Partner Compensation System – What Drives Satisfaction (and Dissatisfaction)?

As noted at the outset of this year, Sterling Strategies has partnered with the Managing Partner Forum and TheRemsenGroup for a series of monthly mini-surveys of managing partners on topics of strategic importance to law firms and their leaders.  It bears strong similarities to our 2012 “strategy question of the month” series – with the added benefit of a partnership with the Managing Partner Forum.

Our first topic – for the January 2014 mini-survey – was the drivers of satisfaction (or dissatisfaction) with partner compensation systems.  The survey drew nearly 140 responses and the findings are informative.

  • Subjective systems, informed by objective data are the most common approach to setting partner compensation.
  • The overwhelming majority of systems are fully open (i.e., both performance data and compensation results are open to all partners).
  • The smallest firms encounter the highest levels of dissatisfaction.

See the full analysis of the partner compensation satisfaction survey at the Managing Partner Forum web site.  The results of these monthly surveys will be published under the “Leadership Matters” tab on the MPF web site.  We hope you find the results interesting and useful in your own firm.

Our topic for February 2014 is practice group management – and the approaches that lead to more effective (and less effective) practice management.  The survey is open to all managing partners (we recognize many of our readers hold other leadership roles – we need to find a good way to tap the collective wisdom of law firm leaders who are not lawyers by training).  If you are a managing partner and have two-minutes to share your experiences with practice group management, click here to be taken directly to the survey.

We welcome your feedback on the survey results and your ideas for capturing and sharing the collective insights and experiences of all law firm leaders.  Improving law firm management and leadership is the primary purpose of this blog and we are always open to your ideas.

You can join our mailing list by clicking here.

Non-Lawyers: A Critical Success Factor for the Law Firm of the Future

Having great attorneys – well-trained, highly capable, hard-working and client focused – has long been a critical success factor for law firms.  Strategically, it has become basic table stakes for competing effectively in the legal industry, particularly among more sophisticated law firms (i.e., BigLaw and BigEnoughLaw).  The big change coming to the legal industry is the growing criticality of non-lawyers.  Yet, it is currently an area in which many otherwise sophisticated law firms fail miserably.

Think about it for a moment.  Where else (besides large and mid-sized law firms) do highly educated professionals get placed on such limited career paths, essentially for lack of a JD?  Furthermore, what is it about obtaining a JD that qualifies a person as an expert in information technology, project management, business development, process redesign, innovation, knowledge management or really anything besides the law and precedent?  As Bruce MacEwen astutely observed in his Growth is Dead e-book, “lawyers are inclined to assume they can do anyone else’s job but no one else could possibly do what they do.”

The very term “non-lawyers” is a peculiar construct of law firms.  And, at many firms it is used in a way that devalues, even marginalizes, professionals who are not lawyers by training and education.  Given the trends affecting the legal industry, especially the trends facing sophisticated law firms, those with a cultural predisposition that devalues so-called non-lawyers will be at a distinct disadvantage in the future.  Consider three examples where non-lawyers will be critical to success.

Responding to Macro-Level Trends

The most obvious arena in which non-lawyers will drive the success or failure of law firms is in response to the macro-level trends influencing the more sophisticated segments of the legal industry.  Richard Susskind’s book is called The End of Lawyers in large part because it foretells a future in which legal training and expertise are necessary, but insufficient for survival and prosperity.  More sophisticated law firms will be (are being) forced by clients and competitors to embrace technology, knowledge management, project management, lean process, and other management tools more common outside the legal industry.

Successfully adopting any of those management tools requires attracting great people – well-trained, highly capable, hard-working and client focused – whose professional training is grounded in engineering, information technology, organizational psychology, management, and other fields.  Their training and backgrounds will not include a JD or a background practicing law (with rare exceptions).  Even in cases where those functional managers do have a JD, it will not be instrumental to the contribution they make to the success of their law firm.

In short, winning law firms in the future will attract (and will highly value) professionals across a range of professional disciplines.  Attorneys will defer to the expertise these professionals bring to the table.  And, attorneys will collaborate effectively with those professionals to apply their expertise to the firm’s practice and its relationships with clients.

