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.

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There is a difference between new fee revenue and new client fee revenue. A law firm has to work harder for the opportunity to earn each dollar of new client revenue. New client revenue is prized all the more because of the difficulty of winning the business and because of the intuitive understanding that without new clients, the law firm will wither and die on the vine.

Nevertheless, we can never forget that for most law firms, each year’s fees will come largely from its existing clients. Existing clients are often taken for granted. New client development and existing client retention each require planning, and for each, the firm must adopt strategies, develop programs, delegate responsibility, set goals, measure performance and hold people accountable.

Here are a few worthy questions important to existing client retention:

• Are the firm players involved with key clients and keeping up with business and industry trends?
• Have we set expectations or set specific goals for spending non-charge time talking with key clients about their goals and concerns?
• Do we plan personnel changes involving key clients and involve those clients to assure the changes are valued rather than viewed as disruptive and costly?
• Do we ask how we are doing and then do something about it when clients tell us?
• Do we have a client bill of rights to set firm-wide expectations concerning customer care?
• Have we as partners gotten together and “agreed on what we agree about” –i.e.—reached a consensus as to our core beliefs?
• Do we communicate our core beliefs continuously and frequently?
• Do we hold people accountable for the quality of their work and for how they treat others?

Have you walked through your office and inventoried the smiles you encounter or looked at the appearance of the office and observed the interaction between team members as a client might see those things?

It is worth knowing that most professional liability claims against midsized firms arise due to lapses in administrative and management systems and not because of the actions of the lawyer. That should bring home how important it is to have the entire law firm team on board when it comes to care and treatment of the firm’s clients. Make them part of the planning and action teams charged with the goal of continuing to improve law firm practices and procedures to better service the law firm clients—to earn excellence in the customer’s eyes.

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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If you are stepping into a law firm leadership position, your success will depend on how well you match your approach and style to your particular firm’s environment and people. Those who selected you did so because they know you can do the job. The question is, “Can you do the job successfully in this environment with these people?” One leadership style doesn’t fit all. In fact, a recent study by Harvard and GE confirmed that negative things can happen due to a mismatch in style when a company hires a successful CEO away from another company.

It all comes down to what Clayton Christensen, Matt Marx, and Howard H. Stevenson call the Agreement Matrix and where your team fits in relation to the four quatrains of the matrix:

When a consensus on objectives exists, the organization needs someone out front leading the charge. The key here is pushing activity—“Just do it!”

On the other hand, when no consensus exists, various factions within a law firm are often pulling in very different (sometimes opposite) directions. It takes power, command, and enforcement to realign the organization behind common objectives. This is the classic call for a leader who can say and back up the statement: “I don’t care if you agree or not, get on board, get out, or suffer the consequences.”

When a consensus exists on both objective and the strategy for achieving it, management’s job is to reinforce the vision through the organization’s culture—folklore, rituals, tradition, planning, etc.

On the other hand, when there is agreement on the objective but weak or little consensus on how to achieve that goal, leadership has to focus on training, standard procedures, measurement and rewards.

Environments are seldom black and white. There are degrees of style and approach. There are different issues and different segments within a law firm that must each be met with appropriate leadership style but you get the gist—one style doesn’t fit all. Your success will depend on how well you adjust to fit the environment and its people.

You can read more about “The Tools of Cooperation and Change” in the October 2006 issue of Harvard Business Review, where the authors noted: “One of the rarest managerial skills is the ability to understand which tools will work in a given situation—and not to waste energy or risk credibility using tools that won’t.” You can purchase a reprint of “The Tools of Cooperation and Change” for a small charge by going to Harvard Business Online.

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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Howard Mudrick lists the following obstacles that can stop the planning process in its tracks.

Partners may be spending too much time and energy focusing on internal matters. This tends to happen when partners have not reached consensus on basic philosophic issues. If the partners can't get beyond this problem, the firm usually falls behind its competitors.

Some partners may not fully understand the economics of their practices. They may have a tendency to set economic goals without regard to whether the firm's client base/capacity for growth can support those goals. They may focus on cutting overhead rather than on increasing gross revenues.

They may not understand how their practice management habits impact the firm's financial success. Even if they do, they may not be willing to change those habits, including:

• Work selection.
• Pricing, billing and collections, including write-downs of time and write-offs of accounts receivable.
• Delegating to other partners and associates and properly supervising work that has been delegated.
• Specialization.
• Keeping time and turning it in.
• Using systems.
• Doing work on time.
• Communicating with clients regularly.

