Category: Partner Compensation

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Your Firm Is Profitable. Is It Going Anywhere?

Your firm can be busy and profitable and still have no strategy. The phones ring, revenue grows, everyone works hard, yet nobody can answer the basic question: what are we trying to become? I’ve seen this before in my practice. Activity hides drift, sometimes for years, until pricing pressure or a failed succession exposes it.

The pressures are stacking up. Clients want pricing certainty and are questioning whether routine work needs to be outsourced. AI is changing how legal work is produced, and early signals indicate the biggest changes will first affect associate and paralegal work. Add succession pressure and rising operating costs, and standing still keeps getting more expensive.

Why firms drift

Drift starts in the partnership. Ask five of your partners what the firm should become, and you’ll get five answers. One wants a new market, another wants to protect the firm’s client base and culture, and each sounds reasonable on its own. Funded from the same profit pool, they starve each other.

Without shared direction, the firm tries to accommodate everyone. This leads to many unranked goals and no agreement on what to forego. Hiring and technology become ad hoc, and marketing follows the loudest voice. Does that sound familiar?

A real plan breaks the pattern by focusing actions and decisions on the firm’s chosen direction. The key takeaway: a strategic plan empowers intentional decisions, not just more activity.

Strategy begins with what you will not do

Most plans list aspirations: improve profitability, attract talent, serve clients better, and strengthen culture. Every firm wants these, so they aren’t a strategy.

Strategy starts when partners choose where the firm will compete and, tougher still, what it will stop. Without exclusions, priorities just crowd an already full agenda.

The main takeaway: strategy drives resource allocation. Commitment to a focus, such as an industry, should be visible in how you hire, train, market, and choose clients. If resources and attention do not shift, the strategy is only words.

Put the economics inside the plan

This is where most plans fall apart, and where I spend most of my time with firms. Growth requires capacity, and capacity is expensive: on average, a firm doesn’t break even on a new associate until three to five years of call. New practice areas take years to mature. AI may cut production time while demanding new spending on software and workflow redesign. A plan that ignores these connections can deliver growth without an acceptable return to the partners.

Build a financial model to test ambitions. Link demand to lawyer capacity, pricing, realization, staffing, and capital needs. Focus on profit per partner; revenue growth means little without it. This analysis forces real conversations. Firms are often top-heavy and lack leverage below, limiting growth. Promising new services may lose money under current pricing. Sometimes, partners need to take home less to fund the future. Partnership decisions buried in the plan indicate a problem.

Alignment gets tested when it becomes personal

Partners easily agree on growth and quality. Things change when plans affect compensation, client ownership, autonomy, or resource allocation. A credible process accommodates these issues. Confidential interviews reveal what groups never do, and a well-facilitated retreat helps partners resolve and commit to decisions. An outside facilitator is valuable if the managing partner is also an advocate in the discussion.

Execution is where plans die

To clarify: Every priority must have an owner, milestones, a budget, and sufficient time. At quarterly reviews, leaders must make decisions, such as redistributing resources or stopping failing work. Consequences for missed commitments are essential. Without them, partners assume strategic work is optional under client pressure, and strategic efforts often lose out.

Start with an honest diagnosis

Before booking the retreat, figure out where your firm is weak. Some firms lack clarity about direction. Others know where they want to go but have never connected the ambition to their economics or built the discipline to execute. The process should fit your firm’s condition rather than a generic retreat agenda.

The Profits for Partners Law Firm Strategic Planning Diagnostic is a short assessment covering strategic clarity, market focus, economic alignment, leadership alignment, execution discipline, and future readiness. It shows where to focus first.

TAKE THE LAW FIRM STRATEGIC PLANNING DIAGNOSTIC

A strategic plan’s main purpose is to give partners confidence to choose and commit. Takeaway: If your plan doesn’t guide decisions and screen distractions, it needs improvement. Contact me if you want to discuss where your firm stands.

