Check out our free webinar series on improving efficiency!
This article is brought to you by the Knowledge Strategy Group of the Law Practice Division. To learn more about how Knowledge Strategy can improve your client service and the economics of your practice, please join our Group’s next free 30-minute monthly webinar, “How to Accomplish Change in a Law Firm—and Make Those Efficiency Improvements Happen”, to be broadcast on July 28, 2016 at noon, Eastern time. Read the program description and register here. This webinar will cover how to get lawyers in your firm to follow through on their commitments regarding practice improvement projects.
Keith Mayfield, chairman of an AmLaw 200 firm, is reflecting on the presentation about compensating practice group leaders made by another AmLaw 200 chairman at a recent managing partners’ roundtable. The presenter advocated:
- paying practice group leaders primarily based on the performance of their group;
- requiring them to devote a majority of their time to non-billable management of the group; and
- empowering them to influence compensation of the partners in their group.
“Wouldn’t that be expensive?” Keith wonders. He’s also unsure how to convince partners to accept that kind of power from their practice group leader.
The cost side
Keith decides to run some hypothetical costs through his firm’s financial model, which is based on the basic economic model for hourly billing in a professional services firm, as described by David Maister in Managing the Professional Service Firm (1993). That model describes five drivers of a law firm’s profits:
Profits per partner =
Realization rate (actual revenues ÷ standard rate revenues) x Average standard rate (standard rate revenues ÷ # hours billed) x Leverage (# timekeepers ÷ # partners) x Margin (revenues – expenses, as a percent of revenues) x Utilization (# hours billed ÷ # timekeepers)
A further description of the model may be found here.
What the model shows
Keith’s model shows that, based on an average practice group size of 40 lawyers, requiring each practice group leader to spend 50% of his or her otherwise billable time on practice group management work would reduce profits per equity partner by about 5%.
Next he considers what performance improvements would be required to offset that decline:
- 2% hourly rate increase, OR
- 25% reduction in write-offs, to 7.5% of associate time (from 10%) and to 3.8% of partner time (from 5%), OR
- 3% increase in number of associates (leverage increase), OR
- 1% hourly rate increase, 5% reduction in write-offs and 1% increase in number of associates.
If practice group performance can truly improve, those targets seem readily achievable, he concludes.
(Note: This model assumes the firm has 600 lawyers, 2.5 associates per partner and a 40% profit margin. Partners bill at an average rate of $700/hour, associates at $300/hour. Partners bill an average of 1,400 hours annually; associates 1,800 hours. There are no non-equity partners. The model’s conclusions, however, are not very sensitive to changes in size of firm, leverage, profit margin, average hourly rate per lawyer, average billable hours per lawyer or the number of non-equity partners. For example, a firm with a size of 300 lawyers, a 35% profit margin or leverage of 1:1 would experience about the same 5% decline in profits per partner from the proposed shift of practice group leader billable time to management. Instead, increases in the ratios of assumed partner/associate hourly rates or partner/associate billable hours will somewhat increase the cost of the management shift.)
Why do it?
Keith next considers the reasons for making this kind of compensation change.
A well-managed group will perform better
The law firm chairman who made the presentation cited David Maister‘s Managing the Professional Service Firm for the view that the practice group leader’s role should be made substantial:
A professional practice is like a sports team, filled with talented athletes who will only win if they truly fulfill their potential. Professionals, like athletes, when left to their own devices, don’t accomplish as much as they do when supported by a good coach.
The manager’s role is to be the reminder, the coach, and the supporter as individuals and teams struggle to balance today’s pressures with longer-term accomplishments.
The group leader needs time to manage
The practice group leader has the following demands on his or her time:
- coordinating marketing and client activities among partners in the group;
- making the rounds with the group’s partners periodically to see how they are doing and to coach them;
- getting more deeply involved in the challenging prospects and matters;
- organizing training and mentoring activities;
- overseeing staffing of matters; and
- conducting performance appraisals.
Whether the time commitment for this work is 50% or 25%, it should be significant.
The group leader should not be penalized for managing
The group leader’s compensation should be aligned with the best interests of the firm. As Patrick McKenna and David Maister said in their book First Among Equals:
Group leaders should be measured and appraised predominantly by how well their group has done, with their own personal statistics being deemed a lesser performance target. Group leaders should still be expected to practice, but personal accomplishments should no longer be the primary element in their appraisal.
