Many firms get stuck at the same critical point with legal innovation. They’ve brought in AI and introduced value-based pricing. A firm strategic plan has been signed off on. Everything looks ready to go.
Then nothing clicks.
These firms struggle to identify the barriers preventing them from moving forward with their innovation efforts. They have AI that could make them efficient and effective. They have value-based pricing that could recognize their increased efficiency. They have strategies to implement everything and get it working in concert.
But there’s still a missing link: partner compensation.
The Four Drivers That Must Work Together
Real change requires four connected elements. Many firms focus on three and wonder why the fourth derails everything.
You need a strategic plan with clear firm goals that support legal innovation. Without direction, changes become random experiments rather than coordinated change.
You need a value-based pricing strategy that recovers efficiency gains. Fixed-fee billing and value-based arrangements reward results instead of time spent.
You need AI that improves effectiveness. The technology exists to streamline legal work dramatically.
And finally, you need a compensation system that incentivizes partners to achieve the tasks required to contribute to the firm’s innovation goals.
Why Compensation Is the Missing Link
You need to align your partner compensation system with your firm’s strategic innovation goals and modify compensation systems that primarily depend on billable hours.
Most firms are strongly opposed to changing their compensation system. However, it is often necessary to implement AI and value-based pricing. When compensation rewards billable hours above everything else, partners resist AI that reduces those hours. Their income depends on maximizing time billed, so they’ll protect that model regardless of firm strategy.
How Compensation Needs to Change for Innovation
Some ideas for linking compensation to innovation include focusing compensation more on revenues and nonbillable contributions instead of individual billable hours. Partners will be incentivized by proactive individual plans that help achieve strategic firm objectives, including AI implementation and value-based pricing. Management will oversee these plans and report on partner performance for comp purposes. Just a couple of the changes needed to foster innovation in law firms.
Most law firms focus on incentives for short-term profit, such as billable hours/production, and little on nonbillable innovations, like AI implementation and value-based pricing, which contribute to long-term profitability. This needs to change.
Clients are quickly catching on to the benefits of AI and will switch away from law firms that don’t adapt their processes, pricing and incentive systems to meet their needs. Therefore, partners currently married to time billing should be encouraged to transition to fixed or value-based pricing models where feasible.
The Urgency Is Real
You can’t escape changing your compensation system in this new environment. The legal market is shifting, whether you participate or not. AI will continue to advance, and client expectations will keep evolving toward value-based relationships.
The technology exists. The pricing models work. The only thing standing between most firms and successful innovation is their willingness to align compensation with their strategic goals.
Stop going in circles. Address compensation now, or risk losing clients and partners in an environment that demands innovation to survive.
