Law Practice Management Asked and Answered Blog

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Sep 29, 2021


Finding and Hiring Law Firm Associate Attorneys During These COVID Pandemic Times

Question: 

I am the sole owner of an estate planning firm in Chicago Suburbs. I have three other associates in the firm. Our volume of business has expanded rapidly during the last six months and we desperately need one to two more associates on board. I have been looking for three months and have been unsuccessful. I have had some leads but when I made offers they were not accepted. Your thoughts would be appreciated.

Response: 

These are tough times for attracting and retaining talent in all businesses. Law firms are having difficulty hiring lawyers as well as staff. Many of my law firm clients are telling me that finding clients is no longer their primary concern – their top strategic concern is now finding, hiring, and retaining lawyer and staff talent.

During these times it is imperative that law firms get creative and think outside of the box. Flexibility is key. Here are a few things that some of my clients have done that has resulted in successful attorney hires:

  1. Paid for sponsoring with Indeed ad placements.
  2. Took out a paid ad with their state bar association.
  3. Used a recruiter.
  4. Increased starting salary/bonuses.
  5. Added medical insurance as a benefit.
  6. Paid a signing bonus.
  7. Provided reimbursement for moving/relocation costs.
  8. Implemented a permanent remote work policy allowing all personnel to work at home a certain number of days per week.
  9. Increased number of vacation/personal time off days.
  10. Added 401k plan.

Successful law firms must attract both clients and talent in order to be successful. All businesses are suffering and having a hard time attracting and retaining attorneys and staff. This also means that other law firms are desperate and may try to steal you lawyers and staff with better pay or other incentives. You need to review all of your benefits and policies as well as compensation to make sure that you are more that just competitive – you need to be on the cutting edge and ahead of the pack. Employees now expect more flexibility, remote work, etc. than ever before.

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John W. Olmstead, MBA, Ph.D, CMC

Aug 25, 2021


Law Firm Associate Compensation – Bonuses Based on Hours or Dollars?

Question:

Our firm is an eight-lawyer insurance defense firm in Chicago. We represent insurance companies across the ChicagoLand  area representing their insured’s in personal injury cases. Our clients are billed by the hour and we have a wide range of hourly rates based upon the client, type of matter, who is working on the case, etc. We have three equity partners and five associates working in the firm. Currently all of the associates are paid a straight salary and a discretionary bonus. We are having issues with our associates not putting in the billable hours that we need them to be putting in. We would like to put in a bonus system to motivate them to increase their billable hours. Should we focus on hours or collected dollars? Your suggestions would be most welcomed.

Response: 

Both approaches – hours and collected fees are used in many law firms and I prefer collected fees when they are workable for the firm. Usually the focus is on working attorney fee collections but can also include a client origination and sometimes a responsible attorney (delegation component). However, in insurance defense firms this is often not workable due to the wide range of hourly rates and the potential unfairness for associates that are assigned to lower hourly rate client matters. Most insurance defense firms that I have worked with either pay associates a salary plus discretionary bonus or salary plus a bonus based upon adjusted billable hours that are actually billed to clients after a certain billable hour threshold is reached. For example:

Many firms breakdown the expectation in to a quarterly or monthly expectation and pay bonuses on a monthly or quarterly basis.

Make sure that your associates don’t game and milk hours. Advise them that the bonuses will be based on hours after write-downs or adjustments. In other words hours that are approved by the billing partner and are billed to clients.

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John W. Olmstead, MBA, Ph.D, CMC

Jul 14, 2021


Law Firm Succession Planning – Will Your Non-Equity Partners or Associates Simply Wait Your Out?

Question: 

I am one of three founding partners in a fourteen lawyer firm in Cleveland, Ohio. We are an insurance defense firm with three founding partners, five  non-equity partners, and six associates. We have three primary insurance companies that refer a majority of cases to the firm. All three of us founding partners are in our early to mid sixties and contemplating our retirement and departure from the firm in the next five to eight years. Our lease runs out in eight years and none of us want to sign another lease. Three of our non-equity partners are in their mid to late fifties and two are in their forties. All of our associates have less than five years experience. When and how should we begin planning for our retirements and exits from the firm?

