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?

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In an article for the upcoming issue of the National Law Journal  (NLJ) posted yesterday on their site, law firms are not taking their own advice when it comes to arbitration clauses in employment disputes.

Is this a case of what's good for the goose isn't good for the gander?  Why would arbitration be a good idea for other businesses but not good for law firms?  The answer brings into question the utility of arbitration. 

The arguments for arbitration come from those who have been burned in litigation.  Litigation can have you sitting in front of a jury that likely has no experience in the subject matter at hand and may in fact have motives other than the subject matter at hand to deliver a large award to a plaintiff.   Arbitrators, on the other hand, are picked from within the industry from which the dispute arises and ostensibly provide a more fair, though equally binding, resolution at less cost than litigation.  Where litigation can hinge on perception, arbitration decisions are meant to be grounded in experience-laden fact.

According to the NLJ story, however, only 10% of 200 law firm respondents to a 2003 survey had "mandatory arbitration in place".  I assume this means that equity partners were bound by it through the partner agreement and that other employees were bound by it as a condition of employment, though it isn't specified in the article.  One reason cited is that arbitration clauses may have a detrimental effect on the workplace.  Said a partner with DLA Piper, "Your attorneys can perceive that you are materially changing their position vis-a-vis the firm and attempting to circumscribe the rights they might otherwise have."

I believe that statement holds true to any situation where arbitration exists, not just when applicable to law firms.  Any other reason to not have them?  The article paraphrased a partner in the New York office of Greenberg Traurig, writing "Arbitration [] no longer offers the benefits of a speedier, cheaper resolution, as proceedings have become bogged down in discovery and quasi-motion work that mirrors litigation."

If that is truly the case, then arbitration has a gloomy future indeed, and not just with law firms.  I brought up the article to an attorney I know who defends clients in arbitration and he told me some of his concerns with it:

• Arbitration has become very inefficient, with no control over evidence admission (ie, evidence can come in at any time);
• The arbitrators do not have the same fear of appeal that judges do and thus are unafraid to ignore precedent;
• The quality of arbitrators has declined.

This indicates some serious problems with the arbitation system for dispute resolution.  As the attorney I spoke with said, "Our clients used arbitration to get away from runaway juries.  Now they are going back to the courts to get away from runaway arbitrators".

We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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The Harvard Business Review is rapidly becoming my other magazine I read cover-to-cover (the other being The Economist).  In the March, 2008 issue there is a short article related to Web Retailing that I believe is a good example of why attorneys need to be spending more time blogging.  Andreas B. Eisingerich and Tobias Kretschmer surveyed online customers on what drives them to purchase from a retailer.  What they found is that online customers do more research and are more likely to purchase from a retailer that engages them than one who simply tries to sell product.  They found that "exploiting consumers' desire for engagement is the single dominant driver of superior shareholder value for e-commerce companies."

". . .[Providing informational content] helps customers search for solutions, invites them to think of all the ways the core products might add value to their lives, wins their loyalty, and entices them to buy."

How does this translate into an endorsement of blogging?  It is no different than creating a brochure or newsletter - it helps clients understand the law of their particular interest or need.  It drives them to seek you when they need someone to represent them regarding related subject matter.  Blogging is a continual dialogue, with very little in the way of up front cost (other than the pain involved in updating content regularly).  Not only does blogging display the expertise of your firms and lawyers, it is a mechanism to drive business development. 

To determine how blogging increases revenue (ie, to measure performance), you must track how clients come to you.  Make sure your business software can track source of business.  With a blog, you can provide downloadable content and require registration to download.  This also helps in determining source of business.  You can determine a lot from who visits your site as well.  You can capture location, frequency of visits, what pages they visit, what they download, etc.  All of this is valuable information for business development purposes.  For example, if your area of expertise is Estate Planning and you write a post related to a new law that fundamentally changes how investment vehicles are treated that increases hits in a specific geographic location by 30%, then you can surmise that the public in that location is interested in this topic; thus, you can focus advertising or public speaking opportunities to get your firm's name out as an expert in the area - not only for those reading the blog, but also those who aren't online. 

