Planning for Success

Originally posted on Small Firm Innovation

I’ve talked to a number of solo and small firm lawyers over the years about the topic of strategic planning, and often get asked the same question: “Isn’t strategic planning  just a “big firm” thing?”

The answer is that strategic planning is for firms of all sizes.  In fact, it’s even more important for solos and small firms in today’s competitive legal environment.  Solos and small firms can use strategic planning to focus their efforts and “steal” work from big firms by providing better value through lower rates and more flexible billing arrangements, for example.

“Isn’t strategic planning too time-consuming for our partners?”  It doesn’t have to be.  In fact, I will outline a straightforward question and answer process which will easily guide you through the planning steps and produce a strategic plan once you’ve answered all of the planning questions.

“But I’ve already got plenty of billable work which clients need me to do now!”  Yes, you may have lots of work now, but are you doing the kind of work you want to keep you intellectually satisfied, and is it producing the most amount of profit for the least amount of your time?  The strategic planning process will help you resolve these questions.

Where are you going?

You start by creating a vision for your firm and deciding what your practice or firm is going to look like in the long term.  What type of law will you practice, who will your clients be, how big will your firm be, will you have a “bricks and mortar” or “virtual” office?, etc.  You need to envision all of these things and look out 5, 10 or 15 years out for your vision of the firm.

The visioning process doesn’t have to be complicated.  Some large firms spend weeks or months creating a vision, as they have many partners who must come to a consensus on it.  But as a solo or small firm, you only have yourself or a few other partners to come to a decision on your vision, so the time required is much less.

The planning process usually involves taking some time out at a retreat to have partners think about the future of the firm, and is most likely facilitated by a third party.  This third party option usually works best, since all partners have vested interests, and you want someone independent to guide you through the process to ensure you have “buy in” from all partners.

Where are you at now?

Once you’ve figured out where you want to go, you need to confirm where you’re at now. What is your current profitability by practice area, who are your current people, what is your current management structure, what is your partnership entry criteria, etc.  You will need to do a SWOT analysis, which is a review of your strengths, weaknesses, opportunities and threats to really define what your current position is.

Who are you?

This is the core values step. This involves creating a set of “values” for partner behavior which all partners are required to adhere to.  You need to decide “who’s in the boat” and who isn’t.  You need the right people to help you achieve your firm vision.

What are the steps required to achieve our vision?

Once you know where you’re going, who you are and where you’re at today, you need to figure out the steps needed to achieve your vision. These steps are known as goals, which will help you to determine if you’re making progress towards achieving your vision.  The goals need to be quantified, so you will know when you’ve reached each step along the way.

Next steps

These are the first key steps in the planning process, which will help you kick-start the creation of a new strategic plan for your firm.  In future posts, I will continue this series on strategic planning for solos and small firms.  We’ll fill in the details on how to complete your firm strategic plan and instill an ongoing strategic mindset to maximize your firm’s competitiveness and profitability for the long term.

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.

Strategic Planning for Law Firms – Key Steps in the Process

So what’s all the mystery about strategic planning for law firms?  Why do so many firms fail to do strategic planning, and if they do try it, why do they fail to implement?

First I’ll address the mystery part.  Most law firms are run as democracies, which allow partners to do what they want with no real accountability.  Strategic planning assumes that you are thinking about your future as a firm, not as a group of solo practitioners.  This is the key to making a strategic plan work.

Here’s some key questions to address in getting the planning process going.

Where Are We Going?

Ideally, you should follow a standard strategic planning process, which involves creating a mission statement and long-term vision for the firm.  The strategic planning process will address the next 3 to 5 years, and should be revisited every 3 to 5 years as the environment changes.

Who Are We?

A core values statement is also essential, to guide all partners and staff on the firm’s expectations of its people.  This will decide who’s in the boat, and who isn’t.  The core values statement is normally created separately from the mission statement, but must support it.

What’s Stopping Us From Achieving Our Vision?

First you need to identify the key issues facing your firm at the moment.  This gives you a place to start turning issues into goals and strategies.  Every issue is a potential hurdle which is preventing you from achieving your firm’s goals.  The firm’s  key issues should be summarized and prioritized.  The top 5 issues should be discussed and ideas exchanged on how the issues are stopping the firm from achieving its mission statement and vision.

What Are The Steps Along the Way To Achieving Our Vision?

Once the mission statement and vision are determined, usually during a strategic planning session with all partners, then you can start eliciting goals from the mission statement. The firm’s goals are normally contained within the mission statement.  Focus on the top 5 goals.

Quantify Objectives

With the top 5 firm goals decided on, you can then quantify objectives which must be met in order to achieve the goals.

How Do We Get There?

Conduct a brainstorming process to consider various strategies to help achieve the goals.  Prioritize the strategies needed to achieve the goals.

Who Will Do What And By When?

This is the action planning stage.  Here we identify who will carry out the strategies and assign deadlines to complete the action plans.  This provides accountability and helps with follow-through.

How Do We Ensure It All Gets Done?

This is where most firms fall down and don’t implement their plans.  You need a management structure with accountability to make it happen.  The Managing Partner will be in charge of executing the firm plan and will ensure every partner does their part in implementing the plan.  The Managing Partner must also be able to impact partner compensation to make partners accountable for their role in the process.