Some partners may not understand the necessity of having a strong, well-managed organization to implement strategic goals. They assume that, regardless of internal issues that are not resolved, there should be no reason that the firm would not be successful in implementing a plan.

Some partners may not understand the importance of decisions that must be made regarding the practice itself. Even if they do, they may be unwilling to make decisions that cut or curtail a given practice, especially if they are involved in it.

If any of the above situations are present in your law firm, the first step toward taking control away from fate as the future determinate for a law firm is to eliminate the obstacle.

The above insightful points were extracted from a paper by Howard L. Mudrick, president HM Solutions. Mudrick is president of HM Solutions, Inc., a Dallas based management consultancy to the legal profession. Howard Mudrick, a CPA and a former partner at Hildebrandt, has more than 20 years experience consulting with law firms plus on-ground experience in financial management positions with midsized law firms. For a copy of Howard Mudrick’s paper, Will Fate Plan Your Future or Will You?, email HLMudrick@aol.com.

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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Guest author: John Remsen, Jr.

Many midsized firms seem to think that strategic planning is for larger firms. However, any firm with an eye toward the future can benefit from the process. Planning can help a firm develop a consensus on key big-picture issues, promote internal communication within the firm, inspire attorneys to get out and do things they wouldn’t otherwise do, and help the firm allocate its resources more effectively. With leadership, commitment, and a good strategic plan, any firm can develop a profitable practice working with clients it enjoys and in the areas of law it finds most appealing.

Establish a Sense of Urgency: A sufficient number of lawyers in the firm must believe that it is no longer “business as usual” and that strategic direction is necessary if the firm is to survive and prosper in the years ahead. They must instill and constantly reinforce a sense of urgency that change is necessary.

Commitment from Firm Leadership: Firm leadership (or at least a critical majority) must have a genuine commitment to develop and implement a strategic plan. Without strong leadership and passionate commitment, it is still “business as usual,” despite the rhetoric. Under these circumstances, the firm’s efforts are doomed to fail.

Involve all Partners in the Process: At the end of the day, the owners of the firm must buy into and support the plan. By involving each of them in the process through a series of one-on-one meetings and/or in a group brainstorming session, each partner will feel a part of the planning process. The likelihood of success jumps dramatically. Associates and staff must also buy into the future of the firm. Special programs that enlist their support will add to the plan’s successful implementation.

Keep the Plan Simple and Focused: If the firm is developing its first strategic plan, it should keep the plan simple and focused. Most firms try to take on too much too fast and wind up accomplishing little. With a realistic plan and by starting slowly, the firm is able to maintain its focus on the most important projects. The firm can always add to the plan later. A law firm is wise to start slow, publicize success, and grow from there.

Create a Plan that Lives and Breathes: Once a strategic plan is adopted, it does no good to set it aside, never to be looked at until the following year, if at all. The plan should be a flexible and dynamic instrument. Its principles should be incorporated into the firm’s day-to-day operations. Firm leadership should communicate the goals and objectives of the plan often and in a variety of ways throughout the firm. Make sure everybody has a copy. Review it at internal meetings. Update it often. All important decisions should be considered in the context of the plan. If the firm makes decisions contrary to what is contained in the plan, it needs a new plan.

Establish Accountability: Nothing happens without accountability. For most firms, this is best accomplished at monthly meetings of small groups (five to six individuals) of attorneys, often organized by practice group. There must be a strong group leader and meetings should have an agenda and meeting notes. Assignments must be made and progress must be monitored.

Measure and Reward Desired Behavior: Simply stated, the firm needs to measure and reward desired behavior. If the firm wants its partners to spend time training younger associates, the investment of non-billable time in the firm’s future must be measured and rewarded. If the firm determines that business development is important, it should reward it through recognition, origination credit, and/or by measuring and rewarding effort. Otherwise, behavior changes will not occur. Without incentives (or disincentives), it’s “business as usual” and there is little change.

Giving Everybody A Role to Play: There is no right or wrong answer here, but the firm must determine each attorney’s role when it comes to investing in the firm’s future. What about associates? Is it the same for everybody, or do we ask different attorneys to take on different responsibilities?

