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.

Role	Compensation	Std Rate	Cost Rate	Profit Margin
Rainmaker	$1MM	$250	$0	100%
Dept. Manager	$500M	$200	$0	100%
Associate	$80M	$100	($44)	66%

 

 

 

 

 

 

 

 

 

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).

 

Role	Compensation	Std Rate	Fixed Cost	Cost Rate	Profit Margin
Rainmaker	$1MM	$250	$270M	($150)	40%
Dept. Manager	$500M	$200	$270M	($150)	25%
Jr. Partner  (Fixed)	$150M	$150	$270M	($150)	0%
Jr. Partner  (Capped)	$150M	$150	$270M	($83)	44%

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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Hildebrandt’s Rees Morrison passes along a simple but clever technique for encouraging attorneys to improve efficiency by finding delegable tasks for non-lawyer members of the team. The idea comes from the corporate world but should work to everyone’s benefit in a law firm as well. The law department asked its attorneys collectively to identify 20 activities that the lawyers were doing but that could be handed off to paralegals, administrative assistants or other support persons.

The panelist sharing the law department’s experience noted that staff members were energized by the initiative. What attorneys were happy to hand off was refreshing and challenging to others. Given the results, the department expanded its goal and accomplishments well beyond the original 20 activities.

I have heard of law firms declaring an e-mail free day to get the team members out of the habit of using e-mail instead of picking up the phone or walking down the hall. So, why not set aside one day per month or per quarter during which time attorneys are asked to identify one to three things they do that could be done by others in the future. Start with partners. Include their secretaries or assistants, i.e., have the assistant identify something that they could do for the partner that would free up the partner’s time for more valuable work. This could involve administrative activities, tasks involving billable work, or even business development activities, including those related to client relations and networking.

I would also suggest that we expand the charge to say “delegate or eliminate”. Parkinson’s Law is always at work in every law firm. For example, there is a natural tendency to add reports and reporting steps, but without deliberate efforts, they are seldom reduced. Thus, Parkinson’s Law is constantly driving non-billable time demands upward and pushing non-revenue producing expenses higher. To offset this tendency, management must be constantly diligent—simplifying and eliminating.

The idea is to take a little time once a month to think about how to do things better. Don’t forget to measure performance and results. Don’t hesitate to reward non-partner participants for ideas that prove to be unusually beneficial.

For the “delegate or eliminate” idea to really pay off for the firm, the mantra of good management applies here as well as everywhere else—plan, set goals, measure performance and hold people accountable.

Morepartnerincome.com is sponsored by Juris, Inc. 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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The answer to increased performance is to step back from the daily wars of the law practice and ask, “How can we do this smarter?  How can we tie our revenue and fortunes to something more than just the partner’s billable time?”  Leverage in terms of fee earners, technology, knowledge management, relationships and, yes, pricing strategies is an important part of the right answer.  As for fee earner leverage, its impact on per-partner earnings is well known and understood.  So, it is surprising that 75 percent of midrange law firms are not successfully implementing the strategy.

The chart shown below is one of many included in the 55-page Juris, Inc. Law Firm Economic Survey published last year. The survey reflected the financial performance of midrange-sized U.S. law firms for the year 2005. Survey results confirmed the important role that leverage plays in determining law firm partner earnings. The first quartile, the top performing 25 percent of law firms, earned more than twice the per-partner income of the next highest group.

The same survey indicated that associates in half of the surveyed firms worked less than 1400 hours. Even among the top performing 50% of firms, the average billed hours for associates ranged from 1550 to 1600. The majority of midrange law firms are both under leveraged and underutilizing the associates that they do have. The only way out of that income-limiting box is invest in improved scheduling and delegation with respect to existing non-partner resources. Partners need to give up some short term income shifting their individual effort from “billable work” to business development, recruiting, mentoring and professional development.

That is apparently a hard call for the majority of midrange firms to make.  I’m reminded of a cartoon I saw years ago.  A Gatling gun salesman was standing at the entrance to a medieval tent as the guard, complete with armor and spear, was saying, “I’m sorry, but the general says he is too busy fighting the war to meet with you.”

Work on this year’s annual Economic Survey is currently underway. Click here to participate and to automatically receive the results and analysis without charge.

 

Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-374,  e-mail info@juris.com or go to www.Juris.com.

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As I headed to Las Vegas for the 2007 ALA conference, I started thinking about the one message I would like attending Legal Administrators to take home to their law firm leaders. My answer came from an e-mail I received that included the following sentence:

My old boss used to always tell me “Don’t try to save money on your attorney, your CPA, or your computer technicians.”

There is a lot of wisdom behind that advice. Attorneys understand the value of their own professional services and the benefit that their clients gain from the attorney’s experience and expertise. When it comes to making changes in the firm’s technology, the services of an experienced technology professional will, likewise, deliver benefits far in excess of their cost.

Law firm leaders, including managing partners, are revenue producers. They ration the non-billable time they devote to administrative and technology areas. While they are producing revenue, they look to their administrator to pull together the details for purchasing and implementing new technology. The administrator thus becomes the project owner. Firm leaders expect the administrator to make it happen. If the implementation is a success and the intended benefits are achieved, the administrator becomes a hero. Unfortunately, they can also become the villain of that story.

