justifying the cost of legal services… And the idea that the compensation levels are arbitrarily set, when those compensation levels in turn result in hourly billing rates, makes no sense from a business standpoint – no business in this country would run themselves that way.” Howrey introduced a merit-based system in 2007.

Still, many will argue that a move towards a system without billable hour requirements or mathematical formulas will result in fewer billable hours. There are two answers to this argument. First, for many law firms, culture dictates lawyers work long hours, so a minimum billable hour requirement is unnecessary. Second, focusing on the quality of hours and not the quantity can have a greater impact to firm profitability than any negligible impact on hours. The key is to make the hours count. As Bunsow also notes, “Our goal is to attract and keep the best people, to compensate them for what they’re worth and to justify their cost to the clients, because we think clients are willing to pay for high quality legal services.”

To implement such a system, law firm managers should begin with full disclosure for the reasons for changing to a new system. Next, evaluation criteria should be discussed. If the goal is improving quality of work, special consideration should be given client satisfaction. Recently, the Association of Corporate Counsel began working on a “Value Challenge Index”. Criteria for the value proposition can be easily applied to a merit based evaluation and includes:

1. Understands goals and expectations

2. Legal expertise

3. Efficiency/process management

4. Responsiveness

5. Innovation/Flexibility

6. Results delivered

7. Values: Pro Bono/diversity/green/professionalism

The merit based decisions and budgets for salary increases should be put in the hands of practice group leaders. “In this fashion, the firm can control its budget and the percent of associate salary expense relative to revenue and total expenses. Also, since these partners are most knowledgeable about associate performance, they are the most appropriate persons to award merit increases.” Lastly, increased monitoring and management of individual margins and rate spreads is essential to improving profitability in a merit based system. But you were doing that already, right?

--Rick Rawls

Rick Rawls is a Senior Business of Law Consultant for Redwood Analytics/Lexis Nexis

Associate Salary Increases & Firm Margins

Admin — Thu, 04 Sep 2008 17:20:23 GMT

It should come as no surprise to anyone that the most recent wave of associate salary increases have helped to erode law firm profit margins. Whether the wave begins in west coast technology firms, or east coast financial capital firms, its effects are felt beyond big law in the mid-size and regional firms headquartered in the mid-west and southeast. And, with 80% of law firm expense tied up in compensation and occupancy, the impact can be devastating. What is more surprising is the response of law firm leaders in this new economic environment. Reactions run the gamut from slash and burn tactics to taking it on the chin and silently watching margins erode. Formulating a balanced strategy and resisting the urge for an emotional response is critical. Consider the following.

First, is increasing associate salaries is an appropriate response to increased competition for the best talent in your market or just a follow the leader reaction? Associate salary increases typically begin in markets where competition is fierce for not only attracting the best talent, but also keeping that talent as the reality of billable hours requirements hits home. Increasingly, associates are not willing to trade work life balance for a big paycheck. This attitude is not pigeonholed in the bottom half of the law school classes, but pervades throughout. Are there other work life benefits your firm can offer to entice top talent?

Secondly, recent surveys suggest the demand for legal services have declined in the first two quarters of 2008, and making sure your lawyers are properly utilized is essential to maintaining profitability. As margins become slimmer, there is no room for unproductive associates taking up space. But are associates really the problem? Most associates have little control over the projects they are assigned and virtually no ability to generate new business. They, like everyone else in the firm, rely on the rainmakers to generate enough billable hours to support the business. Before taking a defensive posture and eliminating positions, look for ways to improve your business development efforts. Are you effectively cross-selling your services to existing clients? Do you place enough emphasis on developing new business and in the right sectors?

Lastly, in today’s competitive marketplace, passing increased costs on to your clients is rarely an option. Even in big law, where clients were thought to be less price sensitive, general counsels are scoffing at increased rates as a result of higher associate salaries. Can you blame them? That doesn’t mean you have lost the ability to control your average rates. The next time someone asks you for an alternative billing arrangement, consider the request an opportunity to control your own destiny. Look for ways to strengthen the value proposition, improve practice management at the matter level, and increase leverage.

Can you avoid the impact of associate salary increases? Not likely. But focusing on the positive economic aspects of your business, rather than going on the defensive, may help you roll through the downturn and leave you prepared for the eventual upswing.

- Rick Rawls

Management Report Do's and Don'ts

Admin — Mon, 01 Sep 2008 17:21:00 GMT

I was recently asked to speak at a conference on the topic of management reports and how firms are using them to help run their businesses. It is a topic that I have been fortunate enough to gain a lot of insight into over the years. Often I am handed a stack of reports and asked to help the firm automate them or to come up with a package of reports to use as their “reporting package”. Most firms spend a lot of time and resources building their reports to look a certain way but spend little thought into the way that they are used and the actions they expect them to drive.