As clients become more web-savvy, it will be the law firms with a strong web presence that will dictate the standards by which other firms compare.  Providing information for your clients is good - providing updated analytical content written by attorneys in their specialty places your firm in a position to engage current and potential clients and drive superior shareholder value.

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The Estrin Report is a great resource for paralegals and other legal support professionals.  The March 22nd post quotes a Maryland Daily Record article where an attorney has been suspended twice - TWICE - for mismanagement of client trust funds.  He never took one penny, however.  Instead, he was the victim of two consecutive bad hires.

The Maryland solo practitioner hired a paralegal, among other things, to manage a client trust account.  The paralegal, without oversight, embezzled nearly $150,000 before being caught.  After being disciplined, the attorney hired another paralegal to "clean up the financial mess left by " the predecessor.  This one took over $170,000 from his clients.

The attorney complained that he had several hundreds of cases he managed and was in court a lot.  "You’ve got to delegate things. You can’t be there to sign every check.”   

Whether these were paralegals or not isn't the point.  What is noteworthy is the exposure attorneys have, especially in small firms, when trusting unmanaged staff to control firm finances.  Embezzlement is more common than we'd like to believe.  (Admin charged with embezzling over $200,000 from firm; Bookkeeper embezzles over $400,000 from firm;  New Orleans firm dissolves after Chief Financial Officer embezzles $2 million;  Office Manager embezzles $700,000 from firm;  Bookkeeper accused of taking over $4.3 million from escrow accounts)  

Ignorance is no defense.  You can't spend all day watching your staff either.  “You’ve got to have some trust in your employees,” the aggrieved attorney said. “You pay them good money.”  In his case, you'd think a little skepticism would have been prudent.

What are some things that can be done to avert a would-be-embezzler?  Tom Collins wrote the following in his September 6, 2006 post:

First, select business software with built-in audit trails and controls. Remain alert to the reality that it can happen in your firm. Keep your eyes and ears open. Obtain professional assistance to implement appropriate internal controls including segregation of duties. Insist that employees take vacations on consecutive days under an arrangement where others assume their duties. Do not let a crisis take over and circumvent normal controls and procedures. Budgeting, comparative financial results, and detailed review and questioning of monthly financial statements are an essential function of law firm management and play a vital role in protecting and preserving the assets of the firm.

Scott Barrett wrote an article in 2004 that addresses ways to avoid being a victim of embezzlement.  Read it by clicking here.

 We have begun taking submissions for the 2008 Law Firm Economic Survey.  If your firm is interested in participating, please contact Brian by clicking here.

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 While sitting on a plane on the way to the ABA Techshow, I was reading the February 2008 issue of the Harvard Business Review.  An article titled, Task, Not Time:  Profile of a Gen Y Job, caught my eye.  I often hear managing attorneys lament the lack of motivation of associates.  The article in the HBR may provide a reason for the disconnect - it isn't that young associates are not motivated, but that they may respond differently than their elders to the conventions of work.  Where many look to the hours you spend at the office as a measure of productivity, the HBR article suggests that the younger generation looks more to results, or task-based productivity.

 

Many younger employees find they can complete tasks faster than older workers,perhaps partly because of technological proficiency but even more . . . because they work differently.  They spend less time scheduling and are comfortable coordinating electronically.  They resent being asked to log hours and stay in the office after their tasks are done, and the idea of face time really annoys them.  [Generation] Ys love to work asynchronously - anytime, anywhere.  One said during out research, "What is it with you people and 8:30am?"

 

Does this explanation fit with your experience? 

 

The article suggests ways to devise a better model of how to define work:

• Articulate the results you expect - and tie accountability to getting the job done;
• Make physical attendance in the office, including at meetings, optional;
• Gauge performance on the quality of work performed;
• Help managers and employees learn to measure dedication in ways other than face time;
• Use today's networking capabilities to allow employees to work from anywhere;
• Support the changes by creating drop-in centers

The above also appears to support what Chuck Newton has termed the 3rd wave law firm. 