Response: 

I suggest that you start now, especially if you are planning on an internal succession strategy. I believe that an internal succession should be your first step if you have the right people in place. When a firm has institutional clients such as you do with many different relationships within each client organization it can take time to transition relationships to the next generation of attorneys in the firm to ensure that clients stay with the firm when you retire. Transition to the next generation of attorneys usually involves legal skill development, management skill development, and client transition. We often recommend five years.

If you are looking for a buy-in for new equity partners you need sufficient time so new equity partners can pay for their initial ownership interests over time and acquire additional interests as they can afford to acquire more. Waiting too long can also create a situation where non-equity partners in the firm feel they can simply wait your out and inherit the clients without paying anything, or very little, for their ownership interests or buy-in/buyouts. Consider making a few folks minority equity partners as soon as you can.

This assume that any of your non-equity partners even want to be equity partners in the firm which is often the case these days. Three of your non-equity partners may also be close to retirement themselves and have no interest in stepping up to equity. If this is the case you will have to focus on the other two non-equity partners. I would begin a dialog with all of your non-equity partners to determine their interest level. At some point you will not really know until you present them will a proposal and appropriate financial information – initial buy-in if there is to be one and founding buy-outs if there is to be such.

If it looks like the interest or commitment level is not there in your non-equity partners you may have to consider an external option such as a merger. The timeline often can be much shorter in such situations.

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John W. Olmstead, MBA, Ph.D, CMC

 

Jun 16, 2021


Implementing a Non-Equity or Income Partner Tier in a Small Law Firm

Question:

I am the sole owner of a five lawyer firm in Indianapolis, Indiana. The other lawyers are associates. Our firm focuses entirely on estate planning and probate and trust administration as well as elder law. I am 60 and do not plan on retiring for another ten years. Two of my associates have been with me for 8-10 years and are vital to my practice as well as my eventual succession and exit strategy. I do not want to lose them so I am considering making them non-equity partners and giving them the title of partner. I am not ready to have any equity partners at this time. I have a production bonus system in place for the associates so I don’t plan on changing their compensation or the system under which they are compensated. How can I make their promotion to partner meaningful?

Response: 

Here are some things you might consider:

  1. Really build up their promotion to partner.
    1. Press releases announcing their promotion to partner to the local media.
    2. Mail out announcements announcing their promotion to partner to clients, past clients, other lawyers and law firms, judges, referral sources, and family and friends of the new partners.
    3. List them as partners on the firm’s website, letterhead, and other promotional materials. (Some firms have even listed them in the firm name – I don’t agree with this)
  2. Include them in firm management and at least begin sharing some, even if limited, financial information with them.
  3. Consider providing them with additional perks.
    1. If your present bonus system is based on working attorney collections, provide a delegation component for fee collections/receipts from other attorneys or paralegals on matters that the partner is responsible for and is managing.
    2. Additional life insurance.
    3. Country or other club membership.
    4. Firm paid automobile.
    5. Gas card.
    6. Firm credit card.

The title of partner in itself is more important than you might think but it requires that a big a buildup. If you only do one thing – do the buildup announcement and secondly include them more in firm management.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 26, 2021


How/When to Admit a New Law Firm Partner

Question: 

Our firm is a six lawyer family law firm located in the Chicago suburbs. There are two equity partners and four associates in the firm. Approximately five years ago the founder of the firm decided to retire and he sold the practice to myself and another associate in the firm. We just finished making our last payment the end of last year. We have an associate that we do not want to lose and he has inquired about his future with the firm and partnership. He has been with the firm for two years. My partner and I are considering offering him a partnership interest but do not know where to start. Any suggestions that you have would be appreciated.

Response: 

The two of you should start by asking yourselves the following questions:

The majority of firms that I work with regardless of size have a non-equity/income partner tier that an associate advances to prior to being considered for equity partnership. This gives associates the feeling of career progression, the title of partner which helps with client and peer recognition, additional responsibility in the firm, and additional compensation. Your associate may not even be expecting or be ready to become an equity partner – they simply want to know what the next step is in their career advancement and whether equity partnership is even possible in your firm down the road. Last week I interviews ten associates in a firm and six out of ten advised me that they had no interest at all in equity partnership. So, don’t assume that your associate is even interest in equity partnership.

