Now that many law firms have woken up to the value of strategic and marketing plans, it’s time to adjust their compensation systems to motivate lawyers to help achieve those business goals.
It makes sense that if you want a group of people to achieve a goal, you reward behaviours that are most likely to get you there. Yet law firm compensation structures are seldom aligned with a firm’s business objectives. But a January 5th, 2016 article in the Law Times News suggests that this is starting to change.
Increasingly, law firms are seeking to adjust compensation systems to better recognize (and encourage) overall value contribution by a partner to a firm. Jim Cotterman of Altman Weil suggests that one of reasons for this change is the need for credit shifting as firm’s attempt to have senior partners hand off relationships before they retire, thus ensuring the continuity of the firm. Another reason I’ve seen is the need for firms to develop more rainmakers to replace the intuitive entrepreneurialism of founding partners who were never quite able to mentor others in their business development skills.
Unless firms start to reward overall value of a partner to the firm, some firms might not survive the shift from first to second generation.
Currently, most firms calculate compensation based on billable hours, origination credits, and other revenue generation elements. The new assessment criterion goes further, and is described as comprising the four Ps of production, procurement, proliferation and profitability.
- Production: the revenues a partner can develop through their own work.
- Procurement: a partner’s book of business, but also a measurement of work expansion that partner has developed from that client base, for themselves or for other lawyers.
- Proliferation: work expansion a partner achieves for a client that doesn’t “belong” to that partner. Cross-selling or rainmaking fit into this category.
- Profitability: ability to deliver on all billings, in a cost-efficient manner.
Many firms might claim to consider these four items when determining partner compensation. Yet most systems are subjective and closed, and given what I’ve seen of most law firm statistics, I’d have to question whether their process is more scientific or gut feel.
Part of the problem lies with mechanics. Production is easy to measure as that’s essentially how we bill. Procurement of new clients can generally be tracked in an accounting system with proper origination tracking. The other half of procurement, which is tracking work expansion for existing clients, requires that each client’s growth is track and analysed on a year to year basis.
Proliferation is also possible to track provided that the client intake process allows for tracking of internal referrals, and that the lawyer opening the file accurately tracks that internal referral source. And therein lies that other challenge: lawyers do not always find it easy to ensure that internal credit is given where due.
Profitability is the area we are most familiar with, but even here there is a refinement. Cotterman explains that this used to be a “health” issues (focussed on actions that would keep realization rates up). But now, firms are realizing that the bottom line isn’t revenues…it’s profit.
Daniel Ronesi of Aderant Holdings Inc., a global business management software company, advises in the article that: “Firms are expecting partners to maximise efficiencies and control their practices instead of being satisfied just bringing in the work and actually doing it.” How do the four Ps help? By demonstrating how well a partner might be contributing economically to the firm overall, while simultaneously advancing the firm’s strategic interests.
If it makes sense for you to consider these potential changes to your compensation system, a word of advice: first, consider building the appropriate support structures. Explore the development of business development training programs, cross-selling strategies and programs, and client teams. These will make it easier for your partners to invest in the time needed to do those actions that will increase their value to the firm overall – and hopefully reap the financial benefits of doing so.