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Session Recap: Bringing Ease to Managing a Legal Team

The average cost of losing an associate who joined as an articling student is somewhere between $300,000 and $500,000. They tend to leave right around year four or five, exactly when they start becoming profitable. A significant driver of that turnover is management behavior that many firms have not figured out how to measure or reward.

That was the thread running through the session Sandra Bekhor of Bekhor Management and I hosted on June 25. See the recording here. Sandra has spent more than 20 years coaching lawyers on leadership and team management, with a particular focus on delegation and feedback. I came at it from the profitability side. What kept coming back is how directly management habits shape firm economics, and how rarely firms treat the two as connected.

Why Managing a Legal Team Is So Hard

We started with what most managing partners already know but rarely name directly: lawyers are not trained to manage people. Law school trains the critical, analytical mind. It rewards the lawyer who finds the flaw in an argument and who assesses risk before anyone else in the room does. Those skills are essential for legal work. In a management conversation, the instinct to find the flaw is usually the thing that gets in the way.

Sandra made the point that good management requires a different part of the mind: empathy and the ability to listen without immediately judging. Lawyers have those capacities. They are just not the ones that get reinforced in legal training or firm culture.

So when lawyers move into senior roles, they are expected to lead and develop their people, without much preparation for either. And without strong role models in the firm to learn from, most are expected to figure it out on their own, which usually means they do not.

The Cost of Withheld Feedback

One of the patterns Sandra sees consistently: litigators who will argue fearlessly in court will not give a direct piece of critical feedback to an associate.

Her explanation made sense to me. In court, everything is rule-bound. The norms for how to behave are clear, and following them is not seen as aggressive. In a feedback conversation, there is no rulebook. The associate is someone you work beside every day. So the conversation gets deferred.

The cost compounds. An associate who makes a mistake in January and does not hear about it will repeat it in February, March, and April. By year-end review, the associate is hearing critical feedback for the first time, on twelve months of work. That is not just a development failure. It is a profitability problem. You have a person billing on your behalf all year at a fraction of what they could be producing.

One point Sandra raised that I do not think gets enough attention: your strongest performers want feedback just as much as anyone who is struggling, if not more. High performers are driven to grow. If your firm is not part of that growth, they will find one that is. They tend to leave right around year four or five. That is exactly when your investment in them starts to pay off.

Why Delegation Does Not Happen

This is where the financial case becomes very direct. Work that goes to a $350 associate should not be sitting with a partner billing at $800 or $900 an hour. The billing math here is clear, even if the behavior rarely reflects it.

Sandra identified fear of losing control as the primary obstacle. That fear is legitimate and takes different forms. Some partners worry about their reputation if a file goes wrong. Some fear client complaints. Some are simply convinced the work will come back needing to be redone anyway.

I added the structural piece. In many firms, partner compensation is tied primarily to billable hours. A partner who delegates aggressively is reducing her own hours. Her compensation reflects that. So she keeps the work. That is a rational response to the system in front of her, but it works directly against your firm’s long-term profitability.

Sandra’s reframe on this: partners who invest in training their team lose some billable hours in the short term. But if the team develops and stays, profitability rises over time. In my experience, the partners who invest in their people tend to build the more profitable practices.

What to Do About It

The practical suggestions we landed on were straightforward.

At the start of each year, each associate identifies two or three personal goals in conversation with the supervising partner. Specific goals tied to that person’s career trajectory, not pulled from a firm-wide checklist. Then a check-in every 90 days. This gives the partner a natural framework for feedback that does not feel adversarial, and it signals to the associate that someone is paying attention. That signal matters more than most firms realize.

Sandra and I both referenced the Balanced Scorecard as a structural tool worth considering. The idea is to measure partner performance beyond billing metrics. Financial results matter, but so does how well partners are developing their teams and building capacity for the long term. For a managing partner compensated partly against a balanced scorecard, the non-billable work of developing people gets counted. That changes behavior.