Business Development and Marketing

Over the past twenty years, marketing professionals have been gradually gaining credibility and respect in law firms.  Marketing and business development positions have been elevated within the management hierarchy and investment in the leadership positions appears to be rising.  However, there is a long way to go to fully capitalize on the expertise of marketing and business development professionals in law firms.

As long as powerful partners can push marketing and business development professionals (and their own partners) away from direct contact with select clients, the firm is at a disadvantage and at risk.  That risk includes the potential of losing the partner (and his/her clients) to a lateral move.  Frankly, partners who keep others away from “their clients” raise a number of red flags.  Beyond the risk of purely mercenary behavior on the part of a partner, a lack of broader contact risks the loss of the client relationship.  Studies demonstrate that clients with multiple partner relationships and/or that use multiple practice groups are much more likely to remain with a firm.  Further, that broader contact improves the probability that emerging and/or nagging problems (e.g., responsiveness, pricing, quality of work, etc.) will surface before a client shops their work to other law firms.

Looking forward, business development and marketing professionals will play an increasingly important role in a number of areas including:  gathering genuine, actionable client feedback; expanding existing client relationships (e.g., facilitating cross-marketing); identifying opportunities to deepen and strengthen existing relationships via process improvement, technology, pricing and other innovations.  Marginalize marketing and business development professionals at your own risk.

Delivering Cost Effective Legal Services

Perhaps the most challenging (or controversial) change coming to the legal industry is the inevitability of involving more non-lawyers in the direct delivery of client services.  That growing involvement of non-lawyers will go well beyond (though it will include) the use of paralegals over the next five to ten years.

Ask yourself a few questions (thought experiments if you will).  Who is a better value to clients in managing document discovery, a well-trained paraprofessional with expertise in IT, database searches and document management or an associate earning three to four times the salary (with less grounding in large scale document management)?  Can a $60,000 per year professional with a finance degree add value to a transactions team (perhaps many times more value than a junior associate)?  Can a trained actuary add value to risk management assessments for major litigation clients?

Certainly, some firms have already made great strides in the use of non-attorneys in the delivery of legal services.  For instance, the best IP practices and firms are loaded with PhD and Masters level technical specialists.  In the future, firms across the practice spectrum will be challenged to become much more creative in integrating non-attorney professionals into their client service teams.  That will be especially evident in practices where clients and/or competition drive the market toward more cost effective solutions.

                                *                                             *                                             *                                             *

So, if your firm still has a culture that devalues non-lawyers – that doesn’t draw upon the knowledge and expertise of other professionals – you better get started on changing that culture.  No silver bullet (technology or otherwise) will save you in the long run if the only voices that matter in your law firm are attorney voices (or even more narrowly, partner voices).

Implementing Law Firm Strategy Using a Balanced Scorecard

We have seen a spike of interest in the Balanced Scorecard since our December 2012 strategy question of the month focused on what kinds of measures law firms are using.  As regular readers will recall, the only measures firms are using with a high degree of consistency and reliability are financial measures.  Other areas – client satisfaction/client relationships; people/professional development; operational improvement – are generally not measured.

The balanced scorecard, as originally described by Kaplan and Norton, envisions a balanced set of goals, objectives and measures in four areas (as depicted in the graphic below).  Those goals and metrics should ideally be focused on advancing the achievement of the firm’s vision and strategy.  While these four categories are logical and work for the majority of organizations, the authors (and experienced managers) recognize that measures should be aligned with the strategy (rather than aligning strategy with the generic scorecard categories).

Balanced Scorecard Graphic

The concept is easy enough to understand, but how does one go about implementing some version of the balanced scorecard in a law firm environment?  In our 2009 book on the topic, we highlighted the range of barriers law firm managers might encounter when trying to use this very powerful tool to facilitate strategy implementation.  We will leave those challenges for another post so we can focus on how to use the balanced scorecard in a law firm setting.

The real key to the process (and this is equally true in a corporate setting and/or a non-profit organization) is to ensure the strategy is aligned from the firm level to the practice (and administrative department) level – and from the practice level to the roles individuals play in strategy implementation.