Making it Happen: The strategic plan is not an end, in and of itself. It is a process through which a law firm contemplates its future and determines how it will allocate resources to take it where it wants to go. Without implementation, a strategic plan is worthless. Planning should never replace and distract from the doing part of the equation. Implementation must be given the highest priority.

#####

About the author: John Remsen, Jr. is the principal of The Remsen Group, a marketing consulting firm that works exclusively with law firms. He is the past president of the Southeastern chapter of the Legal Marketing Association and served on its national Board of Directors. He is a member of the editorial board of The Managing Partner Advocate. He can be reached at 404.885.9100 or jremsen@theremsengroup.com.

 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.

This article is copyrighted separately and published in morepartnerincome.com with the permission of the copyright holder.
© 2006, The Remsen Group.

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It happens in every law firm. The tail has a tendency to wag the dog. It is called Sub-optimization and it cuts into partner income.

Sub-optimization is when the interest of certain departments or individuals drives actions and decisions rather than the goals and objectives of the organization as a whole. It is as if the organization chart has been turned upside down.

I hesitate to tell you how often I have spoken before groups of law firm accounting or administrative personnel and had someone in the audience remark, “We don’t want our lawyers to know they can do that.” That confession is sometimes followed by a chorus of support from a portion of the audience. Their interest in maintaining their work routine without disruption was in control of their actions. They would withhold information about tools and capabilities already available to you through your existing law office business systems because your use of those tools might disrupt their established routine.

Sub-optimization is a naturally occurring tendency in any organization. Sub-optimization is most intense when the organization fails to effectively communicate the goals and objectives of the entire organization. It is lowest when the organization has communicated each area’s role in pursuing those objectives. People need to know where the organization is going and how they are expected to contribute to that journey.

The law firm needs to be one team pursuing common goals with a common set of core beliefs.

Surveys indicate that less than 16% of all law firms have a written strategic plan. That does not mean that the partners do not have a consensus about the direction and goals of the firm. Partners meet frequently, and while some disagreements may exist, there is considerable unity among partners about where they want the firm to go, how they want the firm’s clients to feel about the law firm, and the efficiency and effectiveness of the law firm as a team.

If your firm doesn’t have a formal plan that can be communicated to the firm’s team, work with the other partners to fashion a statement of direction and expectations for how the law firm wants to be perceived by its clients and others. Document and communicate throughout the firm, how each area is expected to contribute to the accomplishment of that road map to the firm’s future. When you do so, you give your administrative team and your associates a good feeling about their job and how their performance contributes to the firm’s goals and mission.
 

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Progress is the history of errors.  Man began his great leap forward when he began to record history.  Unfortunately, it seems to take mankind an inordinate amount of time and repeated errors to learn from history.  Law firms tend to fail for the same reasons—a "me" vs. "we" culture and a lack of dedicated management.

Law firms fail.  They fail often.  This has not been necessarily bad for me.  One law firm customer turns into several as partners scatter and reform into new start-up firms. However, those failures don’t do much for the owners of the failed law firms.  I don’t want to pick on just law firms.  Other types of businesses fail.  But law firms are unique and often start with their own seeds of destruction sewn within.  Most law firms start with a “kill- what-you-eat culture" and compensation systems that encourage the maintenance of that culture.  Somewhere along the way the firm has to go through a metamorphosis for long-term success.  Without that metamorphosis, somewhere down the road (in 5 years or 35 years) it will disintegrate from within

The research firm of Greenfield/Belser Ltd., www.greenfieldbelser.com, and its affiliate, The Brand Research Company, www.brandresearchcompany.com, conducted a survey in an attempt to identify the variables that made a difference between law firms that failed and those that didn’t.  As I review their reported findings, it clearly confirms to me that culture and management are the keys to success. 

• Successful firms differed from those that failed in that the successful firms had a “we” culture vs. a “me” culture including:
  • Strong brand identity
  • Common vision
  • Consensus-driven
  • Open communication
  • Firm ownership of clients

• Successful law firms paid more attention to the numbers:
  • They planned, measured, held accountable and rewarded.
  • They pay attention to Key Performance Indicators, leverage, productivity, realization, etc.
  • They engage in prompt billing and collections.
  • They reinvest more of their profits in the firm.

• Successful law firms have dedicated management—the number one factor that separated success from failure was the presence of non-lawyer C-level executives like a COO, CMO, and CIO empowered with decision-making authority in their areas.

