Daily Dispatch

Profitability Lessons

Compensation: Something’s Not Right Here

By | Mar.28.13 | Daily Dispatch, Fees, Law Practice Management, Money, Uncategorized

profitability

It was a 40-timekeeper firm with four name partners. For years, one senior partner had been giving his top clients massive volume discounts on top of rate discounts, and then staffing his matters with only the most senior staff. He racked up more than 3,400 billable hours every year. The firm paid him more than any other timekeeper, based solely on two metrics: billing revenue received and personal time receipts.

Every year, volume grew and he requested more lateral hires to handle work he couldn’t cover. But everything was not as it seemed. Volume was increasing year after year, but the name partners were taking home less and less money. Finally, management decided to investigate.

The Problem, Of Course, Was Simple Profitability

As this top rainmaker continued to ramp up the client discounts, pay increased for him and for those he brought in to assist. The gap narrowed to a point where the firm was losing money on every hour the partner worked on these matters. Making the situation worse, the firm was passing up better opportunities to acquire new clients because the existing relationships created capacity issues. The firm was growing … but growing unprofitably.

Fortunately, with more than a decade of trends and hard data available, it was easy to lay out exactly what was happening. It was a matter of costs, revenue and staffing. To his credit, the partner who was perpetuating the problem admitted that he had simply been taught to keep clients by any means and work as many hours as possible to make it happen. Once the problem became clear, the firm began negotiating new arrangements with several of his clients and shifting lower-level work to more junior timekeepers. This freed the rainmaker to start generating more profitable business based on his stellar reputation. A culture of profit took shape over time, after several tough years. The firm grew substantially in a profitable manner and ultimately merged with another high-performing firm in the region.

Using Only Hard Data for Compensation Decisions Can Be Risky

Many law firms use only a few metrics like this, and then rely on purely subjective information to make compensation decisions. You cannot—and should not—remove all subjectivity from the process. Qualitative characteristics can be more important than the quantitative ones in many cases. However, you simply can’t manage something that you can’t measure. Every firm, be it a solo practice or an AmLaw 50 global powerhouse, has to have hard data to assist in the compensation process. Otherwise, rewarding behaviors that are detrimental to the firm could become the cultural norm. As we have seen with our rainmaker’s firm, that can put your firm at risk.

Just imagine a partner who is managing her book of business well, and grooming the next class of leaders. If she sees her efforts are not being rewarded—that her hard work is simply funding the old bad habits of underperforming partners—it’s a good bet she will leave, and leave soon. And she will likely take along some of the firm’s best business.

Too many firms fail to take this potential risk to heart and, within a short time, find their firm folded or in disarray.

Russ Haskin is the Director of Consulting at LexisNexis Redwood Analytics. Russ has been a trusted advisor to over 200 law firms across the globe, ranging from small firms to several within the AmLaw 10. He is a recognized expert in matter management, alternative fee arrangements and profitability consulting. In addition, his research on legal management topics has been published by multiple journals.

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One Response to “Compensation: Something’s Not Right Here”

  1. Jane Genova
    1 April 2013 at 2:52 pm #

    Good point about measuring in diverse ways.


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