Cascading

Obviously, this graphic assumes the firm has a strategic plan.  For those who might have missed it, our June 2012 strategy question of the month focused on best practices in law firm strategic planning.  Some examples of how this cascading works across the categories of a generic balanced scorecard follow.

FinancialA firm with clear objectives for profit improvement (could be margins, could be PPP, could be some other reasonable proxy) might ask each practice group to identify the profit driver that offers the most promise for improving performance in their area.  In this example, the practice has identified realization improvements as the most promising area.  They would then set a target for improved realizations and adopt initiatives to drive that improvement.  Individuals in the practice would then move those initiatives forward.  In this example, individuals would focus on getting invoices out on a timely basis, with higher levels of accuracy.  Thus, the firm’s goal for improved profit margins cascades to a practice’s goal for improved realizations, which in turn cascades to individual’s committing to more timely billing.

ClientsOur second example focuses on the client dimension of the balanced scorecard.  At the firm level a goal might be adopted to broaden client relationships where ever possible.  This might be translated into an objective measure that tracks how many clients are served by multiple practice areas and/or partners from different practice areas.  At the practice level, this focus might translate into a set of target clients for whom the practice wants to expand its relationships (either bringing other practices into their relationships or by beginning to serve clients originated by other practice groups).  At the individual level, that could lead to specific plans to introduce colleagues to selected clients (or conversely to seek introductions to colleagues’ clients).

PeopleOur third example focuses on cascading for people oriented goals and objectives.  A firm level goal focused qualitatively on having the best people in the market could be measured via the number and nature of external recognition(s) the firm’s people get (e.g., Chambers, Best Lawyers, Super Lawyers, etc.).  At the practice level, that could translate into initiatives and measures focused on getting people professional (or industry) certifications.  In turn, individuals can adopt specific plans to build certification into their professional development plans.

OperationsOur final example focuses on how operational improvement goals might cascade in a law firm.  In this case, imagine a firm that has adopted a goal to reduce costs related to delivering client services.  A litigation practice in that firm might adopt an initiative to engage project managers on some or all of their matters.  At the individual level, partners/engagement leaders would commit to actively partnering with those same project managers to capture the benefits of project management discipline on matters.

*******************************************************************************

These are obviously generic examples.  However, if you have clearly defined firm level goals, those can (and should) be translated into measurable objectives so progress can be tracked and the firm can make adjustments if the strategy is not working.  With clear firm level goals and objectives, practice groups and administrative departments can align their plans with key goals.  Note, not every department and practice needs to align with every firm level goal – but, every practice has some valuable role to play in the implementation of the firm’s overall strategy.  Finally, this cascading approach enables every individual to take meaningful action that contributes to the achievement of practice and firm level goals.

 

 

 

 

 

 

Top Insights from 2012 Strategy Questions of the Month

Throughout the course of 2012, Sterling Strategies conducted monthly mini-surveys, each focused on a single strategy topic.  The intent was to develop some empirical data on what works and what does not work relative to a variety of strategic management challenges.

We certainly learned something every month.  Often the findings and insights were entirely new (if not entirely counter-intuitive).  Occasionally, the findings confirmed something we believed, but lacked the data to support.

Before setting our sights on advancing the state of strategic management in 2013, we thought readers might enjoy a highlight reel of sorts of the most significant findings from the 2012 strategy question of the month series.  The list is presented as a “top ten,” but the insights are ordered for readability and flow.

