Category: Partner Compensation

Old School Marketing – Sales Is Not A Dirty Word

Originally Posted on Small Firm Innovation

Back in the old days, lawyers really had to hustle to get work.  Okay, that’s just like today.  But lawyers had to “sell” themselves to get clients to use them.  So what’s so different about that today?  Well, many law firms now use technology and social media to get their marketing done.  But it still requires a human touch to get the “sale” done.

Marketing is the set-up, and sales is where the real money is made.  When you’re trying to win legal work from high powered corporations with their own sales teams, you need to match them in sales skills.  The clients will push every law firm to distinguish themselves with their sales abilities to earn their work.

So once you’ve identified and qualified the buyers, you approach them for the sale and “ask for the order.”  What’s that you say?  Yes, this is “old school” marketing.  It’s been done by salespeople in every industry for decades. Don’t want to have a sleazy “car salesman” image?  You don’t have to.  Some of the greatest salespeople are actually very highly skilled lawyers who use their own special sales techniques all the time while networking with blue chip contacts.  Their clients are also great salespeople, and smart lawyers connect them with other great salespeople they know and generate great referrals.

Your clients respect the art of sales as that’s how they conduct business all the time.  Lawyers who master sales techniques are respected by their clients, make no mistake.  It’s all in the delivery.  If you have a great product, you are proud to sell it and its benefits.  Don’t focus on features, focus on benefits, and distinguish yourself from the competition.  Find out the customer’s needs, then provide them with the customized product and service they require.  Listen a lot, and cater to their desires.  Really care about your clients, and provide added value over and above what they are expecting.  These are all tried-and-true sales techniques, of course.

It’s time that lawyers really understood the language of sales and applied the concepts.  In today’s competitive legal environment, you can’t afford to be “outsold” by your competition.

Some large law firms now even have sales departments.  They’ve got the message, and they train their lawyers in sales techniques using standard sales training courses.  Solos and small firms have the same opportunity.  You can get the necessary sales training from many sources out there.

Immerse yourself in the sales culture and start regularly “asking for the order.”  Some of the most successful lawyers I know are experts at it.  Some may call them rainmakers, but the smart ones know that deep down they are really just good salespeople.   After all, the highest paid person on a car lot is the sales manager.  Now that’s a goal to aspire for!

Trends in Partner Compensation Systems in Law Firms

An increasingly competitive legal environment is resulting in changes in how law firms pay their partners.

In my experience there are three main types of partner compensation systems:

1)      Equality/lockstep – Compensation is determined mainly by seniority. I’ve seen this system used by many small firms and some large US and UK firms.  The advantage is it encourages partners to work as a team, while the disadvantage partners may not feel it’s fair if other partners don’t pull their weight yet are paid the same as high performers.  This can lead to a lack of incentive for high performers, and creates a risk they may leave.

2)     “Eat what you kill” – Compensation is determined mainly by personal production. This system is used by small and midsize firms.  Objective systems like this usually focus on just the numbers, which makes it clear to all partners the expectations, and is fairly simple to determine compensation.  The downside is these objective systems also encourage partners to “game” the numbers to their own advantage.  This can lead to breakdowns in team-building, where partners act as “lone wolves” and talk about “my clients”, not firm clients.

3)     Subjective Merit – Compensation is determined by subjective analysis supported by objective factors. It usually involves a compensation committee of 3 or 4 partners, and is used mainly by midsize and large firms.  This system has the advantage of encouraging partners to operate at a higher level and get compensated accordingly.  The subjective merit system may have an objective component as a starting point, but subjective analysis reduces the potential for “gaming” the system in a purely objective formula system.

Depending on the culture of the firm, any of the above systems may work effectively.  However, my experience and research indicates the most effective system for increasing profits is the subjective merit compensation system.

Compensation System Trends

One of the major trends I see is towards more “pay for performance” in law firms, with an emphasis on rainmaking results.  Rainmakers are paid big bucks to switch firms, especially commercial lawyers able to command and move a large client base.

Compensation compression ratios (the $’s paid to the highest paid partners compared to the lowest paid partners) are increasing, as firms accommodate rainmakers at the top end of the pay scale.

Law firms are requiring an increasing minimum practice size to remain as an equity partner.

Non-equity partnerships are growing in popularity as firms attempt to maximize their leverage and equity partner compensation.

Large firm compensation systems are becoming more “corporate” in nature, as firms grow in size and scope internationally.  The larger the firm, the more corporate the model.  Managing partners and executive committees are wielding more power, and are providing more input to the compensation of individual partners, who are becoming more like employees in large firms.

Managing partners and practice group managers are being compensated more for their management accomplishments.  Some firms are compensating their managing partners using balanced scorecard techniques, for example.  Law firms are trying to run like real businesses, and are delegating more and more of the firm’s business functions to their management partners.

Many firms are requiring pre-retirement phase-downs in compensation and have established retirement policies at a set age eg. 65.  There is some controversy here, however, given challenges to the legality of forced retirement. Firms are continuing to try to enforce these retirement policies to maintain increasing equity partnership leverage and profitability objectives.

There is a trend for senior partners with portable practices to move from firms where they have spent their entire careers, after being forced out by the imposition of set retirement age policies.

Most firms have fairly “open” compensation systems, where partners know what other partners are being paid.  The trend is towards less compensation transparency in larger firms, however, with power and information centralized within a few management partners.  Compensation discussions can be too much of a time distraction for large firms.

