Law firms don’t often fail because their lawyers aren’t good enough. They fail because the partners aren’t on the same page.
Firms may look strong on paper if they are profitable and have good clients. But underneath, conflicting partner priorities and misaligned incentives slowly eat away at profits and stall innovation.
People often don’t notice this misalignment until it’s too late.
How to Tell if Your Partners Aren’t on the Same Page
When partners aren’t aligned, it shows up in small ways that affect both the way things work and the way people act. One partner is building long-term relationships with clients, while the other is maximizing billable hours. The result is that clients have different experiences and there is tension over how files are staffed.
Incentives that reward only billings or originations put partners in competition with each other, which makes it less likely that they will work as a team or share information. Leadership agrees on growth goals, but without support from all partners, strategic plans stay on hold.
The issue is not a deficiency of talent. It’s that the partnership is going in different directions.
The True Cost of Misalignment
Misalignment has a cost that can be measured in dollars. High-value clients go to competitors because the service is inconsistent. Associates leave because the partner they work for decides not to mentor and delegate. Partners don’t want to make changes that could hurt their pay, so investments in AI or changes to pricing models get put on hold.
Even small cracks in alignment can lead to lost revenue and a weaker market position.
Making Things Fit Together
To get everyone on the same page, firms need to deal with the things that really change how partners act. Compensation systems influence what partners should focus on, and they should reward working together and building client relationships. Plans must be directly linked to partner interests in order to be successful. If a strategy doesn’t make it clear how it helps each partner, it won’t get off the ground.
Firms need effective management that ensures decisions are made promptly and carried out. Without accountability, alignment quickly disappears. When these levers work together, partners start to pull in the same direction.
The Chance to Align
Aligned partnerships lead to huge benefits. Clients get the same level of service from every practice group and matter. Associates are less likely to leave because they get better training and mentoring. Partners see innovation projects as shared goals, not threats, which helps them move forward.
Alignment does more than just stop problems. It speeds up growth and profit.
The Bottom Line
The biggest threat to a law firm isn’t other law firms. It’s not being aligned inside.
When partners put their own goals ahead of the firm’s goals, strategies don’t work and innovation stalls. But when pay, strategy, and governance are all in line, the firm has a big advantage over its competitors.
The cost of being out of alignment is high. The benefits of alignment are even greater.
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.
Originally published in BCLMA Topics, Winter 2022 Edition
A fractured partnership, compensation concerns, retention headaches, work delegation issues and a myriad of other significant struggles inside a firm are massively disruptive, stressful, distracting and ultimately, very expensive. In the past few years, we’ve seen managing partners and executive committees who are hard-working and well-meaning but frustrated and tired.
Strategic planning assignments are significant undertakings and sometimes with a lot at stake. Firms invest time and resources to ensure they get it right, and implementation requires long-term commitment to achieve goals.
Colin’s AI assistant Eric
To get most partners on side, a bespoke plan must:
Reflect the culture of the firm and desires of the partners
Be powered by your firm’s data with a professional financial analysis
Be developed at a pace that achieves a tipping point of support by key partners
Emphasize implementation of strategies
Be facilitated by credentialed experts with experience in law firm planning
Every major component of the firm is connected. For instance, if compensation doesn’t reward desired behaviour most lawyers will only focus on current work. When firm governance is unclear or poorly structured, decisions take too long and leadership is lacking or missing altogether. Leadership is fundamental to a highly functioning operation and essential to implementing your strategic plan.
Talent retention is another significant issue lately. When associate retention is low, partners lose the benefits of leverage and spend too much time on billable work rather than mentorship, business development (BD), recruitment, or management. And average costs of losing an associate are now north of $300K, and some suggest more.
Let’s look at some of these issues further.
Compensation model isn’t working for us
Many firms mistakenly decide on a compensation system before developing a plan. This often results in one of two compensation models: An “eat what you kill (EWYK)” formula-based model or an equality model with a lockstep compensation system. Both options have risks.