  1. Grow your own – When developing a strategy for generational succession, it is best to develop people yourself (rather than seeking to hire future leaders laterally).  Our November 2012 survey found that “high lifer” firms (i.e., firms with higher percentages of people who were hired at the entry-level and stayed) have dramatically higher confidence that future leaders exist within every experience level of their firm.
  2. Confront the elephant under the rug – The August 2012 survey focused on what approaches to managing under performing partners actually work and which do not.  What we found was that under performance rarely improves without frank discussion and accountability.  More importantly, confronting under performance actually has a reasonable success rate.
  3. Show me (more than just) the money – What characteristics make up a “model partner?”  That was our question in July 2012 and what we found was that, while originations and billings are very important characteristics in a model partner, subjective factors (e.g., training associates, bringing legal acumen to the table, being a good corporate citizen) comprise nearly 50% of the mix of characteristics firms want from the hypothetical ideal partner.
  4. See no evil, hear no evil, speak no evil (at least when it comes to partner compensation) – Our inaugural survey in January 2012 examined the question of what approaches to setting partner compensation lead to the highest levels of satisfaction.  It turns out, objective (i.e., formula) systems correlate with the highest levels of satisfaction.  And, so-called “closed systems” in which compensation and other data are not published are also closely correlated with higher satisfaction.
  5. The “vision thing” is a key to effective strategic planning – We took an objective look at what tools and approaches lead to more effective strategic planning in law firms (beyond, obviously, hiring Sterling Strategies) in June 2012.  The firms with the most effective strategic planning processes are much more likely to have articulated a vision for the future, a set of shared values, and measurable objectives to track progress toward achieving major goals and strategies.
  6. Focus practice group leaders on things that make a real difference in group performance – Firms with the most effective practice group management experiences are much more likely to ask practice groups to focus on cross-marketing, on profit drivers for their respective group, and on aligning practice strategy with firm-level strategy.  Meanwhile, the least effective groups get bogged down in administrivia.
  7. Better budgeting practices – Firms with the most effective budgeting processes are more likely to plan for growth (in addition to looking for cost savings).  And, the more effective budgeting processes are considerably more likely to involve practice group leaders in the budget development process.
  8. 2012 profit growth was driven by production and realization improvements – The bloom was clearly off the rose relative to using rate increases to drive profit growth (unlike the decade before the financial crisis).  Bonus question – is leverage dead?  On the surface the answer would appear to be ‘yes,’ but the reality is that leverage is wearing new disguises (e.g., more income partners, larger top-to-bottom compensation differentials, growing use of contract attorneys, etc.).
  9. Data, data, data (if you hope to be successful with AFAs) Alternative fee arrangements are growing across a number of categories.  Law firm leaders were emphatic in noting that the key to success with AFAs is well analyzed data (both cost data and historical work load data).
  10. Practice portfolios are driving domestic law firm mergers – Allowing for alignment of fundamentals (e.g., firm cultures and economic compatibility), the most important driver of mergers these days is finding a merger partner with complimentary practice area strengths.

As a bonus (since many may have missed it with the crush of year-end collections and the holidays), see our December 2012 findings regarding the use of objective measures and scorecards in law firms.  Short summary – firms are universally good or excellent at measuring financial objectives and results, but do a poor job measuring the strength of client relationships, people development, or much of anything else related to their operations.

We are immensely grateful to the many, many law firm leaders who completed the short (usually two-minute) strategy surveys throughout 2012.  That input enabled us to build a nice body of empirical data regarding a number of important strategic management topics.  It was helpful for law firm managers – and to us as strategy consultants.  We intend to take a slightly different approach in 2013 (shooting for five-minute surveys on a quarterly basis).  That will reduce the number of times we have to pester you all for input over the course of the year.  In place of some of the monthly surveys, we will share insights and proven approaches gained directly via other channels.

Best wishes for a very healthy and prosperous 2013.

Partner Development Strategy – November 2012 Strategy Question of the Month – Survey Results

Our strategy topic for the November 2012 focused on where the future leaders of law firms will be coming from.   There is a simple industry wide issue relative to generational demographics.  A very large cohort of baby boomer partners will be retiring over the next 20 years.  In fact, by 2020 (eight years from now) half of the boomer cohort will be 65 or older.  If you look at the broader demographics, the generational cohorts create something akin to a roller coaster.
 