I suggest that you give these issues serious thought before jumping off the cliff and prematurely admitting another partner. Adding another equity partner is a serious step and should be give appropriate due diligence.

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John W. Olmstead, MBA, Ph.D, CMC

May 05, 2021


Law Firm Succession Planning – How Important is a Formal Appraisal Valuation of the Firm?

Question: 

Our firm is an eight lawyer litigation firm in Portland, Oregon. We have three founding equity partners in their early sixties and late fifties, three non-equity partners, and two associates. Recently the equity partners began succession planning discussions among ourselves. Our preference would be an internal succession and transition to the younger non-equity partners in the firm. In our discussions we were discussing buy-in, buyouts, and valuation and one of my partners suggested obtaining a formal valuation. What are your thoughts regarding hiring a business appraisal firm to provide us with a formal appraisal/valuation of our firm?

Response: 

While I don’t wish to downplay a formal valuation, they can be expensive and I find often not really used in the final outcome, especially when it involves selling partnership interests to others within the firm.

Most law and other professional practices sell (to outside parties) for a multiple of annual gross fee income. Often this is discounted (sweat equity discount) when assets or shares are sold to other attorneys within the firm. Generally, this rule-of-thumb method of valuing a law practice is used to value the practice. However, the eventual value of a law practice comes down to what an interested party is willing to pay. In the final analysis the value of the practice is what an outside buyer or an attorney working for the firm will pay for (or invest) the practice. The valuation process is simply a tool to use to help you begin discussions and get to this point.

Many law firms with multiple partners view the law firm simply as a compensation vehicle designed to put as much income as possible in the pockets of the partners. They do not see the firm as an investment vehicle nor do the partners expect unfunded buyouts when they retire or otherwise leave the firm. These firms try to fund retirements with 401k and other retirement vehicles so there is no unfunded buyout upon retirement. The goal of these firms is to be in a position to acquire and retain top lawyer talent. Often these firms simply require an initial capital contribution and return cash-based capital accounts and earnings to date upon withdrawal or retirement. Sometimes a founder benefit is provided for the original founder(s) of the firm as a reward for their sweat equity establishing the make and making the initial investments. Such founder benefits are often a percentage based on an average of a founder’s compensation over the past three years.

Value in a law practice is largely personal to the lawyer and that individual’s ability to attract and retain clients. The lawyer has knowledge, experience, skill, judgment, and reputation—all elements of professional goodwill – not institutional or firm goodwill. As long as clients primarily hire lawyers, as opposed to firms, this will remain a guiding principle in valuing law practices. This is not to say that some firms have not created a “brand identity” that is separate and distinct to the institution. And in larger practices, the servicing team (including other partners and other practice specialties) influence the client’s selection decisions. Those firms are rare.

Often when selling partnership interests to others in the firm affordability and terms plays a larger role than valuation.

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John W. Olmstead, MBA, Ph.D, CMC

Apr 07, 2021


Law Firm Internal Succession – Non-Equity Partners and Business Development Ability

Question: 

Our firm is a twelve-attorney insurance defense firm based in Indianapolis, Indiana. The firm was founded thirty years ago by myself and two other partners. We represent approximately twenty-five insurance companies. Our lawyer headcount consists of three equity partners, four non-equity partners, and five associate attorneys. My partners and I are in our early sixties and just beginning to think about retirement. Two equity partners will retire in the next five years and the third is not sure of his timeline. We would really like to see an internal succession as opposed to a merger with another firm. We have yet to have any discussions with our non-equity partners and their interest in equity ownership. Frankly, we have never promoted any non-equity partners to equity partnership because none of them bring in any business and we have always thought this should be a prerequisite to equity partnership. Your advise and thoughts are most welcomed.

Response: 

I believe that for an internal succession strategy to be successful you have to start the transition early and the best way to accomplish this is to begin admitting others to equity partnership sooner than later, especially if you are expecting a founder benefit or buyout. While I believe that business development should be a major consideration when admitting equity partners this may not apply in your situation. If your non-equity partners are good minders, have solid relationships with your insurance company clients, and can hold the clients after the three of you retire this may be more than adequate for a successful succession strategy. I have worked with numerous insurance defense firms that are in their second generation totally serving clients that were originated by the original founders. Keep in mind that you are looking for an exit strategy.

