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:

• RVs, Bananas and Recession-Proofing the Law Firm;
• Planning Helps Law Firms Weather A Bad Economy;
• Information-Driven Business Development For Law Firms;
• Management ABCs: The Hawthorne Effect;
• Marketing Advice for Lawyers During Economic Down Cycles;
• Retained Earnings Prepare Law Firms For Unexpected.

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.

Related posts

• Survey Targets Business Development In Law Firms
• Law Firm Challenge Number 1: Get a Plan!
• Top 25% of Law Firms Earn Margins Above 40%
• The End of Generally Accepted Accounting Principles?
• The Case Against Income Partners

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.

• 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.

• 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.

Related posts

• Partner Cost and Client Profitability (Part II)
• Client Profitability: What Is The Cost Of Partner Time?
• Return on Partner Effort
• Measuring Your Law Firm's Billing Cycle
• Law Firm Business Model: Margin

This is the second 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.  This article is focused on pitfalls of some firms' methodology in allocating costs to partners.

Some firms have chosen to exclude costs all together from billable hours worked by partners.  Generally it has been requested for one of two reasons: the firm would like to keep actual partner compensation out of the profitability model (a closed compensation system), or the firm is thinking about a P&L model where partner compensation is simply a distribution of firm profits.  While this methodology does accomplish those goals, from a client profitability perspective, it introduces its own set of issues.   

What results is a model where client profitability is maximized by only using partners to perform the billable time.  In the example below, there is a timekeeper with a 66% profit margin and two partners, both with 100% margins.  Any hour that the Associate performs for a client will in essence drag down that client’s profitability and a matter manager might be tempted to use a Partner where an Associate would suffice in an effort to ‘game’ his clients profitability.  This is contrary to the proper use of leverage and economic theory which would have the partners working on tasks for which lower level timekeepers are not qualified such as originations and the management of matters and attorneys.  For this reason alone, there needs to be some cost associated with each billable hour of a Partner’s time, if not for any other purpose than to represent the opportunity cost of them not performing these other tasks.  Besides, every firm that we have encountered expects their partners to perform a certain quantity of billable hours for their clients which would imply that some of their compensation should in fact be allocated to the client.

Another methodology that has been requested in an effort to support a closed compensation is what we call a fixed (or capped) partner cost.  In this scenario, every partner is given the same direct costs.  Aside from the privacy of actual compensation, firms make their case by stating that above a certain point, all partner compensation is for contributions besides the billable hour.   However, since billable rates vary significantly even in the upper echelons of partners, it is hard to justify those hours having the same cost rate.  Regardless, like the methodologies we have already examined, this too creates some unfortunate outcomes. 

The biggest concern with this methodology is the reversed leverage that it creates (similar to having no costs at all).  In the example illustrated below, we see a firm that has chosen $270,000 as the partner direct costs.  Any partner whose compensation exceeds this threshold has their compensation limited and as a result, all have a $150 cost rate for their time.  The result is that the highest rate timekeepers have the highest profit margin, 40% in the case of the Rainmaker, while those with lower compensation, like the Jr. Partner, have minimal (or zero) profit margin for their work.  Certainly, the cost to the firm for these 3 timekeepers is not the same.

The alternate version (and preferable to the former) is to use the dollar amount as a limit to partner compensation and not a flat amount for every partner.  In the example below, we see the Jr. Partner whose actual compensation is below the $270,000 mark.  In the fixed methodology his profit margin is 0% but if it were capped, his direct costs would be his actual compensation and therefore would have a more favorable profit margin of 44%. This still does not relieve the cost similarity between the Dept. Manager and the Rainmaker but it is a slight improvement over having all partners at one cost rate.  Of course this methodology does not meet the requirements of a closed compensation system (unless the firm is primarily interested in the privacy of Sr. Partner compensation).

The next installment will focus on better ways to calculate partner cost in measuring client profitability.

Related posts

• Partner Cost And Client Profitability, (Part III)
• Client Profitability: What Is The Cost Of Partner Time?
• Why Law Partners Hoard Work?
• What Corporate Clients Read Into Law Firm Bills
• Measuring Your Law Firm's Billing Cycle

The following is the first in a series of posts on compensation written by Ron Paquette, an analyst with Redwood Analytics, now part of LexisNexis.  Ron is a new contributor to the blog who we hope will write regularly.

Most law firms want to evaluate client and matter profitability. When deploying profitability models, one of the most common questions Redwood receives has to do with determining the cost of partner time on billable work. Since most matters in the legal industry today are billed on an hourly rate, the most effective means of allocating costs is on an hourly cost basis. There are two components to costs, direct and indirect (overhead) – the focus of this discussion is on the direct component, e.g. partner compensation. And since most firms set billable hours expectations for their partners, the question becomes:  How much of a partner’s compensation should the firm consider when calculating this “hourly cost rate” allocated to each billable hour he/she works?