Any firm can generate data, but to be able to use this data to help model, analyze, and improve their business the firm must approach reporting with a more consistent process. Currently, I see many firms looking at information that could be best described as “interesting”. Interesting information is not the same as useful information. In order to take full advantage of the information available to them a firm must:

• Understand the business drivers of a law firm
• Identify what is controllable
• Establish reasonable goals and relevant metrics

Once the proper mindset has been established and goals have been set, the law firm can move forward with building a set of reports that identifies the best opportunities to reach these targets. The most important part of developing these reports is to keep them focused on the specific drivers of the goals and not get lost in the “noise” of the data. A common misconception is that having more data available improves the management process. In fact, the danger of information overload is just as great (or greater) of a problem as not having enough data or the wrong data. As Jack Trout says in his book Trout on Strategy, “Knowledge is power only if you can separate the important from the billions of data swirling around you”.

In the end, reports need to be catalysts for action. Reports by themselves do not make any difference in performance of a firm, rather they should serve to initiate improvement. By setting up a plan from the outset and then setting up reports to manage towards that plan the firm will become more efficient and consistent in their approach. Reports do not need to be complex to be useful, but they do need to speak directly to the questions being asked, providing clear direction quickly and succinctly.

- by Derek Schutz

RainToday Report: 76% of Law Firms Discount Fees

Admin — Fri, 06 Jun 2008 07:00:32 GMT

Pricing has been a frequent topic at More Partner Income. Some past topics include the science behind pricing, the ill effects of inflation on pricing, pricing management, and discounting.

RainToday has recently released the Fees & Pricing Benchmark Report: Law Firm & Legal Services Industry 2008. David Maister wrote a blog post on a similar report released by RainToday focused on the consulting industry on April 28th. There were some striking similarities between the two reports:

65% of consulting firms reported they discounted fees. 76% of law firms reported discounting fees;
Average discount of responding consulting firms was 11.7%. Average discount of responding law firms was 9.9%.

Of the two pre-bill adjustments (mark downs and discounts), discounting is the most difficult to change. Both show weakness in the firm, but discounting creates a feeling of entitlement from clients. How?

Marking down time tells your client one of several things (the below is not exhaustive):

I spent more time than I can reasonably charge you for the service provided: ie, I am not efficiently working the matter;
My associates spent more time that I can reasonably charge you for the service provided: ie, my firm has less competent attorneys working on your case or I have inefficient staff working on your case;
Even though I spent an adequate amount of time on this, it "seems" too high to me: ie, I am unclear on the value of my service.

All of the above are correctable. They are entry-specific adjustments that can be seen as temporary.

On the other hand, discounts are typically applied to the entire bill. This gives rise to expectations of entitilement. They can tell your clients one very negative thing: I am overcharging you up front and adjusting it on the back-end.

Just as discussed on this site in the post Discounting At Law Firms, the RainToday report suggests that there may be valid reasons to discount, but only when the discount is intentional, strategic, and, ultimately, mutually beneficial to you and your client.

Some reasons to discount given in the report include well-funded start-up clients (in expectation of long-term payoffs) and absorbing the cost of training new associates. It is also something to consider when trying to win RFPs, in exchange for quick payment of invoices or in return for a threshold amount of work that the client will provide to the firm.

The important part of discounting is that it is mutually beneficial to you and your client - there needs to be consideration for the discount. It needs to be binding so that if the client does not perform on their end, the discount doesn't get applied. If there isn't quid pro quo, you are giving a clear message to your client that you overcharge up front - and that your rates are open to negotiation.

Partner Cost and Client Profitability (Part VI)

Admin — Tue, 03 Jun 2008 07:00:03 GMT

This is the last in a 6-part series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. The third article, titled Partner Cost And Client Profitability, (Part III), is focused on basing a partner's direct cost on a "minimum margin percentage". The fourth article, titled Partner Cost and Client Profitability (Part IV), is focused on basing a partner's direct cost on a "minimum margin dollar amount". The fifth article, titled Partner Cost and Client Profitability (Part V), is focused on allocating a partner's direct cost using a variation of both the "minimum margin percentage" and "minimum margin dollar amount" based on different partner "ranks" using a sliding scale. This final article compares the different methodologies to help a firm decide which one to utilize in their environment.