The EWYK model encourages “lone wolf” behavior at the expense of a team effort or what’s in the firm’s best interest. It can be divisive and stunt growth as only individual effort is rewarded. The equality model can lead to mediocre firm performance and underperforming partners. We’ve seen firms lose high performers under this model.
Instead, we recommend a “subjective merit” model where both qualitative and quantitative criteria are considered in partner compensation. A compensation committee typically evaluates partners’ contributions with the Managing Partner. As a performance-based model, it motivates high performers, rewards good management, encourages team effort and discourages lone wolf behavior. Partners are motivated to do non-billable tasks, help achieve firm goals, and encourage the right partner behaviors, such as firm building and levering work to associates.
Firm governance needs adjusting or an overhaul
Many firms have governance systems that are not advancing the firm’s interests. We have seen the following symptoms when the wrong structure is in place:
Leadership can’t make decisions
The firm is stuck and not moving forward
There is a lack of focus
Decentralized decision-making without oversight
Firm-wide confusion of who does what
No written firm plan
Many firms run as a democracy where partners operate independently and are not accountable to anyone. Firms are hesitant to manage themselves like other businesses with a CEO with authority and responsibility. Instead, committees handle day-to-day operations, including a management committee with little power to execute a plan, if there is a plan.
Indecision results in lower profitability, missed opportunities, high opportunity cost of partner hours spent on slow decision-making, and a loss of good partners who grow frustrated with the lack of firm progress.
The solution is to appoint a Managing Partner (MP) to act as the CEO and coordinate creating a firm plan approved by the partnership. The MP will execute the plan with authority to achieve the firm’s goals. The partnership will evaluate the MP’s performance to recognize the MP’s efforts like any regular business is key. Once this centralized governance system is in place, your firm will become far more profitable and competitive in the market.
Retention of associates is a significant challenge
Retention challenges are causing significant disruption for partners and interfering with firm profits and growth. Of course, associates leave for a variety of reasons, however, firms can recalibrate to better accommodate their needs and desires to win loyalty and a long-term commitment.
Susan’s AI assistant
The associate experience is not what it was 25 years ago, which is stating the obvious. But we regularly engage in discussions with partners who are either puzzled or inflexible to the needs of today’s associates. Many are looking for alternative career paths, meaningful opportunities for growth, client contact, fair compensation, some flexibility to work from home, robust mentorship, coaching and skills training, and work/life balance. Partner investment in associate development should be baked into annual plans.
Engaging with associates on these issues, welcoming ongoing dialogue and taking corrective action are essential in creating an associate-friendly culture.
Our lawyers don’t know how to develop work
A fulfilling career and an opportunity to earn a greater income usually requires developing skills to attract new work. Again, this investment must be supported by rewarding non-billable time for marketing and BD and skills training. Most associates are interested in learning how to retain clients and win new work and expect firms to support this growth. Without associate participation in BD the firm’s succession plan in rainmaking is hindered.
It takes years to generate work, benefit from referrals and develop a desirable practice. Some leave training too late and provide this support too infrequently. Aside from mentorship, BD is one of the largest investments you should make in associates.
Partners frustrated that associates aren’t participating in attracting new work should revisit their training programs, individual business plans, BD budgets and how they reward participating in marketing and BD and origination of work.
Strategic planning connects all your organizational components and links your vision to your goals and actions to create a high-performing firm with an enduring legacy.
Colin Cameron is a chartered accountant and former COO of a large regional Vancouver-based law firm and founder of Profits for Partners, Management Consulting Inc. Susan Van Dyke has held several senior legal management positions and is Principal of Van Dyke Marketing. Together, Colin and Susan bring 60+ years of vast legal management experience in small to large law firms to their strategic planning projects.
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Colin Cameron, CPA, CA
Welcome to my blog. I am a management consultant in Vancouver, Canada providing strategic profit-focused advice to small and midsized law firms. I can help your business realize its true profit potential.
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