The practice of law is a business. That means law firms are governed by the same cash flow formula that defines all business success: P = R - E. Profit (for the firm owners) equals revenue collected less expenses. This defines cash flow, the lubricant that enables all businesses to function. When partners take too much money out of the organization, it creates a cash flow challenge. In too many law firms before the Great Recession, the partners got accustomed to larger-than-life styles of living and were unwilling to fund the organization due to a sense of their own personal entitlement.
Ownership Commitment
Lawyers, as owners of their firms, have a responsibility and commitment to the success of the firm. Cash flow is not just a financial metric. It is a moral responsibility for law firm owners. An owner, meaning a partner in the firm, should be the last person to receive financial benefit from the firm, after staff and associates and vendors and suppliers.
The owners of the firm should obsess about how to improve the firm’s efficiency, growth and profitability by building the firm as a cohesive unit, getting away from the broken model in which firms are only silos of sole practitioners under a loose organizational umbrella. Such lawyers too often jump ship and continue their flagrant conduct at another firm.
An ownership mentality that supports an emotional commitment to the success of the firm can lead directly to the ideas of value billing and client service instead of focusing on billable hours and ignoring the worth of what each person does. It takes the law firm out of the realm of commodity industries. It makes a law firm truly professional.
Client Demands
The recession showed that law firms no longer can or will pay compensation out of scale with what clients will accept. The value clients want increasingly determines what lawyers will be paid. That means more efficiency in fees, and less emphasis on increased profits per partner. The objective is lower costs, and law firms will increasingly feel the brunt of that effort.
To the extent that law firms provide the service clients need, at the price clients are willing to pay, they will have an adequate compensation pool. Otherwise, they will be challenged to stay in business. As business clients seek to reduce their legal expenses by reducing their need for outside counsel, the survivors are expected to provide certain work with relatively steady volume (such as patent filings or employment cases) at fixed rates over a certain period of time, turning these matters into the legal equivalent of a commodity. For non-commodity work, firms are expected to use flexible-fee alternatives. Using contingent, fixed, capped, and value fee approaches where time is not the relevant issue to determine the fee is essential to providing the value clients want.
Team Philosophy
Given these complexities, the best compensation approach in today’s cost-sensitive environment uses the client team philosophy to both increase revenues and reduce costs. Base compensation in this approach is tied to the effectiveness of involving other firm lawyers as part of the team delivering legal services to clients. This allows for blended high and low rates on client work, maximizing revenue and profitability. Compensation is paid based on what is generated for the organization– not for any one individual – because the organization’srevenue is maximized, and so too is cash flow, the lifeblood of organizational survival.
Compare athletic teams that have one or two self-centred, freelancing stars to those teams with no stars, but great cooperative skills. The former may have a good season (often followed by a collapse), the latter has greater staying power because the collective nature of the achievement allows everyone to stay at the top longer. The best law firm compensation approach gets away from a star system that rewards only the individuals who are out for themselves, by also rewarding those individuals who help the team perform better.
The team approach makes explicit the tie between individual compensation and the firm’s overall revenue. Firms that service major clients with teams (not just a single rainmaker) can identify and provide needed practice specialties that reflect a full range of client concerns. A billing attorney coordinates the service provision according to a strategic plan, and can give clients a complete and virtually seamless service package. The client receives “one-stop shopping” from a group of lawyers who are chosen to address specific needs, both in terms of practice specialties as well as billing rates.
Teams represent a cooperative effort to increase revenue within a compensation model that depends on the success of the organization. Compensation is paid based on what is generated for the organization – not for any one individual – because the organization’s revenue is maximized, and so too are profits, the lifeblood of organizational survival. In The Business of Law®, as in the business of life, a rising tide still lifts all boats.
Ed Poll is the principal of LawBiz Management. He coaches lawyers to greater profits with less stress; he is the creator of the new Life After Law coaching program that enables lawyers to plan for a profitable exit. He can be reached at (800) 837-5880 and edpoll@lawbiz.com. See www.lawbiz.com.