More non-equity compensation arrangements are being used for hiring lateral partners and retaining good “up and comers” with long-term potential for building a practice.

Buy-in requirements are growing as firms grow and partner leverage increases.

More flexibility for balanced lifestyles and part-time partner arrangements are being demanded and received by the new generation of partners.

Compensation Criteria Trends

There is more emphasis on teamwork, and less emphasis on personal billable hours. This also ties in with growing recognition for the need to lever work, and the growth of alternative billing practices.

More firms are doing strategic plans in response to increasing competition, and this is leading to a need to recognize partners’ non-billable efforts in implementing strategic plans at the firm, practice group and individual partner levels. This also means more recognition of training, supervision, quality control, and various other non-billable tasks performed by partners.

More firms are recognizing client origination results, and firms are tracking client and matter origination more diligently.  Sales skills are being taught to partners and associates.

More peer evaluation is happening, especially in larger firms. There is also more emphasis on client feedback, realization and profitability of partners’ practices. More emphasis on cash in, and less on billings.

Compatibility with firm culture is becoming more important. Non-conformists with firm culture are punished, leaders are rewarded.

Summary

The key trend is toward more “corporate” compensation models, driven by competition and the corporate style of growth of large national and international firms.  Compensation is driven more by the strategic goals of the firm, and partners who contribute to firm goals are compensated at higher levels.  There is more emphasis on pay for performance as well.

Compensation compression ratios are widening, as firms attempt to accommodate and retain the rainmakers in their firms.  This has resulted in major dollars being spent to lure new rainmakers to the large firms.  Business development is more and more highly prized, and rainmakers’ compensation is increasing significantly.

The danger of a high compensation compression ratio is you could end up like Finley Kumble a few years ago.  They hired many rainmakers and paid them exorbitant dollars for their client originations without a sunset clause, and the whole firm came crashing down. Several factors were involved, but the extremely high compensation compression ratio was pointed to as a major factor in their demise.

Firms are also trying to encourage partners to lever more to others, and in the process institutionalize clients so it is more difficult to move clients when partners are offered more money by other firms to lure them away.  Buy-in requirements are rising as firms lever more and reduce the % of equity partners relative to non-equity partners and associates.

Large firms favor subjective merit systems, while smaller firms favor more objective systems. Large firms are increasingly profitable, and the gap is widening, so there may be some correlation/cause/effect with subjective merit systems which leads to increased profitability.

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Different Incentives for AFA’s – GC’s vs. Managing Partners

Recently Bruce MacEwan of Adam Smith, Esq. did a great post on his blog on the different incentives that General Counsels (GC’s) and Managing Partners have regarding Alternative Fee Agreements (AFA’s).  GC’s are accountable to their shareholders, while Managing Partners are accountable to their partners.  Bruce’s point was that GC’s are incented by their shareholders to reduce costs and push AFA’s, while managing partners are incented by their partners to run a profitable firm.

So given the current difference in incentives for GC’s and Managing Partners, is there a way to reconcile the two points of view and come to some agreement for a mutual goal and appropriate incentives for both sides?

I think there is.  I would suggest as a start that law firms start reducing the emphasis on billable hours in their partnership compensation systems.  By doing so, this will encourage lawyers to focus more on the profitability of their practice, not on their own personal billable hours.  It will also incent them to lever more work down to associates and paralegals, or to outsource legal work where it makes sense.  These actions make good business sense whether an AFA is in place or not.  This will make your firm more profitable, produce high realization and reduce the overall cost of legal work.  Any resulting efficiencies from this approach which produce extra profits can be shared with your clients in the context of an AFA.

And there is much inefficiency in the way that law firms produce legal work now.  The fact is that partner compensation systems that incent partners to maximize their billable hours encourage “bloat” in the overall cost of legal work.  It also encourages firms to keep too many partners around billing at high rates.  It’s no wonder that clients are rebelling against this type of system.

Emphasis on partner hours billed has created law firms that are too top-heavy for their own good. Many firms have too many partners compared to associates and paralegals, and partners are “hoarding” work that should be levered down.  As a result, the cost of the legal services goes up due to higher chargeout rates on average.  The answer is that most firms could probably do with, say,  20% fewer partners (admittedly a number totally off the top of my head), and still handle the same work volume, but in a far more efficient way and at a lower overall cost for the client.  The tricky part is that law firms’ overall billings will go down, and partners have a vested interest to keep the compensation criteria as is to protect their own interests.   It won’t be easy, but forward-thinking firms are  addressing this issue now.  And if you don’t address this issue, these forward-thinking firms will steal your clients from you.

So the firm’s partner compensation system is the best place to start.  The smart firms that de-emphasize billable hours and focus instead on value, efficiency and reducing overall legal costs have the opportunity to take work from firms who are simply too lazy or greedy and won’t change unless they have to.

Admittedly, GC’s are incented to reduce the overall cost of legal services, so there is a conflict here with law firms’ incentive to grow the size of their practice.  But, if there is the potential to grow profits in a properly constructed AFA arrangement, then this should satisfy law firm partners who are rewarded for increasing profits for the firm and the client, not just the size of their practice.

And if the choice is to lose a good client playing big annual fees, even at a discounted rate, then partners should really get focused here.  As well,  by the time the client decides that it wants an alternative fee arrangement, it will probably have been approached by several other law  firms offering the same thing, and you’ll be yesterday’s news.

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