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We will soon start accepting submissions for the 2008 Law Firm Economic Survey.  This is our 3rd year to conduct the survey and in two short years we have created the largest survey of its kind focused on the mid-sized law firm.  Our survey serves several purposes, including but not limited to:

• Providing a measure of annual performance for mid-sized law firms based on per-partner income;
• Validating the core profit drivers that affect per-partner income;
• Providing expert analysis and content for managers to help increase per-partner income.

This year we are adding a focus on client development activities.  In our 2007 survey, 25% of managing partners responded that marketing and business development activities were their firm's best ways to achieve higher profitability.  In the 2008 survey we are asking managing partners what marketing and business development activities they utilize and how effective each are.

We are also asking questions regarding rate as it pertains to practice area.  I have had more questions regarding what firms charge for specific industries than any other finance-related question.  Attorneys want to know whether they are charging the appropriate market rate for their specific industry.  Since each industry can be pretty specific, we have chosen some broad practice areas that we hope will give firm leaders some insight into pricing. 

We are also hoping to do more regional breakdowns by rate, utilization, margin, leverage, etc.; another area in which we receive many requests.  Of course, the main focus of the survey will remain the law firm business model and the key profit drivers that affect per-partner income.

The survey will be broken down into two main parts:  the first part requires financial data and will take some time to assemble since there will be questions regarding 2007 year end numbers (such as standard blended rate by equity partners, non-equity partners and associates, and paralegals).  We will be conducting this part by telephone to help respondents with any questions.  We hope this will also reduce the possibility of invalid responses.  There have been several instances of firms having their responses disqualified due to inaccurate numbers after we were unsuccessful in our attempts to contact them to correct the responses.  We believe the best time to validate responses is at the time of submission and hope the telephonic interview process will help in this regard.

The second part will be for managing partners/shareholders/directors/etc.  Because this part doesn't require financial data (and thus shouldn't require assistance to complete accurately), it will be offered as an online questionnaire to encourage participation by managing partners.

The survey is geared to mid-sized firms.  For us, that means firms from 5 to 100 fee earners (which includes partners, associates, paralegals and others who bill clients for their work).  Although we hope to broaden the scope of the survey in the future, this year we are only accepting submissions from firms in the United States.

All respondents who complete the survey will receive a complimentary copy of our 2007 Law Firm Economic Survey and 50% off the price of the 2008 Survey.  The price has not changed and is still $495, so the value for participating is approximately $750.  The cost of the survey at $495 is among the lowest (if not the lowest) in the industry.  Further, firms who also complete the Managing Partner section of the survey will be offered a summary benchmark comparison of their firm against other respondents.  The benchmarking comparison is valued at over $1,200. 

Due to the time it takes to compile the data and prepare the survey for release (which we hope will be mid-summer), we are only accepting submissions for a two month period and may stop accepting submissions at any time after we reach our target of 375 respondents.  If you would like to participate in the 2008 Law Firm Economic Survey, please email me by clicking here and fill out the email request.

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You may have seen the commercial:  The banker bumps into his client who tells him that he is taking his business to LendingTree.com.  The banker, surprised, says, "But we've been your bank for 20 years."  To which the client replies, "Oh, since your bank is in the network, you get a chance to compete too.  And, so you know, I am pulling for you."  With a condescending slap on the arm, he finishes: "Good luck, buddy."

The idea, of course, is that the competing banks will give the client the lowest price and thus the best deal.  Relationship means nothing.  Is that truly representative of the way business works?

I don't think so.  Any marketing professional will tell you that client development is nurturing and maintaining relationships.  Without relationships, you can't hold on to business.  However, there is no denying the rise in competition in gaining legal services based on price.  The key, I believe, is to prove that the value of your firm is better than the value of another firm.  How you do that will prove to be the difference between increasing your client base and losing opportunities.