Over the past several weeks, I have explored a number of methodologies for determining the appropriate amount of partner compensation to consider direct cost and allocate to clients for purposes of evaluating client and matter profitability. Since a partner is compensated for a multitude of contributions to the firm (billable hours, originations, matter & client management, attorney management & development, and for firm ownership), the issue is complex. Through my last five postings, I have evaluated half a dozen methodologies, all of which are used by at least one firm Redwood has worked with, but not all are recommended.

The first step Redwood took as we set out to answer this question was to determine what we were trying to accomplish with an allocation methodology. From there, we developed a list of five criteria to evaluate each methodology against. As I wrote about in the prior blog entries, the advantages and weaknesses are all based on this list:

Simplicity. If the methodology is not easy to understand with a minimal number of decisions, it will prove difficult to build partner buy-in.
Positive margin. There is value associated with every hour of partner time at standard rates. While discounting may be a planned strategy to acquire a client or matter, at full rates, every hour should have some margin.
Rate based. Compensation can be affected by a large number of factors including discretionary bonuses and overall firm performance in a year (cash received from a litigation case). As a result, it is possible for compensation to decrease from one year to the next. Since we are trying to assign costs to the client for the billable time only, it is important to ignore these effects. Instead, direct costs should be based on partner’s standard rate,
Leverage. While not the only measure, leverage is extremely to increasing firm profitability. Any methodology should (through the resulting margins) encourage the use of lower cost timekeepers over higher cost (and highly compensated) partners.
Closed Compensation system. If this is a concern for your firm, it can generally be accomplished by using a rate-based methodology and leaving out any actual compensation figures.

In our journey through this process, we gathered various approaches from our clients and from industry experts. The list of criteria above is a solid place to begin evaluation to determine if the resulting model is providing the desired outcome. In the figure below, you will see the six methodologies that we evaluated and the degree to which they meet the criteria above (solid circle indicating criteria met, half circle indication partial, and blank indicating criteria not met). As you can see, the three methodologies that we recommend to our clients, Minimum Margin %, Minimum Margin $ and Sliding Scale, meet almost all six of the criteria we have laid out here.

If you use or know of another methodology, we would be interested to hear about it and may be able to provide some guidance on its performance against the list of criteria. Please send an email to rpaquette@redwoodanalytics.com with any suggestions, questions, or additional methodologies that we have not yet seen.

Partner Cost and Client Profitability (Part V)

Admin — Tue, 27 May 2008 07:00:00 GMT

This is the fifth in a series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. The third article, titled Partner Cost And Client Profitability, (Part III), is focused on basing a partner's direct cost on a "minimum margin percentage". The fourth article, titled Partner Cost and Client Profitability (Part IV), is focused on basing a partner's direct cost on a "minimum margin dollar amount". This article is focused on allocating a partner's direct cost using a variation of both the "minimum margin percentage" and "minimum margin dollar amount" based on different partner "ranks" using a sliding scale.

Over the last 4 weeks, we have been discussing in some detail the topic of partner compensation as a direct cost in profit modeling. Specifically we are answering the question: “How much of a partner’s compensation should the firm consider when calculating the cost rate allocated to each billable hour he/she works?” We have evaluated several methodologies that create unfavorable results and 2 that Redwood Analytics recommends. While we will discuss another methodology today (or variations of previous strategies), it is important to remember that there is not one right answer that will work for all firms. Instead, it depends on the current state of affairs of the firm, the long and short term goals of the firm, the relative level of partner compensation, and maybe most importantly, how the firm thinks about client profitability.

Sliding Scale (for minimum margin % or $):

The final methodology we will explore in this series is a variation on the previously recommended approaches. In this variation, firms have the flexibility to use different minimum margins for different partner “ranks”. We do not suggest moving to complete customization (where each partner has a different threshold) but we do recognize that the minimum margin for a senior partner may differ from that of a mid-level partner and a junior partner. In other words, it has been argued by several partners we know that the relative portion of compensation paid to a partner for performing billable work decreases with seniority. Since most firms have some form of partner ‘shares’ , ‘points’ or other credits, we recommend using this as the basis (see fig 1 below), but standard rate or tenure could work as well. In this example, we have split the partnership into 3 buckets to determine the minimum margin %, the firm is free to choose any number of buckets. It should be kept in mind that too many can unnecessarily increase complexity and open the door for disagreement for both start/end points for the ranges and the minimum thresholds

Minimum Shares	Maximum Shares	Minimum Margin %
1	50	40%
51	100	30%
101	150	20%

Figure 1

Alternatively, instead of using a handful, a firm could create a continuum to represent the changing minimum that would eliminate the abrupt change in partner profit that would be experienced as they progressed from one bucket to the next (see fig 2 below). In this example, a partner with 150 shares would have a 20% minimum margin while a partner with 100 shares would have a 30% minimum.