More Partner Income’s position has consistently been that long-term survival depends on the development of a “we” culture.  That takes leadership to align the firm behind a shared vision.  It takes consensus building and frequent communication to build and maintain a shared vision.  Visions aren’t important if progress isn’t measured, people aren’t held accountable and milestones aren’t rewarded. Doing so takes dedicated management - something that requires more than 25% of the managing partner's time.

If you asked me for a law firm success checklist, it would look like the following:

• Leadership
• Consensus Building
• Shared Vision (Unifying brand or value proposition)
• Common set of beliefs — Firm Culture
• Dedicated Management
• Plans
• Measurement
• Accountability
• Reinvestment

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I previously posted “The Structure to Structured Planning”.  If you have not read that posting you might want to read it now.  This posting deals with the moderator’s approach during the planning session.  There are two main approaches for conducting strategic planning sessions.  One is the Brainstorming approach and the other is the Consensus Process.  I favor the latter.  Both require someone from the outside or a planning team member to be the moderator.

The Brainstorming process during the opportunity section would go like this:  “ For the next 30 to 45 minutes (and without discussion or making any judgments), let’s list on these flip charts every opportunity we can think of to improve our law firm from the standpoint of partners, employees, clients, etc.”  That is done in rapid open forum.  The moderator begins to reduce the list.  For example, the moderator might ask the group to classify each item as one that would have a major, moderate or insignificant impact on the firm.  Moderate and insignificant items would be left for another day.  Attendees would then be asked to rank the impact of the remaining list, eventually reducing the list in an effort to uncover the opportunities with the most impact on the future success of the firm.  Remember, one of the reasons for the planning process is to get the entire team unified behind the main things on which the firm will concentrate.  That doesn’t mean they are the only things the firm will do.  The organization will likely accomplish little if it doesn’t concentrate on something.

The second approach, which I prefer, works like this.  I would ask each planning team member to write down what he/she think would be our best 10 opportunities for increased performance and health of the firm during the planning period ahead (a three- to five-year period).  Once every team member has completed his/her task, I would ask them to number the items on their list from 1 to 10.  The item given the number 1 ranking would be the best opportunity.  I would then ask them to draw a line between items 5 and 6 on their list.  I would go around the room asking each member for his/her number one item.  If the next person's number one item had already been mentioned, they would give me their number 2 item, etc.  That process would continue until the top five items for each of the participants were among the listed items on one of our flip charts.  This process builds the confidence of planning members because those participating in the process discovered there is a lot of commonality among their lists.  Planning is a discovery process.  Sometimes it is the discovery of the obvious; sometimes a new light bulb goes on.  The similarity of the list illustrates that planning is going on continually, not just when the planning team assembles off site or in a conference room.  Sometimes the planning process just makes it possible for the organization to work together to go where they already thought the firm should be going.

Now, with everyone’s top 5 items listed, the moderator will ask the team to rank the entire list of items (probably 12 to 15 items).  After they have done so, the moderator tallies the results.  I use several methods, but the simplest is a show of hands.  “Who has this item listed as their number one?”  I would move to the next item and ask again, “Who has this item as number one?”  Repeat the process for the planning team members' number two items, etc.  Generally you need to run through the list no more than 5 times to see a clear pattern.  Most midsized firms will limit its Main Thing opportunity list to 3 to 8 new main opportunities.  These are the biggies: getting out of the practice area, developing a new practice area, shutting down an office, acquiring expertise in employment law, upgrading the firm’s business system, revising the firm’s compensation system, implementing a system for measuring client satisfaction, revising the compensation system to include mentoring as a part of the computation formula.  Implement a program to increase the firm’s leverage from 1.1 to 2.1, implement a training program, and install a mentoring system to increase utilization of new associates in their first year, etc.

Planning is a discovery process.  Sometimes it is a discovery of the obvious and sometimes it breaks new ground.  The one thing you can count on is that we are far more likely to get there if we know where we are going and how we are supposed to get there.  I refer to that as "I65 North".  I65 North is a reminder that the law firm business is a journey and that the leadership’s job is to get all of the firm’s people traveling in the same direction.

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The planning process plays another important role. It is a tool for the firm’s leadership to unify the law firm. With the team on the same track, individual day-to-day decisions begin to move the organization forward in the same direction, i.e., toward the law firm’s agreed upon goals and objectives. I refer to this as “I65 North”. 

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