 
  • Baby Boomers are a large cohort of over 80 million people
  • Generation Xers  are a smaller cohort of roughly 60 million people
  • Millennials are a large cohort of over 80 million (similar in size to the boomer generation – with many still in high school)
So, how do you overcome the overall industry (and societal) demographics to ensure you have strong people across all generational cohorts?  Our findings point emphatically to the value of hiring and developing ‘lifers’ (i.e., people who stay with the firm they join at the entry level).  In other words, the best path to ensuring you have great people across the generations is to hire and develop your own!  To quote a  couple of respondents:
 

  • “We are blessed with strength throughout the demographic ranks, as well as a culture that is attracting like minded star/potential star laterals. We highly value having high quality lawyers at all levels (including entry level), training and mentoring, and making it such that all who work here can, if they do their parts, make a career at our firm.”
  • “(Our future leaders are) most likely from “lifers”.  We have a good group of them.”
Firms who reported that 50% of more of their current attorneys are ‘lifers’ (let’s call those firms ‘high lifers’) are dramatically more confident in the future prospects of their young people.  Asked the importance of various generational cohorts in future succession (i.e., who are most likely to produce business developers and leaders over the next 10 years):
.
  • ‘High lifers’ are three times as likely to consider their current associates to be a very or critically important source of future leaders (compared to ‘fewer lifer’ firms).
  • Similarly, ‘high lifers’ are 3.5 times as likely to have confidence in associates that they ‘plan to hire and train in the next ten years.’
  • ‘Fewer lifers’ on the other hand only truly have confidence in their mid-career (over 45) and younger equity partners.
 
More broadly, no one expresses much confidence in the ability of future lateral hires to be key players in 10 years.   However, there were firms anecdotally expressing great confidence in their laterals.
.
  • “We have grown over the last 10 years 200%, mainly from lateral hires. It is from this group that we see our future leaders.”
  • “(Our future leaders will be) highly successful laterals that subscribe to our business philosophies and firm culture.”
In addition, there is not much confidence in the future prospects of younger (under 45) non-equity partners.  While not entirely surprising, the lack of confidence in non-equity partners raises enough questions about their long term role(s) to fill its own blog post.

.
Hiring at the entry level has been consistently lower across the industry – as compared to pre-recession levels.  The following pie chart explains why that condition persists quite clearly.
 
Finally, a couple of respondents looked into the proverbial crystal ball and offered predictions about where the future generation of law firm leaders will emerge.
.
  • “They will come from the middle tier of law schools, they will have worked their way thru college and law school, they will have started working early in their teens and understand how to make a dollar.  They will display a high level of emotional intelligence and a majority will be women.”
  • “From those who have a business/entrepreneurial bent as opposed to simply applying a legal analysis to a set of facts.”
As always we thank those who took the time to share their insights with peers and colleagues.  Comments are open and we welcome your emails and phone calls as well.

Partner Development Strategy – November 2012 Strategy Question of the Month

The demographics of the legal industry are clear – a very large cohort of baby boomer partners will be retiring over the next 20 years. In fact, by 2020 (eight years from now) half of the boomer cohort will be 65 or older. While it is certainly true that productive people work beyond age 65, there will clearly be a need for a new generation of highly capable partners to develop and manage client relationships, to train and mentor future partners, and to lead their firms and practices.

If you look at the broader demographics, the generational cohorts create something akin to a roller coaster.

  • Baby Boomers are a large cohort of over 80 million people
  • Generation X  are a smaller cohort of roughly 60 million people
  • Millennials are a large cohort of over 80 million (similar in size to the boomer generation)
There are clearly cultural differences between (and within) each generational cohort – something demographers have studied and documented.  However, simply looking at the size of the cohorts underscores the challenge facing law firms over the next 10-20 years. A large generational cohort has begun to retire and will continue to retire over the next 20 years.  Meanwhile, the generational cohort behind them is smaller (and we see many firms with fewer equity partners from this generation).  The Millennial generation represents a new, large cohort (boding well for the long run), but the oldest Millennial is still an associate today – and many are not even out of high school yet.

The question then is, “where will law firms’ future leaders come from?”

The very short survey below should only take two or three minutes to complete.  Your individual responses will remain anonymous and confidential – collective input will be published here at the end of the month.  Please complete the survey by the close of business (PST) on November 28, 2012.  If for some reason you do not see the survey in the box below, click this link and you will be taken directly to the survey.

As always, thank you for your willingness to share your experiences with your peers in the legal industry.