The role of hero or villain is cast during the purchase phase. The same project can turn one administrator into a villain while another, at a separate firm, becomes a hero. The difference invariably arises from the amount of training and professional assistance included in the proposal the administrator takes to the partners. The hero opportunity is forfeited when an administrator trims the proposed project costs by cutting recommended assistance and training.

Firms that go through change with ample training and with the guiding assistance of an experienced implementation specialist consistently have positive feedback about both the benefits realized and the implementation process. Firms that opt to “save money” by pushing through change on their own with limited understanding of the new technology or the impact that it will have on the firm often find the process painful and the intended benefits slow to realize. Those firms invariably wind up paying a much bigger project price in terms of disruptions and delayed benefits.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income contact Juris National Sales Center at 877/377-3740, e-mail info@juris.com or go to www.Juris.com.

 

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While attending the 2007 New York LegalTech, I visited with the PensEra team. The Montréal-based company had just landed Orrick and Linklaters as new accounts for its time capture system.  Linklater has 30 offices worldwide and Orrick’s 18 offices span seven countries.

 

Why would these global firms replace their existing time entry systems with PensEra’s TimeKM™ system?  PensEra re-engineered the process.  Rather than approaching time entry from the perspective of the accounting people, PensEra did it from the attorney’s point of view.  It would be wrong to think of TimeKM as a time entry or time tracking system.  It is an anywhere, anytime, from any device time capturing system.  Rather than pushing more work and coding off on the attorney, it saves the attorney steps. It turns phone calls and e-mails into time entries with a click.  Other billable time can be captured as easily and coding and other niceties can be added later or even taken care of by an assistant if the attorney prefers. It is a collaborative model that simplifies and streamlines time-tracking for the working legal professional.

 

PensEra is the Juris Alliance Partner through which Juris law firms have 24/7 full mobility functionality using BlackBerry® or other PDA devices.  If you would like to know more about PensEra’s ability to turn time capturing on its head and give your firm’s legal team any time, anywhere, any device access, contact PensEra Knowledge Technologies at 800/620-881 or contact the Juris team at 800/377-3740 to learn how TimeKM™ and TimeKM Mobility™ have been integrated into the Juris law office business system.

 

Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

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Rees Morrison wrote a must-read article for the Legal Times that is also available on Law.com. When it comes to practices within your law firm, Rees believes your bills read like an open book. Bills tell clients the whole story—the good, the bad, and the ugly. In his article Do the Math on Outside Law Firms, he points out that he is writing about more than “the kinds of billing abuses that third-party bill auditors should ferret out — block billing, differences in amounts billed for the same event, days of more than 10 hours billed, and long, suspicious patterns of hours.” He notes that, “Bill review should not be just a drudgery to be gotten through. In fact, bills can tell you much more about the performance of your law firms and your own staff than most law departments realize. “

While law firms look at their bills as just a record of the billable work and pass through expenses for the period covered, savvy corporate clients are reading between the lines. Here is an executive overview of some of the things a savvy corporate client is likely to read into your bills:

Those 0.2 billable hours added each month read “Partner Sprinkling” and don’t expect me to pay for drive-by billers.

An associate with more than 1000 to 1500 hours on my matter, all in one year, doesn’t have enough to do and is padding their billable time at my expense.

More than 30 percent partner time means I’m paying partner rates for associate and paralegal level work.

If expenses are more than 10 percent of the bill, my guess is that no one in the law firm is looking out for me. They aren’t getting the best price for expenses passed through to clients.

I can tell it’s not a well-run (managed) law firm because their bills included work and expenses more than 30 days old. Sloppy is as sloppy does!

While there can be a good and legitimate reason for all of the red flags listed above, the client-centered law firm will review its bills from the client’s point-of-view to manage the client’s business efficiently and to proactively communicate with the client when billed items, left unexplained, might indicate otherwise.

Rees W. Morrison, co-head of law-department management consulting for Hildebrandt International, hosts the blog Law Department Management.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
 

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The international users group for Juris is having its annual educational conference in Nashville, Tennessee, as I write. The conversation among the 300 attendees covers a lot of ground. However, whenever you bring together people involved with the business side of law firms there is one topic that always comes up—“what partners are not doing."

Here is a David Maister quote that partners would do well to recite as the opener for every partners' meeting:

“What you do with your billable time determines your current income, but what you do with your nonbillale (investment) time determines your future.”

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

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Before you jump, give a lot of thought to why you want to start your own firm. As one speaker asked, “Do you really just want to get away from where you are?” If that is the case, find another law firm to join. Because once you embark on your own, what you do and how you spend your time will change drastically, and your work hours are more likely to increase than decrease.

The biggest challenge has to do with business development. It is in the business development area that success stories are separated from the “also ran” and failures. David Maister wrote: “What you do with your billable time determines your current income, but what you do with your nonbillale (investment) time determines your future.”