Here are some ways that your firm can show value:

• Showcase your talent.  You have superior talent - make sure others know.  Have attorneys write articles, speak at seminars, write blogs - market their talents to the widest audience.
• Never Eat Alone.  Attorneys should be entertaining clients and prospects whenever they are not doing billable work.  Industry conventions, meetings, etc, should always have representatives of your firm in attendance.
• Highlight your commitment to quality service.  Take a page from value-billing firms:  highlight in your bills the fact that calls were returned promptly, how much you saved the client, and how much you appreciate their business.  Don't take their faith in you for granted.
• Don't wait for your client to fire you.  You don't want to be that banker.  Don't wait for your client to tell you they are shopping.  Conduct surveys and follow up - if a client has an issue, correct it and make sure the client knows you corrected it.
• Justify your high fee.  Don't devalue your services:  JUSTIFY IT.  Case studies, testimonials, high value cases, have them all available for clients to read.  Don't be afraid to talk about your rates.  Explain what goes into them.  Many clients lament fees because they don't know what the dollar figure represents.  Explain, with confidence, the investment you have in technology that gives your firm a competitive advantage to better represent them and helps contain costs so that you can be more efficient.  Show how the investments you make have a direct effect on the quality of services you provide.  Make sure they know what the fees represent:  the culmination of dedication to the highest quality legal services by someone who cares about them personally and professionally.

What other ways can attorneys build and maintain relationships with clients so that they don't shop around for the lowest price?

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A friend of mine practices in firm that specializes primarily in transactional work. Much of the work is billed flat fee but they still track their time so the firm can determine profitability. Recorded time is set against an attorney's budgeted hours for the year so that they are credited for their flat fee work. My friend lamented associates padding their worked hours for flat fee work so they make their budget numbers. In this case, padding hours doesn't affect clients since the fee is pre-set but it does affect reporting of profitability.

Aric Press, Editor-In-Chief of The American Lawyer, wrote in the December, 2007, In-House article that 2008 may well be the year when clients start to demand alternative fee arrangements:

One of the unintended consequences of electronic billing is that clients can now easily compute and compare the cost of tasks. Soon there may be other technological threats based on knowledge management that can convert once complex acts of lawyering into rather commoditized routines.

I have been pretty adamant in my defense of the billable hour. That doesn't mean that I am against alternative fee arrangements when the use of them will improve the efficiency of the firm and thus increase profits. Recording time, regardless of fee arrangement, is still a good idea. However, sometimes it just makes more sense to bill using fixed fees for certain tasks.

Why not take advantage of this and place an internal value on the task as well? You can do this by determining the time it takes to perform the task, then mark it up to the market price (perhaps based on the hourly rate times the time it should take to perform it). When a task is routine, standardization gives firms opportunities that can revolutionize a firm's business model. Not only will attorneys have a value based on their billable hour, but certain repetitive and reproducible tasks can be valued as well. Your firm will diversify its product offerings to clients, giving them more options for services and giving you more options to strengthen the client relationship. You could ostensibly set a price list for legal products - in effect competing with the emerging online forms market.

In the example of my friend's firm, creating a standard task that is reproducible and given a proper value reduces the inaccuracies in reporting due to "padding time" by associates trying to make their numbers. In the example of the firm whose client has already placed billing guidelines on a firm, this has the equal benefit of both providing cost certainty to the client and saving the attorney from repetitive time entry.

There is also the benefit to the general practice firm. The firm can market package transaction services at a set rate, and tack on billable hours beyond the scope of the repetitive (and priced) task. Sound a bit like value-billing?

How would this work? For transactional work, it would be as simple as setting a value upon a routine task, such as creating a will. For a simple will, attorneys will determine what the variables are, determine what it has cost in the past, agree upon an acceptable price based on market acceptance and variables, then price it.

In a litigation matter, it is no different. Many firms are already required to provide budgets based on tasks for the benefit of client cost allocation. Each task that the firm performs can be priced. Litigators can anticipate the course of the suit and determine a cost for the entire matter. There should be a value placed upon every legal task, whether it be writing a status letter, reviewing a file, etc. The price can take into consideration variance in time it takes for different attorneys to perform the task. That is up to the firm to decide.

By standardizing the value of certain tasks, it also opens another opportunity for building firm expertise: giving royalties to attorneys who create reproducible work product. Firms spend years building up forms. Forms are rarely created again - they are typically modified. Yet no one gets credit for creating the forms.