Figure 2

In the examples below, we see the three familiar partners from our previous blog entries with the minimum % applied from the table shown in figure one. Once again, the Jr. Partner is not affected by the minimum because his fully loaded margin exceeds the threshold. Unlike the minimum margin % methodology though, this approach differentiates the Rainmaker and the Dept. Manager (instead of both having 40%). Keep in mind that while we have illustrated this methodology using the minimum margin % approach, we can also apply this to the minimum margin $ approach.

Role	Comp	Std Rate	Shares	Minimum Margin %	Cost Rate*	Actual Margin
Rainmaker	$1MM	$250	125	20%	($200)	20%
Dept. Manager	$500M	$200	75	30%	($140)	30%
Jr. Partner	$150M	$150	25	40%	($83)	44%

* Assumes 1800 standard billable hours expectation

Advantages of the methodology:

It ensures that every partner has a positive margin associated with his/her hours when valued at standard rate. While one may purposely choose to lose money on specific matters through discounting, there should be margin on every hour of time when valued at published rate.
It is based on the partner’s published rate. While total compensation can rise and fall with firm profits, this relative cost will not fluctuate and this method is in line with thinking about compensation for a partner’s work effort.
If executed properly, a leverage model will be supported by forcing the highly compensated partners to a lower margin % than lower compensated partners.
It supports a firm with a closed compensation system since actual compensation will not be revealed through profit model.

We have to address the weaknesses of this approach as well:

Higher complexity. With either bucketing (fig. 1) or the margin curve (fig. 2) the firm will still have more decisions in this methodology than in either minimum margin approach. More decisions open the door to more disagreements and dissenters.

Like the other Redwood recommendations, the weaknesses are overshadowed by the strengths in the model. And, if the firm can build agreement around the (semi-arbitrary) decisions necessary for this methodology, Redwood believes this creates the most robust model of all those explored, allowing the firm to assess relative client profitability without having to exclude a client due to high/low partner costs. In the last entry of this series, we will detail the list of criteria we have developed to better understand the strengths and weaknesses of a new methodology that we may encounter.

While this series documents every methodology (some with slight variations) that we have come across in our years of working with firms, we do realize that it is not necessarily exhaustive. Have you used, seen, or thought about a methodology that we have missed? Do you have any other feedback? I’d love to hear from you: rpaquette@redwoodanalytics.com

Partner Cost And Client Profitability, (Part IV)

Admin — Tue, 20 May 2008 07:00:39 GMT

This is the fourth in a series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. The third article, titled Partner Cost And Client Profitability, (Part III) , is focused on basing a partner's direct cost on a "minimum margin percentage". This article is focused on a related methodology: using a "minimum margin dollar amount" to allocate partner direct cost.

Thus far, we have evaluated a number of methods of allocating partner direct costs (compensation) to a client. Since firms have differing long and short term goals, levels of partner compensation, and thought processes about client profitability, we have concluded that there is not one perfect solution for this question, but instead a handful of recommended options.

Minimum Margin $ (or fixed margin $ for firms with closed compensation):

Very similar to the Minimum Margin %, this methodology differs only in that the threshold is set as a dollar value instead of a % of standard rate. Some firms we interviewed think about partner profitability in dollars, stating as an example that each partner should have an annual margin (standard revenue less direct costs) of $100M on their bRate MinimumMargin Minimumillable time (hourly margin is an option as well).

In the example, again we have the same partners but now each is given a minimum annual margin of $100M (or $56 per hour based on 1800 std hours). Since the Rainmaker and the Dept. Manager have fully loaded margins much less than this amount, they are set to the minimum while the Jr. Partner remains at his full compensation level. Notice that with this methodology, while both the Rainmaker and the Dept. Manager are at the minimum threshold, they have different Direct Margin %. While the dollar margin is the same, the higher rate timekeeper has a lower margin %, thus encouraging a billing attorney to use the more junior (or lower cost lawyers) on their matters.