• Billable hours;
• Originations;
• Matter & client management;
• Attorney management & development;  and
• Their status as a co-owner of the firm.  

Related posts

• Partner Cost and Client Profitability (Part II)
• Partner Cost And Client Profitability, (Part III)
• The Science Behind Pricing
• Survey Targets Business Development In Law Firms
• Return on Partner Effort

A reader emailed me with a question related to the compensation of a non-practicing equity partner whose responsibilities include only the investment of capital in the firm and bringing in new clients.  The firm has a niche practice and is looking to expand.  Their plans require more capital than the existing partnership can manage.  They are in a position to bring in another partner who will be responsible for infusing additional capital in the firm.  The partner will also do some rainmaking.  The new partner will not be responsible for any management or production and will not be expected to manage any of the clients in which he brings. 

Because of the rainmaking responsibilities, I wouldn't classify the partner as a "silent partner".  However, since the partner won't participate in the day to day management of the firm nor will be responsible for any production, it may be better to classify him as "muted".

I asked several attorneys I knew and didn't get very good answers.  Thus I am taking the question to More Partner Income readers.  What ways would you suggest this firm compensate an equity partner whose responsibilities are only investment in the firm and rainmaking?

Related posts

• What's Wrong With Billing By The Hour?
• What to do When Clients Don't Pay?
• Unintended Impact of Outsourcing on Law Firms
• The Science Behind Pricing
• The Myth that Companies Hire Attorneys, Not Law Firms

Many, including myself, have for several reasons (in my case, personal experience), railed against lockstep compensation as a debilitating agent to per partner income and the ability to keep top attorneys. I have seen the internal griping, the uncomfortable situations, and the inevitable loss of talent because of the appearance of unfair distribution of compensation based on a lockstep system.

James Cotterman, however, in an January 3rd post, argues "[t]he success or failure of any compensation system is not simply inherent within the structure of the program." He defends the lockstep compensation system - with a caveat:

[A] pure lock-step program largely requires the firm to assess a senior associate’s ability to progress as a partner over the remainder of his/her career. Essentially you are making some thirty or more years of future compensation decisions at one time. Such an assessment requires much more careful attention to the qualities of being a partner. And such attention is rare.

Among the benefits of lockstep compensation plans:

1. It supports a single firm philosophy.
2. There is little internal competition.
3. Leadership has more time to lead without the annual compensation ritual.
4. Non-traditional roles and new postings are more easily undertaken.

1. It supports a single firm philosophy.
I agree and disagree. It should support the single firm philosophy in that it treats all partners more or less the same. However, I don't assume a single-firm philosophy requires socialistic tendencies. In fact, such tendencies in a market system don't work well and can lead to a split up of the single firm. Also, the system in many ways requires trust within the firm that everyone will do their part. As David Maister has aptly noted, attorneys aren't big on trusting each other. In declaring that law firms are unmanageable professional entities, Maister wrote:

Recently, I was advising a firm on its compensation system. They didn’t like my recommendations. Finally, one of the partners said, “David, all your recommendations are based on the assumption that we trust each other and trust our executive or compensation committees. We don’t. Give us a system that doesn’t require us to trust each other!”

2. There is little internal competition.
Little internal competition should help foster trust and teamwork. Experience tells me that little internal competition fosters laziness. Distrust is a problem but competition is not. Measurement improves performance. However, if you don't care that you are being measured, then you won't excel. Incentives to reach goals fosters competition and that isn't a bad thing. If you incent properly (ie factor "firm citizenship" into your compensation system), teamwork will be rewarded.

3. Leadership has more time to lead without the annual compensation ritual.
There is no question that compensation discussions are a large source of discontent and delay in implementing strategic plans. If all partners agree to a compensation plan that is not going to change, that would be a great thing. Do I believe that is possible? Perhaps, if, as Cotterman notes, firms give more attention to the qualities of being a partner - ie, they are consensus-builders in the Henry Clay mold and can make "some thirty or more years of future compensation decisions at one time".

4. Non-traditional roles and new postings are more easily undertaken.
If compensation isn't affected, attorneys should be more willing to take on roles that otherwise would affect their ability to maintain their income.

Cotterman discusses two main arguments against lockstep compensation:

1. There is no accountability.
2. Stars are not specifically recognized monetarily (at least not instantly).

I made both of those arguments above in disagreeing in part to the arguments for lockstep compensation. Without measurement, there is no accountability. Without accountability, internal strife erupts and your star attorneys walk. So I don't disagree a bit to either argument.

Cotterman notes that some of the most prestigious and profitable firms in New York and the UK use lockstep compensation. This is proof enough that the system can work. However, I would argue (as he does) that a commitment to the mangement of the firm and a single-firm philosophy is critical to it success. The challenge for small and mid-size law firms is to create an environment that fosters teamwork and manageability. For the lockstep compensation to work, firms need their own Henry Clay who can effectively communicate the philosophy that supports the system and the consensus-building qualities to bring others to agreement.