By giving an attorney a royalty for a form, you encourage expertise to be passed on to the rest of the firm. You can position attorneys who have a talent for researching and integrating current law into forms as work product creators and attorneys who are better at managing relationships and matters representing clients. Both have value. Both can be compensated based on the work they perform. Form writers would receive a percentage of the cost of the task as a royalty for a certain time period whenever their form is used. Just as you should place a time limit on origination credit, you should only provide royalties on forms for a certain time.

How can this be advantageous to the firm? Several ways:

• It encourages information sharing within the firm.
• It compensates those who provide value to others in the firm.
• It can further a strategy of increasing leverage by giving credit to partners while reducing their billable hours.
• It transfers the wealth of knowledge gained at the firm's expense back to the firm.
• It can aid the strategy of succession planning by providing a route to semi-retirement while ensuring that the firm maintain its areas of specialization.
• It allows partners to spend more time on what they excel in most: rainmakers focused on marketing efforts and strategic planning and grinders developing work product.
• It gives firms an opportunity to give associates responsibilities that will benefit the firm as well as the associate.

Of course, with any change in policy, there are uncertainties that have to be addressed. For example, what if another attorney within the firm finds a problematic provision in the form and proposes to change a few clauses? What if the attorney proposes an entirely new form? Although in theory it would be a good thing to have several different forms from which to choose, logistically it may make more sense for your firm to settle on a preferred form from which attorneys may receive a royalty. That along with determination of the royalty percentage is sure to provide lively discussion in the partner meeting.

Whatever direction your firm goes when applying new policies, it should conform with a universal requirement of periodic measurement and adjustment.

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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.

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Many in the legal industry are often found complaining of the reliance on the "billable hour" (see here, here, here, here, and even the venerable Scott Turow gets in on it here). Value-based billing and other fixed-fee type arrangements are offered as a better guide.

That begs the question: What has the billable hour ever done to deserve such lament? The answer, in part, may be due to attorney discipline. Again and again I work with attorneys who consider recording their time as an administrative chore, something to be done by others if at all possible. With this attitude, attorneys are likely backtracking to remember what work they did and inevitably are either billing too much or too little. No amount of discussion or proof by the numbers will convince the attorney who is unwilling to record their time as work is being performed.

Attorneys tell me about their clients wanting cost certainty, client questioning the time it takes to perform a task, and clients feeling overcharged for work. This leads many to discount their time through markdowns or taking a percentage or some subjective dollar amount off the bill. This tells me that the client has trust issues with the attorney (or the attorney is worried about it) and the attorney is making it worse by discounting (tacitly acknowledging the client's suspicions).

On the other hand, I know of attorneys who don't have this problem at all. They never write time down, they never discount, and they never have a client question their bills. The client trusts that what they are being billed is the actual work that the attorneys performed. What are they doing differently? Are they value-billing? No. They enter time as work is performed. They use timers. And they are disciplined. Here is the process:

A client calls. A time entry is opened. A timer starts. As the attorney talks, he/she writes in the narrative. If the call requires a letter or other task, the attorney does it, then comes back to the entry and types it in. Once finished, they stop the timer and mark the entry to be billed. Done.

What happens if another client calls? You pause the timer; open a new one. If you want to go back, you pause the second entry and go back to the first. You can do this on a piece of paper and a standard kitchen timer, but why would you want to do that? That only delays the billing of the work and duplicates the process of time entry. Utilize the technology that is out there to help you manage your practice. Do it yourself. Make sure your system has an easy way to access timers within a time entry and can manage multiple timers.

Working in this way can be learned. The difference between the attorneys above is that one looks at the matter first, then the time entry. The second attorney looks at the time entry first, then the matter. By wrapping the tasks you perform inside of a time entry and utilizing timers, you won't over charge and you won't need to discount your time. Better, you won't need to reconstruct your time entries later, wasting billable time and invariably leaving billable work unrecorded (and unbillable).

If you want to stop billing by the hour, that is fine. But I don't think that is the problem for clients. I think it is a matter of trust. Don't allow your relationship with your client to get this way - utilize timers and don't bill any more than the time you work in a matter. And record your time as you work!

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