Category: Partner Compensation

Client-Facing KPIs

Originally published in Law Practice Magazine

Many law firms use Key Performance Indicators (KPIs) to maximize their profitability, but have little knowledge o­­­­­f what their clients’ KPIs are. This is because law-firm partners commonly hold the view that the lawyer has lots of experience with this type of client or work, and believes he or she knows what the client wants already.  However, the only way to really know what clients want is to ask them. When you ask clients what’s important to them, these five client-facing KPIs usually stand out.

Deliver on Time 

Most clients have a good idea of the turnaround time they require from the law firm. But you need to ask them what that timeline is in order to find out exactly what they’re looking for here. Then you need to measure your success in achieving this objective on an ongoing basis, because the client certainly will be.

Meet Budget 

The client expects an estimate or budget for the legal costs up front, and will judge you on how close you come to the original estimate and how frequently you meet budget. The client will also expect you to be as efficient as possible.

Be Effective 

Did you achieve the outcome the client was looking for within the client’s cost parameters? First you need to ask the client up front what outcome he or she views as success. You then need to measure your progress toward achieving this outcome on a regular basis throughout the file.

Add Value 

Ron Baker, a well-known value-pricing consultant, created this formula for determining value. I have modified it slightly for this article.

Value = Increase in client profits minus the cost of your legal services.  The client’s perception of value is determined by its view of how much “profit” you added to its bottom line during your engagement. The client assesses the value that your firm added on both a quantitative and qualitative basis.

Value can be added in four main quantitative ways:

1) Help the client increase revenues—e.g., refer work to client, obtain large recovery on plaintiff file, etc.

2) Limit costs, e.g. reduce payout on an insurance matter

3) Reduce risks, e.g. prevent potential for future payouts

4) Use your firm’s reputation to help the client obtain financing

In addition, the client will qualitatively assess your firm’s “value add” based on criteria such as your creativity, what you added to its knowledge systems, your win/loss ratio, and whether you work compatibly with its people and its culture.

Satisfy the Client 

The client is constantly evaluating you on all of the above factors in assessing its satisfaction with your service.  Amazingly, recent studies show that the average law firm asks only five of its 20 top clients whether they are satisfied with the firm’s service. Law firms need to be more proactive about asking clients if they’re satisfied, and make changes as required to meet the clients’ satisfaction.  You can track client satisfaction on a continuous basis using interviews, survey questionnaires, and so on. Keep regular track of your client-satisfaction scores, and focus on increasing satisfaction. Reward partners for achieving high client-satisfaction scores.

The Challenge 

Hourly billing systems are still the norm for law firms and encourage law-firm partners to maximize billable hours and production, not to be timely and cost-effective on client files. The challenge for most firms is how to motivate partners to achieve both firm profitability and client KPIs. Law-firm partner-compensation systems must be modified to reward partners for being on time and cost-effective in order to make this happen.  Whether you bill on an hourly or fixed-fee basis, however, you still need to maximize value for your clients. That’s how you can establish a long-term strategic partnership with your clients, which will provide a steady and growing stream of profits for years to come.

Are you ready for client-facing KPIs? Put your clients’ success first, and use this goal to motivate all lawyers and staff in your firm. The rest should follow naturally.

close up of human hand

Lawyers: Ask for the Order!

Mike O’Horo of RainmakerVT posted a great article, “Lead-generation is not the same as business-generation”.  The article notes how the whole process of marketing as most law firms do it is essentially worthless if you “don’t ask for the order” and make the sale.  Most lawyers have great difficulty with this step, and miss out on a lot of very profitable business.

In most law firms, the number of real rainmakers is less than 10-20% of the total # of partners.  Yet all equity partners are expected to bring in business of a minimum $ amount to support the growth and profitability of the firm.  Rainmakers must be compensated to a level that keeps them happy, as they are a rarity in the practice of law.  You must motivate and retain these rainmaker partners with appropriate compensation packages to ensure the future success and profitability of the firm.  The rest of the partners must be satisfied with earning less if they can’t or won’t bring in the business.

You must reward your rainmakers with bonuses or higher units of compensation to keep them motivated and bringing in new business. You’re not just rewarding partners for hours billed, you’re rewarding partners for originating work, which needs to carry a bigger weighting at compensation time.  This is where many small and midsize law firms’ compensation systems fall short in my experience.  This is rewarding lawyers for increasing sales, and really no differs from paying bonuses to the best-performing car salesperson on the lot. The sooner law firms get this, the better off they’ll be.  Since all partners will share in an increasing pie, individual partners can’t be worried a rainmaker is making more than them, when everyone benefits from what a rainmaker does.

Law firms must operate in a business-like fashion.  For decades, law firms have operated with a partnership business model protected from the ravages of competition that other professions and businesses have had to endure.  Changes must now be made quickly to become more business-like in your operations and reward partners for “asking for the order” before your competitors beat you to it and steal your rainmakers away from you.

Increasing law firm profitability – what’s working and what’s not?