That said, even Clay couldn't ultimately prevent the Civil War. I'm still against lockstep compensation. However, for those who want a guide on how to make it work (as it certainly can work, I am just not a proponent of it), read his article here.

Related posts

• Which Comes First, Doing the Right Things or Doing Them Right?
• What to do When Clients Don't Pay?
• What Law Firm Partners Need To Agree About
• Unintended Impact of Outsourcing on Law Firms
• The Shine Wears Off Of UTBMS for Law Firm Clients

It is probably too late for most law firms, but if you haven’t written those yearend distribution checks yet you might want to read two of Jim Cotterman’s recent blog posts. See his post Balance Sheet Metrics and his post Partners Contribute Hidden Capital. Cotterman is big on new partner buy- ins and instructs law firms to reinvest a portion of profits back into the business.

Cotterman puts it this way:

“Partners should receive a fair exchange for their own labor plus a share of the profit from the labor of others less the following:

LESS investment for growth—new people, offices, practices and markets are often funded out of current cash flow. Since firms deduct these expenses currently they are the hidden capital invested by owners to grow the business.

LESS investment for capitalized assets—items shown on the asset side of the balance sheet when there is no corresponding third party obligation for funding those assets (debt or capitalized lease obligations).

LESS investment in working capital—higher salaries for associates being a prime example of a limited duration cash gap often funded by initially lower equity partner compensation.”

Cotterman is right. The future success of the law firm depends on what you do not distribute. Getting partners to accept leaving something on the table isn’t easy, however. It is made harder by practices that fail to pay departing or retiring partners for their share of the “value” of the law firm.

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.

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Last week I wrote about some responses to the 2007 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. I wrote about two of the strategies: increasing fees and cutting costs. However, 25% of managing partners felt marketing and business development was their firm's best way to achieve higher profitability, second only to increasing fees. That is a substantial number, especially since those same respondents reported that only 3% considered marketing and business development when determining partner compensation. It appears there is a disconnect here.

If you believe that marketing and business development is an effective strategy to achieve higher profitability, it is in your firm's best interest to provide a financial incentive to increase marketing and business development activities.

So, how would you compensate for marketing activities? Utilize your accounting system to record non-billable work that is targeted to specific marketing activities. Some Juris clients create specific codes representing marketing activities and require a certain amount of time be allocated to these activities each month. Just as the firm budgets for billable hours, they budget for marketing hours. And your compensation formula, to the extent you use them (63% of those surveyed were using either a strict or mostly formula-driven compensation system), should include non-billable business development and marketing hours. Only 4% of those surveyed placed considerable weight to non-billable hours in their compensation formula.

Requiring non-billable time as part of your compensation formula is an incentive to focus on marketing activities. It doesn't, per se, achieve higher profitability. Marketing efforts must also be targeted and measured, just like any other performance metric. However, it is a lot easier to determine whether your business is being generated by word-of-mouth or by marketing efforts if you are tracking the hours you spend marketing and have a paper trail of activity that leads to new business.

Michelle Golden has a great post on developing a marketing plan here - she even includes a downloadable sample marketing plan spreadsheet. John Remsen also has a good article on marketing plans here. Look here, here, and of course here for other ideas on how to integrate marketing into your practice.

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.

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• No related posts.

There is a new blog in town. Cotterman on Compensation is a welcome addition to the blogging community.

James D. Cotterman is a principal with Altman Weil, Inc. and an undisputed expert on the subject of law firm compensation. If you are a regular reader of morepartnerincome.com, you know I have quoted James D. Cotterman more than just a few times. I don’t know of anyone else in the legal community that is considered an authority on law firm capital structure and he is. You can’t deal with compensation without also addressing a law firm’s capital structure. That is something that Altman Weil’s announcement confirms:

“Cotterman on Compensation will discuss all levels of law firm lawyer compensation, from associates to service partners, to rainmakers, to lawyer-managers, and senior lawyers who are phasing down in preparation for retirement. It will comment on external market forces as well as the complex internal issues of system design, productivity, and motivation. It will draw on Altman Weil’s extensive survey databases as a source of compensation trends and benchmarks.

The blog will also address key issues of law firm finance including capital structure, profitability, buy-in and withdrawal, retirement and succession strategies, and turnarounds.

For 20 years, Jim Cotterman has advised law firms on compensation system design, capital structure and other economic issues. He is the lead author of the definitive book on law firm compensation, ABA’s Compensation Plans for Law Firms. He has been the supervising author for Matthew Bender’s loose-leaf text How To Manage Your Law Office and is currently a member of the Board of Editors of American Lawyer Media’s newsletter Accounting and Financial Planning for Law Firms.