Mike O’Horo of RainmakerVT posted a great article, “Lead-generation is not the same as business-generation”. See here. 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.
A recent article by Shannon Green of Corporate Counsel magazine caught my eye regarding billing arrangements. In the article, Shannon summarizes a panel discussion on project management at a Legal Marketing Association event held recently at Latham & Watkins’ office in New York. See here.
Michael Caplan, director of operations for the office of the general counsel at Marsh & McLennan Companies Inc., said, “the biggest misunderstanding law firms have about their clients is thinking that they are first and foremost focused on reducing costs. To general counsel and CEOs…predictability is more crucial…the billable hour at companies like ours is dead.”
The rest of the article outlines the advantages of using project management to achieve the above goals for clients, and the need to budget carefully the staffing required to do the job to avoid write-offs for the law firm.
Nat Slavin, founding partner of law firm consultancy Wicker Park Group, noted that “It is mind-numbing to keep up with the different needs of clients, but you have to do it, he said, adding that when it comes to managing a project for a client,”One size fits one.”
I observe that every client has unique needs, whether it’s how they want their project managed or how they want to be billed. Some clients are looking for cost certainty and fixed fee billing, while others are happy with hourly billing if law firms communicate with them regularly and alert them if hours are projected to go beyond original estimates.
Since clients value different things, it’s necessary to find out exactly what the client values up front, whether it’s cost certainty, turnaround time, etc. Then you can construct an alternative fee agreement or hourly billing estimate that meets their unique needs. You give the clients a choice of how they can be billed, whether on a fixed fee or hourly basis, or a combination. There is no one size fits all as far as client demands go on billing arrangements.
Law Firm Patton Boggs Lays Off 65
The above article cites another cost-cutting campaign by a large US law firm. 65 associates and staff are let go to trim costs because of reduced profits:
“Mr. Newberry said the layoff of 30 lawyers and 35 staffers were an effort to “align head count with revenue”…There were no partners who were let go, Mr. Newberry said. The firm now has 455 lawyers. But in recent months the firm has notified 18 partners their contracts won’t be renewed unless their performance improves.”
As a general observation, law firms often cut associates and staff during tough times but don’t cut partners. Why not cut unprofitable equity partners as well and optimize your firm’s leverage? Cutting associates and staff boosts short-term profit but often sacrifices long-term profit by reducing leverage. This is a real problem for most law firms, and highlights the deficiencies of the traditional democratic law firm business model.
Most law firms focus on short-term costs like associate and staff head count, but don’t address the really important “costs” such as unproductive partners and equity partner head count. Many large law firms have 20%+ excess capacity in their partner ranks, which is a huge drag on PEP profitability. You need to cut your ownership ranks and optimize leverage to compete with new law firm business models and ABS structures coming out of the UK. Easier said than done, however, when the owners must hold a democratic vote on who’s going first..