Role	Comp	Std Rate	Minimum Yearly Margin	Minimum Hourly Margin*	Cost Rate*	Direct Margin
Rainmaker	$1MM	$250	$100M	$56	($194)	22%
Dept. Manager	$500M	$200	$100M	$56	($144)	28%
Jr. Partner	$150M	$150	$100M	$56	($83)	44%

*Assumes 1800 standard billable hours expectation

Advantages of the methodology:

It ensures that every partner has a positive margin associated with his/her hours when valued at standard rate. While one may purposely choose to lose money on specific matters through discounting, there should be margin on every hour of time when valued at published rate.
It is simple. Firm leaders need only to decide on one variable that can be based on firm analytics and margins for other titles (e.g. income partners or senior associates).
It is based on the partner’s published rate. While total compensation can rise and fall with firm profits, this relative cost will not fluctuate and this method is in line with thinking about compensation for a partner’s work effort.
The most highly compensated partners will be forced to the minimum margin ensuring they appear less profitable than junior partners, therefore supporting a leverage model.
Multiple partners hitting the minimum margin level will have different margin % if they have different standard rates, further promoting a positive leverage model.

We have to address the weaknesses of this approach as well:

A firm will need to decide on the minimum margin. While strong arguments can be made for a certain threshold, there may still be dissenters.
Each partner who is affected by the minimum threshold will have the same margin (in dollars), leaving discounting as the only differentiator of profit on billable time

Like the Minimum Margin %, the strengths of this methodology prevail over the weaknesses and many firms have found this option easy to implement and easy to gain support for (due to minimal arbitrary decisions). In the final two entries, we will discuss some variations on the two minimum margin methodologies (% and $) and discuss a set of criteria to help a firm determine the pros and cons of each.

Managing Partner Forum Attendees: Business Development Most Effective Way To Improve Profitability

Admin — Fri, 16 May 2008 07:00:54 GMT

This past week, The Remsen Group held the Southeast Managing Partner Forum in Atlanta. Fifty-eight participants attended representing thirty-nine firms in the Southeastern region. According to 23% the participants, marketing and business development was the most effective way to improve long-term profitability. This eclipsed raising rates, which was rated as the most effective way to improve long-term profitability by 21% of respondents.

According to the 2007 Law Firm Economic Survey from LexisNexis, marketing and business development was second only to rates as the most effective way to improve profitability. Yet only 3% linked compensation to marketing and business development activity. It is apparent that firms consider marketing and business development as important keys to improving profitability.

In our 2008 Survey (currently accepting submissions - please click here if you would like to participate), we dedicate 19 questions on business development. We hope to be able to flesh out what works for firms and what isn't working to improve profitability.

In a year where the majority of economic news points to an economic downturn, how a firm invests now will determine what opportunities open for it after the economy recovers. It's worth reviewing some past posts that help firm's manage down cycles and prepare for the eventual upswing:

Another interesting statistic that follows earlier surveys is that over 2/3rds of the attendees of the Managing Partner Forum in Atlanta did not follow a firm-wide strategic plan. John Remsen, along with John Smock and Thomas Grella, Esq., have teamed up to provide a web seminar on Law Firm Strategic Planning. John Remsen is the owner of The Remsen Group, a marketing consulting firm that is focused on the law firm market. John Smock is a management consultant and partner with Smock Sterling strategic management consultants. Mr .Grella is the Managing Partner of McGuire Wood & Bissette, PA and co-authored the book The Lawyer's Guide to Strategic Planning published by the American Bar Association. The webinar is scheduled for June 10th at noon eastern. To register, click here.

Partner Cost And Client Profitability, (Part III)

Admin — Tue, 13 May 2008 07:00:29 GMT

This is the third in a series on partner compensation and client profitability written by Ron Paquette, consultant with Redwood Analytics, now part of LexisNexis. The first article, titled Client Profitability: What Is The Cost Of Partner Time?, was an introduction to the concept of allocating partner cost in calculating client profitability. The second article, titled Partner Cost And Client Profitability, (Part II), is focused on pitfalls of some firms' methodology in allocating costs to partners. This article is focused on basing a partner's direct cost on a "minimum margin percentage".

When it comes to allocating partner direct costs (compensation) to a client the answer, unfortunately, is not a simple one. After exploring options with various law firm leaders at a number of firms, we heard consensus on one key point -- that “it depends.” “Depends on what?” you might ask. Well, it depends on the current state of affairs of the firm, the long and short term goals of the firm, the relative level of partner compensation, and maybe most importantly, how the firm thinks about client profitability. As a result, we have developed a handful of options to address the analytic needs while considering firm goals and philosophy. In my next several entries, I’ll explain some of those options, and their pros and cons. Today’s option is basing a partner’s direct cost on a minimum margin percentage for each partner.

Minimum Margin % (or fixed margin % for firms with closed compensation):

In this methodology, margins (Std Rate less Direct Cost Rate as a % of Std Rate) are kept at or above a minimum threshold (or equal to the threshold for firms with closed compensation cultures). In the example below, we have the same three timekeepers from previous examples, with the Rainmaker and Dept. Manager having compensation that exceeds their billable hours revenue. With the minimum margin % methodology, these two timekeepers’ direct costs are set so that the margin % is 40% (this variable is set by the firm) while the Jr. Partner maintains the 44% margin occurring ‘naturally.’