Vision is important to success, but what is the focus of your vision? It can’t just be about money. It has been said that the only business with a mission to make money is the Mint. The rest of us have to deliver a product or service. Vision is about having a unique value proposition—something that sets you apart from the pack. It is something that gives you a competitive advantage. Even then, you need a shtick and a niche—a tactic for achieving your vision or objective and a narrowly defined market where you can secure a dominant position.

Here are examples of a shtick:

• A language other than English
• Knowledge about a particular region, country, or industry
• A unique office space, address, or proximity
• Credibility as an expert, author, or lecturer
• Business, professional, political, civic, religious, social, or cause group contacts
• Internet visibility—blogs and virtual law practice strategy

Why do you need a niche–a tightly drawn market–to achieve and maintain market leadership or dominance? A firm that establishes a level of dominance in even a small niche marketplace has an incredible advantage. What makes this exciting and opportunistic is that you get to define the market and then go after it. Defining your niche means applying multiple criteria like that listed below to carve away those clients and prospects you will not pursue in order to concentrate on those remaining.

• Geographic
• Industry or Consumer type
• Problem or Need
• Specialty

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
 

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Regardless of how you bill (hourly, contingent or fixed price), you need to know the invested time to measure profitability. Most firms measure relative profitability as “realization”. Overall realization is the percent collected divided by the value of the hours worked at standard value.

One of the problems, however, is that some of the time invested on a case or matter is never captured. That is leakage—time worked but not reported. It happens most frequently in firms that allow legal professionals to track and report time after the fact. Some studies indicate that leakage is as high as 40 percent when timekeepers are reconstructing how they spend their time at the end of a week, for example. It stands to reason that those smaller slices of time worked will be lost to an imperfect memory.

Increased fee earner productivity for many firms is as simple as switching from after-the-fact time reporting to tracking time as worked. You can kick that up a notch with PDA devices like the BlackBerry® to provide your mobile professionals with anytime/anywhere capability. Time tracking software can also turn e-mail and phone messages into time entries with a simple click.

Check with your business software vendor for their time capturing options. There are some generic products that can be used across a number of time and billing systems. One of those is Carpe Diem from Sage Software. Another is DTE from Advanced Productivity Software, Inc. However, before you go the generic route, check with your time and billing software vendor to find out what options they offer for time tracking as you work. The law firm business software suite from Juris Inc., for example, includes the MyJuris option for the legal professional. MyJuris not only equips the timekeeper for anytime/anywhere time recording, it provides continuous reporting back to the firm’s main Juris system, providing managing partners and practice heads with current-to-moment information on billable and non-billable activity including both completed and in-process work. It uses dashboard technology to provide information that is both actionable and instantly digestible. The MyJuris option goes even further to improve law firm realization; time entries are automatically audited against engagement rules with feedback to the attorney. This eliminates rework. It also reduces client-initiated adjustments and eliminates rejected bills. Keeping current with time and expense activity coupled with engagement rule auditing means bills get out the door faster and money gets in the bank sooner. Faster billing and collections also reduces adjustments and bad debts. It all adds up to more partner income! For more information about MyJuris download the 6 page product brochure (PDF) available from Juris, Inc.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

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Daniel Lee Jacobson, a practicing attorney and professor at Pacific West College of Law, writes a scholarly and surprisingly objective review of the history of the billable hour in April issue of the California Layer. He notes that the billable hour may yet prove to be a transitory convention but objectively reports that the available statistics suggest it is not likely to disappear soon.  

 

Lawyers understand the income-limiting nature of the billable hour. They understand that removing this income-limiting governor on earnings capability means unlocking law firm revenues from the billable time of the owners and partners, either through contingency work, fixed fee agreements, or through the prevailing method of leverage off of others. So why is the billable hour so entrenched? 

 

There are two important influences at work. First, law firms are doing pretty well as is.  Yes, they have greater potential, but things may just be good enough the way they are.  Why risk a good thing for something that might or might not produce a better result? Sometimes “good” is just good enough!

 

Second, there is no significant counterinfluence from the legal consumer.  The Law Office Management & Administration Report (LOMAR) for March noted that almost ninety percent of all fees are still based on hourly rates. Businesses have invested significantly in systems and procedures for tracking and managing the traditional hourly bill.  The corporate world has too much invested sunk cost to move in a different direction at this time.

 

Not only are hourly rates still the prevailing norm, they are on the increase.  An Am Law survey of managing partners found that firms have raised rates for 2006 by an average of six percent.  According to LOMAR, midsized firms averaged a five percent increase nationally.

 

So while morepartnerincome.com is a proponent for taking advantage of every opportunity for fixed fee pricing at the matter and portfolio levels, you need not think you are out of synch if you depend on the billable hour in combination with leverage to drive the majority of your law firm revenues.  The billable hour is well and quite healthy, thank you!  

 

PS: Just because things are doing pretty well, doesn’t mean you shouldn’t kick them up another notch.  A copy of the Law Firm Business Survey results for the business year of 2005 will give you benchmark information to compare to your own results. The comparison will indicate areas to change for “More Partner Income”.  Participate in the survey today to receive your copy of survey results.

 

Morepartnerincome.com is sponsored by Juris, Inc.  For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

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