Management sends a contradictory message when it asks a practice group leader to be responsible for all the above activities but compensates the leader primarily based on the same criteria as partners not carrying that extra responsibility, such as billings and billable hours.
Can the leader pay his keep?
As noted above, only modest improvements are required to offset the billable hours shifted to practice leadership work. Improvements in efficiency (through better training and a leadership push to develop checklists and other practice tools), success in marketing (through a more strategic focus, better coordination and pro-active coaching), improvements in the rates that can be charged for work (through more strategic marketing to get higher-value assignments, coupled with uptraining of partners and associates) and small increases in leverage (through improved training and staffing process) should more than offset the loss of the practice group leader’s billable hours. The business case for efficiency improvements is addressed in our Knowledge Strategy Group’s first webinar, archived here.
In fact, profits per partner would increase 10% if the following were achieved, even taking into account the loss of the practice group leaders’ billable hours:
- 2% hourly rate increase; AND
- 25% reduction in write-offs; AND
- 3% increase in number of associates (leverage increase).
The problem of getting work
Lack of work has been a problem for many firms, reflecting the fact that the demand for legal services is no longer growing in most areas. The challenge is increasing the firm’s share of a static market. The factors for success are mostly defined at the practice group level. That requires the practice group, through the stewardship of its leader, to analyze the key competitive factors, such as price, type of work or industry focus, and to devise a strategy to address those factors.
It is difficult to imagine a practice group leader with a full-time client load being able to devote sufficient time to that kind of effort, or having the incentive to do so. Incentivizing and empowering the practice group leaders is the first step in the firm’s being able to improve its market share.
The need to empower the leader
For the practice group leader to succeed, he or she must be able to persuade the other partners in the group to follow the leader’s advice and respond constructively to the leader’s suggestions. It would be unfair to tie the leader’s compensation to performance of the group without giving the leader the tools to accomplish his or her mission. Responsibility without authority is a classic failure scenario for a manager. For this reason, David Maister recommends that the practice group leader be required to contribute formal input to the firm’s performance evaluation system regarding all members of the practice group, including the other partners. The leader should not be the sole source of performance evaluations, though.
How to do it?
It is important to obtain buy-in from the partners in the practice group for:
- The choice of practice group leader. The leader should be proposed by firm management based on the leader’s perceived skills to do the job of managing the group, not as reward for rainmaking or other successes. Confidential interviews with partners regarding firm management’s proposal for the leader would be one way to obtain buy-in. A formal voting system should be avoided.
- The requirement that the leader spend 50% of his or her billable time on practice group management. Partners may naturally be suspicious of a leader who is not carrying a full client load, so it is important that they accept this requirement.
- The fact that the majority of the leader’s compensation will be determined by performance of the group as a whole. Compensation does not increase solely by reason of having the job of managing, but rather only if group performance improves. The metrics and criteria for determining the group-driven portion of the leader’s compensation should be laid out clearly to the group’s partners. Transparency will aid in convincing them the leader’s compensation is in fact tied to the group’s success. An anonymous feedback system from the group’s partners regarding the leader’s performance each year may also be considered.
- The leader’s input into group members’ performance evaluations. This should be described transparently to the partners.
Changing to the new practice group leadership system should be accomplished through a series of meetings with the partners of the firm as a whole, as well as with individual practice groups. Being able to have their questions and concerns addressed will ease some of the partners’ anxiety and assist with buy-in. As noted, confidential partner interviews, though time-consuming, may help in confirming support for the selected leaders. Bringing in an outside consultant to explain the rationale for the new system could also be considered.
In some situations, it may be desirable to pilot the new approach with a few practice groups. This has the advantages of taking less time to implement, putting less of the firm at risk if the effort does not succeed and creating a persuasive success example when it does. The pilot approach has the disadvantage of delaying its benefits for the firm as a whole.
Requiring practice group leaders to devote 50% of their time to managing the group, and compensating them primarily based on performance of the group, can result in improvements to the group’s financial performance that more than offset the leaders’ lost billings.
About the Author
Jack Bostelman is chair of the Knowledge Strategy Interest Group of the Law Practice Division. A former partner of Sullivan & Cromwell, Jack is currently president of KM/JD Consulting LLC, a law practice management consulting firm and blogs at www.kmjdconsulting.com/blog. He can be reached at email@example.com.