Role

Compensation

Std

Rate*

Cost

Rate*

Direct

Margin

%

Rainmaker

$1MM

$250

($150)

40%

Dept. Manager

$500M

$200

($120)

40%

Jr. Partner

$150M

$150

($83)

44%

*Assumes 1800 standard billable hours expectation

Advantages of this methodology:

It ensures that every partner has a positive margin associated with his/her hours when valued at standard rate. While one may purposely choose to lose money on specific matters through discounting, there should be margin on every hour of time when valued at published rate.
It is simple. Firm leaders need only to decide on one variable that can be based on firm analytics and margins for other titles (e.g. income partners or senior associates).
It is based on the partner’s published rate. While total compensation can rise and fall with firm profits, this relative cost will not fluctuate and this method is in line with thinking about compensation for a partner’s work effort.
The most highly compensated partners will be forced to the minimum margin ensuring they appear less profitable than junior partners, therefore supporting a leverage model.

There are some weaknesses to this approach:

A firm will need to decide on the minimum margin percentage. While strong arguments can be made for a certain threshold, there still may be dissenters.
For those who have the minimum margin %, the only profitability differentiator relative to how they affect client profitability is the realization on the hours worked. If too many partners are at the minimum, there is virtually no difference in leverage within the partner ranks.

Overall, the strengths of this methodology far outweigh its drawbacks. With this method, client profitability can be evaluated objectively with minimal explanation about the handling of partner compensation. In subsequent entries we will be evaluating additional methodologies vetted by Redwood Analytics and providing a checklist of criteria that your firm can use to select a methodology.

Reflections on the 2007 ALM Billing Rates & Practices Survey

Admin — Fri, 11 Jan 2008 08:00:58 GMT

"Is the billable hour dead, as many like to proclaim (whether wistfully or presciently?)" So starts the Executive Summary for the 2007 ALM Billing Rates & Practices Survey. The relentless assault against the hapless billable hour continues. Here is yet another blog post arguing against hourly billing. Yet if you look at billing rates, they continue to increase. The 2007 ALM Billing Rates & Practices confirms this, but also drills down into respondent's use of alternative fee arrangements.

According to the ALM survey, the average billing rate nationally is $240. This is in line with the 2007 Law Firm Economic Survey from LexisNexis, where nationally, attorney rates were at $249 (broken down: equity partner rates were at $263 and non-equity partners billed at $235 on average). In the ALM survey, "[a]ll but a small percentage were the leader, managing partner, shareholder or owner of their firm", so I didn't include the firm effective rate that includes associate and paralegal rates in calculating the $249 (for those of you thumbing through the LexisNexis survey). Only 8% of the ALM respondents were associates, so it may very well be that average rates were lowered to $240 in the ALM survey by the associates (who in the LexisNexis survey billed at $175 per hour).

The survey is heavily weighted to small firms, with about a third of respondents being solo practitioners and 58% from "small firms" defined as between 2 and 39 attorneys. Why ALM decided to include mid-sized firms (Juris defines mid-size to include firms with attorneys with over 10 attorneys) in the small firm category, I don't know, but it might be due to a small amount of respondents in that 11-39 range.

As further comparison, the average national billing rate for equity and non-equity partners in the 2007 Altman Weil survey was $315. The National Law Journal Billing Survey partner average was $427. Both the Altman Weil and NLJ surveys target larger firms.

One of the observations of the survey was that size of the law firm matters and the above figures certainly indicate this. However, in the LexisNexis survey, the observation was different: it isn't the size that matters, but "that law firms that outperform with regard to per-partner income do so because they excel in performance on the key law firm profit drivers." The ALM Billing survey doesn't profile the firms for per-partner income and thus only looks at part of the picture.

In the chart above, each quartile was ranked for the following key profit drivers: productivity (billable hours), leverage, billing realization, effective rate, and operating margin. The highest performing firms ranked the lowest in all of the indicators.

Size, on the other hand, didn't make as much of a difference. For example, the per partner income of the top performing firms with 25 or more attorneys in the LexisNexis survey was $609,548. Income per partner for firms with 11 to 24 in the top quartile was $548,557 and with 10 or fewer attorneys, $512,896. However, the difference between quartile 1 and 2 across all sizes is substantial: $325,986, $322,876, and $294,871 respectively. While there is less than $100,000 that separates the smallest surveyed firms from the largest ones, there is nearly $300,000 difference between quartile 1 and 2 across firms of all sizes.