Originally published in Canadian Lawyer

Leverage

One of the fastest and easiest ways to increase profitability is to increase leverage by moving work down to the most efficient staffing level.  I’ve noticed some firms are adding non-equity partners to increase leverage and profitability, and this is a trend that continues to build. Clients are pushing hard on rates and don’t want to pay to train associates.  Non-equity partners, by contrast, hit the ground running and don’t incur training and supervision costs. Firms don’t break even on associates until three to five years of call on average, while non-equity partners are profitable right away.

Other ways to use leverage:

– Large national firms are pushing out underperforming partners with practices that don’t meet their minimum size standards, as they continue to lever themselves for maximum profitability.

– Personal-injury firms are outsourcing legal work to India to reduce costs.  This is quite a step forward in Canada, where until recently our privacy laws have made law firms hesitate to make this move.  If the outsourcing company’s servers are based in Canada and the work is being checked by Canadian lawyers, then this option can work well.

– Large national firms have outsourced administrative tasks such as word processing and billing to reduce costs.  Many firms are also outsourcing entire facilities-management, technology and marketing departments to local outside vendors such as Ricoh and Pitney Bowes Inc.

Cost Containment

“New business-model firms” such as Delegatus services juridiques inc. in Montreal and Cognition in Toronto are effectively acting as outsourced general counsel for large clients.  They operate on a virtual basis to contain premises costs and have also stripped down the management infrastructure required to run their operations. Their lawyers spend most of their time at clients’ offices, using clients’ support staff on files, which helps keep overhead costs down to as much as 50 percent of the average large firm.

Some firms are getting into project management in a big way, and find that clients are very happy to work with them to reduce their overall legal costs by getting more effective and efficient in how their legal matters are handled. This is a significant trend, and one that some law firms are using as a warm-up to alternative billing.

Centralized Management

Firms of all sizes are centralizing their governance systems to increase their efficiency and profitability. By giving managing partners the power to affect partner compensation, these firms allow the managing partners to motivate partners to do non-billable tasks that help to achieve strategic objectives.

Setting up file-approval systems under the control of a managing partner can lead to significant gains in profitability. In my experience, top-down, centralized management is the most efficient and effective way to manage.

Selecting the right clients is also crucial to becoming more profitable. Successful firms evaluate clients for their profitability, their ability to pay, and their fit with the firm’s strategic goals.

Utilization

Some firms are using “full-day” time accounting where lawyers track all non-billable time in addition to billable time. The idea is to get lawyers to account for all of their available time at the office, e.g. eight or 10 hours a day.  By having lawyers and staff account for all of their time, firms are capturing 10 to 20 percent more billable time and adding significantly to profitability as a result.

Firms should also attend to this non-billable information to ensure that their lawyers are not just focusing on the short term and their own billable hours. As management guru David Maister would say, how you spend your non-billable time is where your real profit is in the long term—for instance, your business-development efforts.  Tracking lawyers’ non-billable time can also reveal whether project-management techniques are working effectively and efficiently.

Another recent innovation is smartphone time-capture technology that allows lawyers to log their time while they work it, rather than afterwards, when their memory is hazy. This is the key to maximizing time-capture percentage.

Strategic Planning

Firms that proactively carry out strategic planning are more profitable than firms that don’t. Today’s highly competitive legal market demands that firms maintain a continuous planning mindset if they want to succeed. In the successful firm, the managing partner takes charge of executing the strategic plan and focuses on getting partners to follow through on their assigned tasks in order to achieve the goals of that plan.  The most profitable firms reward partners who complete non-billable tasks and penalize those who don’t.

The firms that do the best in today’s market are the ones with a tight vision.  They keep their team closely focused on the firm’s strategic goals, as opposed to taking a silo approach in which everyone operates independently. The days are past when a law firm could make easy money while letting every partner do whatever he or she wanted.

Partner Compensation

Your firm will make better profits if it rewards partners for the value they provide to clients rather than if it rewards them only for hours billed. Partners also need to be rewarded for profitable practices, in addition to sheer volume of billings. Those who expend extra effort in the firm’s best interests should be rewarded the most, and those who lever work down to others and unselfishly lead their practice groups should get special rewards.

Generally speaking, firms with subjective compensation systems are more profitable than formula-based firms. This is because the formulas usually drive partners to focus on personal production, instead of helping grow the whole firm.  An “eat what you kill” approach can stunt the growth and profitability of a firm.

People

Firms with strongly defined core values for their people do better than firms without them. In order to succeed, a firm needs a strong culture, where everyone buys in. This helps it achieve its goals faster, and makes its staff work harder and feel more fulfilled.

As the push to acquire the best talent continues, small firms are capitalizing on opportunities to hire senior partners who are close to retirement and are being pushed out of large firms.  Some are leaving early, taking their clients with them, to join small firms and enjoy better work-life balance. This can be a great win-win for both the senior partner and the small firm, as these partners can bring big-firm institutional clients that are coveted by small firms and can significantly increase their profitability.