Category: Partner Compensation

Partner Compensation Trends – Subjective Criteria

One of the most important partner compensation trends I’ve observed is the move to more emphasis on subjective criteria in the compensation process. This topic is covered in the July 4, 2016 issue of Canadian Lawyer article “It’s not all about money” by Michael McKiernan. Michael interviewed me for the article and I provided my comments on this trend in partner compensation:

“According to Colin Cameron, a Vancouver-based law firm management consultant, intangibles are also in vogue in the upper echelons of law firms, despite the enduring popularity of simplistic profit allocation methods such as eat-what-you-kill. EWYK remained the most popular partner compensation method in our survey, used by 35 per cent of responding law firms, but that was down from 40 per cent in 2015.

Cameron predicts the proportion will fall further as partners continue to search out new ways to measure and reward subjective leadership accomplishments that don’t show up in spreadsheets of billable hours and direct revenue generation. “It’s certainly simpler, and in some ways more transparent, to focus on those factors that you can easily put a number to. It’s more difficult to evaluate how good someone’s training is, whether they’re supervising associates properly, and how their project management skills are,” says Cameron. “But I think more and more the trend is for firms to realize they need to recognize these contributions if they’re going to increase their long-term profitability.”

However, the transition often proves tricky, as one respondent at a mid-sized Western law firm complained: “Migrating to a revised compensation model while senior partners oversee the compensation process” has led to problems in “succession planning and rewarding business development efforts” at the firm, they wrote.

“Often there will be different interests between partners, who are perhaps closer to retirement and thinking about cashing out in the short term, versus younger partners just starting out, who are more likely to be thinking longer term,” Cameron says.”

In my experience, an over-emphasis on formulaic or “eat-what-you-kill” compensation systems results in dysfunctional behavior as partners focus on building their own numbers without regard to the firm’s best interests. This often leads to conflict and resentment between partners which can destabilize the firm and erode firm profitability.

10 major trends impacting Canadian law firms in 2015

Global firms such as Norton Rose and Dentons have moved into Canada and more are on the way. They have swallowed up mid-tier law firms such as Macleod Dixon, Fraser Milner and Ogilvy Renault. Heenan Blaikie is another casualty of the competition being created by these global giants as corporate and securities deals now have more major players vying for fewer deals. These global mergers also create breakoffs of groups of partners who don’t want to be part of a worldwide firm run from New York, London or Brussels. This creates opportunities for small and midsize firms to absorb these disaffected partners, with their institutional clients, which are greatly desired by small firms, and can be run profitably from a smaller, more efficient platform.

Since the financial crisis of 2008, clients are demanding fee discounts of 10% to 50%. They are under pressure from their CEO’s to cut their legal costs and discounts are the easiest way to accomplish that.

Clients are also pushing for alternative billing as they want fixed fees and some certainty on their legal costs and as a result firms must focus on becoming more efficient.

There’s also a rise of innovative NewLaw business model firms providing legal services with much lower overheads, up to 50% lower than large firms and they are stealing work away from large firms because their charge-out rates and fixed fees are also up to half as much as large firms. This puts a lot of strain on maintaining realization rates and profitability in an increasingly competitive legal market environment.

Legal services are increasingly being commoditized in line with the competition created by more players in the legal market, and more lawyers are being pumped out of law schools that aren’t needed to meet the demand. Clients realize that often lawyers aren’t needed to do many simpler legal tasks, and they’re pushing for work to be outsourced to other cheaper jurisdictions or countries, or pushed down to paralegals, contract lawyers or outsourced general counsel to be done more cost-effectively. The mystique of law firms being the only ones who can do legal work is fast fading. There are many other non-law firm competitors in the legal industry now.

Realization rates are dropping. In the Georgetown Law 2014 Report on the State of Legal Market the average overall realization rate in 2014 was 83.5%, which was down 8% from the 92 percent rate reported in 2007, so that’s a big drop in realization over the past seven years. Clients are rebelling against law firms’ steady increase in their charge-out rates over the past decade, and they’re fed up and just will not take it anymore. Large firms have increased their charge-out rates much more than small and midsize firms, so that’s another opportunity for small and midsize firms to steal clients away from large firms.

Technology focus – LegalZoom and other automated legal service providers are quickly picking up market share and commoditizing most routine legal forms and documents. Law firms are automating more of their predecents and routine legal documents to increase their efficiency for fixed fee quoted commodity work.

Client focus is a term you’re hearing more and more, as clients demand that law firms think about client needs and profitability, not just their own. Clients want law firms to focus on their KPIs and their strategic goals.

Finally, mid-tier law firms are under continuing cost pressures as global firms are pushing hard from the top and NewLaw firms are nipping them from underneath. Mid-tier firms such as Heenan Blaikie, Macleod Dixon and Ogilvy Renault didn’t have the sophisticated management structure or the resources needed to compete with the global firms, and the NewLaw firms have cut their overheads in half. So mid-tier firms are increasingly in a Catch-22 situation, with nowhere to run. They will either be swallowed up or blown up, unless they change their business models.  Again, here’s another opportunity for small firms and midsize firms under 50 lawyers to steal clients away from their larger counterparts and hold the NewLaw firms at bay by reducing their overheads and updating their business models.

How Realization Rates Can Increase Firm Profit

Here is a white paper I wrote for Clio on “How Realization Rates Can Increase Firm Profit”. In recent years, realization rates have been dropping for law firms of all sizes as clients have pushed for lower rates and fixed fee pricing of legal work. The paper explains how realization rates and other key profitability metrics are calculated and outlines several strategies to increase realization rates and profitability.