Which brings us back to the ALM Billing & Practices Survey. 88% of respondents to the 2007 ALM Billing Rates & Practices Survey reported that they offer "alternatives" to the billable hour and it made up an average of 37% of their revenues. That is a pretty substantial number. Given that the survey is made up of smaller firms, you may be tempted to conclude that smaller firms are moving away from the billable hour in order to compete better with larger firms.

That may well be the case, but it is just as likely that some small firms that continue to not operate like a business could be getting caught up in a trend that in the long run will drop their profits even lower while the solo practitioners next door is making half a million. If you don't measure performance, you won't know.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Contact Me

Admin — Fri, 11 Jan 2008 01:34:34 GMT

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Law Firm Partners Link Profitability to Rate Increases/ Cost Cutting

Admin — Wed, 05 Dec 2007 14:06:12 GMT

One of the interesting questions posed in the Remsen Group Managing Partner Survey (part of the Juris 2007 Law Firm Economic Survey by LexisNexis (the Survey)) related to managing partners' strategic perceptions of profitability. When asked "What strategy has your firm found to be most effective in its efforts to achieve higher profitability?", 26% of the managing partners responded that increasing fees was their firm's most effective strategy. Coming in second was marketing and business development (25%), then cost cutting/ expense reduction ( 18%), improved efficiency (14%), higher billable hour requirements and divesting of low profit work (both under 10%).

Though it isn't surprising that firms list rate as the top strategy to achieve higher profitability, most firms only increase rates at or just above the pace of inflation. According to the Survey, standard billing rates increased an average of 5% to 7% between 2005 and 2006. Adjusted for inflation (currently around 3.5%) this increases rates by 1.5% to 3.5% before other costs of doing business are calculated into the rate (such as the continual decline in client willingness to pay for costs such as online research). Increasing rates in such a way may achieve higher profitability but at 1.5%-3.5% is it the most effective strategy?

What is more surprising and at odds with other Survey findings are the respondents that claimed that cost cutting/ expense reduction was their most effective strategy to achieve higher profitability. Survey numbers do not show any correlation to increased partner income and low expenses. In fact, according to the Survey, the firms with the highest per-partner draws spent the most - but also had the highest margins.

Most Survey respondents gave low priority to improved efficiency, divesting of low profit work and (surprisingly) increasing billable hour requirements. Yet survey numbers from both 2005 and 2006 consistently show that those firms who had the highest partner income performed well across all five of the key performance metrics (rate, utilization, realization, operating margin and leverage).

The New York Lawyer posted on December 4th that some firms have been cutting staff in a bid to lower operating costs. Said Southern California legal recruiter Larry Watanabe, "They want to retain rainmakers, and to do that, you have to maintain a meaningful level of profitability." So they must. However, again, based on this year's Survey, the firms in the 1st Quartile (representing the highest per partner income) also had the highest operating expenses. If you are cutting costs to maintain profitability, then the firm isn't growing and this is no achievement. This may indicate that for those 18% of firms who used cost cutting as a strategy to increase profits, times aren't so good.

What factors are more likely to achieve higher profitability?

• Better efficiency in workflow – lower the days to bill and days to collect fees;
• Discontinue “lock-step” compensation increases to the extent your firm uses this to compete;
• Adopt and adhere to a written, achievable strategic plan;
• Measure your key performance metrics:
o Effective rate upon collection of fees;
o Realization both at billing and collection;
o Productivity (billable hours or equivalent);
o Operating Margin;
o Leverage – either by headcount or billable hours;
• Market to your strengths – don’t be afraid to ask for business.

What strategy has your firm found to be most effective in its efforts to achieve higher profitability?

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com .

Secondments: A Sound Law Firm Tactic

Admin — Tue, 04 Dec 2007 19:37:00 GMT

The terms ‘secondment’ and ‘secondees’ aren’t used much in the U.S. Nor is the tactic (by whatever name) used often by midrange law firms. Secondees are usually young associates who for an intermediate term (several months to a year) are given over to clients as temporary additions to their in-house legal team. Internationally the practice is more common, especially in the U.K. It has expanded beyond secondment assignment just for young associations to include senior members of the law firm.

There are good reasons for the strategy. First and foremost is the relationship building aspect between the law firm and the client. Because secondees are usually provided at a bargain price, the client views the arrangement as the law firm making an investment in them. For midrange firms, a secondment strategy lowers the risk of adding to its legal team. Adding new associates is an expensive undertaking. The cost comes right out of partner profits and many experts believe that it takes as long as three years before the cash flow from the additional associate becomes positive. The smaller the firm, the greater the relative impact on existing law firm partners. Having an ongoing secondment program can help finance those additions.