The harder question, which an audience member put directly, is how you make management changes stick when partners are still paid primarily on billable hours. The honest answer is that you probably cannot, not at scale and not over time. Some portion of partner compensation needs to reflect how well partners are managing and delegating. Even five or ten percent signals that the firm takes it seriously. Setting those goals at the start of the year and reviewing them at the 90-day mark gives it structure.

The AI Question

Near the end of the session, an audience member raised a specific question about AI and delegation: if junior work is being replaced by AI, what do you do with your junior associates and paralegals?

One view: you retrain them as validators. Have AI take the first pass. Have the junior associate review the output and produce a corrected version, then send that to a senior associate or partner for a final pass. The skills shift from producing the work to interrogating it. That is a legitimate developmental path, and some firms are already building it into how they count billable hours.

Sandra’s point: whatever structure you build around AI tools, the management principles for developing your people hold.

None of what Sandra and I described is complicated. What makes it hard is that many small and midsize firm partner compensation systems actively reward the opposite behavior. If you want to think through what changing that looks like in your firm, reach out.

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What to Decide Before Your Firm Touches an AI Tool

Your firm is already running on AI. Most managing partners have no idea how much.

That is the argument Kathy Serenko, Amy Adams, and I made during our June 3rd webinar on “Three AI Conversations Every Law Firm Needs to Have”, hosted by the Law Firm Profitability Group on LinkedIn. Not which tools to use, but what your firm needs to have decided before it touches any of them. The recording is here.

Kathy Serenko is the founder of AI Efficiency Labs, and Amy Adams is the founder of Gaia Allies and AIReady™.

Kathy led with the governance perspective. Her opening question: Are you already exposed? Her answer, based on what she sees in firms daily: almost certainly yes.

AI enters your firm in ways leadership cannot see. A paralegal uploads 300 pages of medical records to a personal ChatGPT account under a deadline. The summary looks clean. Three months later, the error surfaces in a settlement discussion. A vendor tool your firm approved last year has AI inside it you never examined. The tools you signed off on produce errors that reach binding deliverables before anyone reviews them. AI is designed to produce plausible output, and it will not tell you when it is filling in blanks.

Kathy’s second point: having an AI policy is not the same as having governance. Less than 40% of law firms have a policy at all, and a policy is only a statement of intent. The missing layer is the day-to-day controls built into your actual workflow. Without those controls, the policy and the reality of what is happening in your firm will not align.

Governance means a domain expert, not IT, is the authority over AI output in each practice area. Someone who reads a research memo and recognizes when the content is wrong. The errors appearing in court sanctions are content errors, and the people catching them are judges and opposing counsel. They are domain experts. Your oversight authority in each practice area needs to be one too.

Amy made the workflow case. Her rule before recommending any AI system: map the workflow first. She recently spent 90 minutes with a family law partner doing exactly that. In your firm, that work probably has not been done. If the process exists only in someone’s head, the AI system inherits every gap in it. The tool scales what is already there.

Before the workflow is designed, the economics need to be settled. If a matter that used to take 10 hours now takes five, and your firm is still billing hourly, you may be cutting your revenue in half for that work. Pricing needs to be decided before the workflow is built. Firms that build the workflow first and sort out the pricing later often discover they cannot make money at it.

Everyone in your firm is asking the same question in different ways: what happens to me? The concern is real at every level, and dismissing it does not make it go away. What is actually changing is what each role does. Paralegals are running AI systems that used to require associate hours. Associates who used to produce first drafts are now verifying AI output and building judgment through that review. Partners who used to do the work are moving toward designing the systems that do it. The firms handling this well are having that conversation before the tools arrive.

Leadership does not get to delegate this responsibility. You cannot hand AI governance to a technology committee and check back in six months. You have to understand where the exposure is and whether your compensation structure supports what you are asking of your partners.

Your partners who put their expertise into an AI system will watch their billable hours fall as the system takes on that work. That contribution needs to be reflected in how they are compensated. If your firm still pays only for billable hours, you will not get the cooperation needed to build something that works.

The firms moving ahead well on this have answered the harder questions before reaching for tools.