The relationship with insiders that secondees develop during their tenure with the client will surely prove to be valuable in terms of retention and expansion of the business relationship between the client and the law firm. And the law firm builds a team with a far greater awareness of service quality concerns of all clients.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Steering a Law Firm for Financial Success

Admin — Tue, 17 Jul 2007 16:55:07 GMT

Since 1984, law firm leaders have had the benefit of David Maister’s Law Practice Business Model that clearly identified the variables determining law firm profitability. Any firm that is not measuring (tracking) these key performance indicators in some form or fashion is engaged in wishful thinking. They are relying on accidents or events to determine their financial success or, more likely, financial failure. Maister expressed the model this way:

NIPP = (1 + L) x (BR) x (U) x (R) x (M), where,

NIPP = Average partner income

L = Leverage (ratio of associates to partners)

BR = the “blended” hourly billing rate

U = Utilization (client hours recorded)

R = Realization (revenues divided by “standard value” of time recorded)

M = Margin (partners' profits divided by revenues)

As noted in my prior post about Maister’s model, it doesn’t tell the whole story. In addition to leverage, price (“blended rate” in Maister’s model), productivity (“utilization”), realization and expenses as a percent of realized revenues (“margin”), law firm leaders have to be just as concerned about metrics that measure unbilled fees (work-in-process) and billed but uncollected fees (receivables). The managing partner has to be concerned about metrics that are not reflected in the financial numbers but will impact those numbers in the future. For example, are we opening new matters faster than we are closing old ones? Are the partners meeting their individual marketing goals? Is client satisfaction on track or veering off course?

For measurement to drive performance, you need to add targets (goals) to the process. Supporting those goals, you need strategies and programs on which you will rely to achieve the goals. You need to know who is responsible for implementing and supporting the strategies and who has assigned responsibilities for carrying out program plans. Your systems need to measure actual performance against those program plans. And, of course, for goals and measurements to pay off, you need to hold people accountable.

The question isn’t how do you measure all those things. That is what you have people and systems for. The real question is about you as a law firm leader. Given all the other things you have on your plate, how do you keep track? How do you gain the situational awareness you need to know when things aren’t going as planned? How can your people give you the actionable information you need to flip the switches and twist the dials to put things right?

The old tools—management meetings, wandering around and stale backward-looking reports—were dull instruments. Today, technology is providing business executives and law firm leaders with new tools, Dashboards. Dashboards can provide each member of the law firm with a total field of view over their particular area of responsibility. Each dashboard can be tailored to deliver instantly digestible information relevant to the individual’s position in the firm.

At the CEO or managing partner level, your law firm dashboard should deliver visual indicators as to the speed and direction of the firm compared to the plan. Your control systems should automatically notify you when things deviate from standard or expectations. For example, my car dashboard tells me nothing about the air pressure in my tires until that pressure varies from expectations. Then I’m alerted. That is the kind of exception information law firm leaders need.

But it is not enough to know when things are off course; the information delivered to you by your information systems should be actionable. You don’t want to just know that the air pressure is low. You want to know which tire is involved. It is not enough to warn you. You need to know what, when, where, how and who!

The information delivered to you as a number, a chart, etc. must be active. Active information is information you can navigate through or from to reach related information. You want immediate access to reach or collect everything you need to take action. Consider something as simple as a missing but expected material payment from a client. You should be able to click on the exception alert and get to the client contact information, the responsible attorney, etc. Likewise, if billable hours for the days or week are behind target, a click should identify the office, practice leader and individuals giving rise to the variance, etc.

If you don’t have the kind of breakthrough tools described above, where do you go to get them? The answer is your business system vendor probably already provides them; you just aren’t taking advantage of what is available to you. For example, law firms using Juris® can add the company’s optional MyJuris and separate Active Information Suite to gain all of the capabilities described. If your business software vendor doesn’t already offer similar capabilities, they probably have something under development. If they neither offer it now nor have it under development, then you probably have the wrong business software and should plan to change. There are at least two companies that offer cross-vendor solutions that can deliver some of the benefits described—Redwood Analytics® and Handshake Software.

Morepartnerincome.com is sponsored by Juris. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

Role	Compensation	Std Rate*	Cost Rate*	Direct Margin %
Rainmaker	$1MM	$250	($150)	40%
Dept. Manager	$500M	$200	($120)	40%
Jr. Partner	$150M	$150	($83)	44%