By starting early and admitting them sooner than later you can implement a client and management transition strategy and determine if they are willing to buy-in and purchase an initial minority interest as well commit to purchasing your remaining ownership interests or paying your founder benefits.

The three of you should be giving some thought as to your financial expectations keeping in mind that valuation of the firm must be balanced with affordability and future equity partners ability to financially handle the buy-ins and buyouts.

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John W. Olmstead, MBA, Ph.D, CMC

 

Mar 10, 2021


Law Firm Non-Equity Partner Compensation

Question:

Our firm is a sixteen attorney full-service law firm in Denver, Colorado that works exclusively with small businesses. We have six equity partners five non-equity partners, and five associates. Three of our equity partners serve on the firm’s compensation committee of which I am one of the members. Our committee makes compensation recommendations to the partnership for equity partners, non-equity partners, and associates. Since forming the non-equity partner tier a few years ago we have not changed our method of compensating non-equity partners which has been salary and discretionary bonus. We are wondering what factors we should be considering and what some of the best practices are concerning non-equity partners. Your thoughts would sure be helpful.

Response: 

Non-equity partners’ salaries are generally based on a baseline of a predetermined billable hours multiplied by their general billing rates, plus an estimated overhead factor and incentives. The bonus threshold is generally based upon their billings and collections.

Below is a list of the factors that are considered in most firms when allocating salary increases and bonuses to the non-equity partners:

A goal should be for equity partners to earn 25 to 30 percent or more profit margin on work provided to the non-equity partners.

The firm should ensure that a profit-margin opportunity is not totally given away by virtue of the salary and bonus calculations that overemphasize billable hours and billings rather than collections.  Consideration must be given to firm overhead and profit margins.

If the work performed by the non-equity partner was originated by that attorney, it is reasonable that some portion of the fee generated be paid as a commission for originating that work. Originating the work and doing the work yourself is a common scenario. It is not unusual to see firms pay a 10 to 15 percent commission for that work.

If the work is originated by the non-equity partner but billed and handled by someone else, the commission should be lower (approximately half the normal commission or less).

All of these origination commissions should be built upon the expectation that the work is billed and collected at reasonable rates. There is little justification for paying for origination for work that is not profitable.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

Feb 10, 2021


Law Firm Partnership – Non Performing Partners

Question: 

Our firm is a litigation defense firm in the Chicago suburbs.  Four of us started the firm twenty years ago and we have since grown to a sixteen attorney firm consisting of eight equity partners and eight associates. The other four partners were initially associates and later admitted after they had been here for five to seven years. The other four partners bring in very little business and their production is dismal compared to the four founders. Our associates working attorney receipts are larger than a couple of our equity partners. Our compensation is a equal salary for all partners with remaining profits allocated to each partner based upon their ownership percentage which are 15% for each of the four founding equity partners and 10% for each of the other equity partners. They was no buy-in for the newer partners. Profits have been flat for several years and partner compensation as well. We would like to hear any thoughts that you may have.

Response: 

It sounds like partners are left to their own and are not accountable to other partners in the firm. Successful firms your size have performance expectations and guidelines for all attorneys in the firm with consequences for non compliance.

Many firms your size use a compensation committee to determine partner compensation and performance peer reviews – – both written and face to face interviews are conducted with each partner in the firm. Partner performance reviews are often avoided like the plague by many firms. They are time consuming and it is hard to give candid feedback to colleagues. However, without partner performance reviews neither the partners nor the firm will reach full potential. When partner performance reviews are used not only to review performance but to set measurable goals this data can be incorporated into the compensation system and provide additional hard data for providing a true measure of partner contribution and value.

You may have to consider changing your partner compensation system or changing nonperforming partners status to non-equity partners or associates.

You must muster up the courage to confront underperforming partners but before you do that you have to determine what the baseline performance expectations are for the firm, communicate them, and put in place consequences for non-compliance.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

Feb 02, 2021


Law Firm Compensation – Changing System to Incorporate Client Origination

Question: 

Our firm is a small insurance defense/corporate litigation firm in Los Angeles, California. We have six partners and 7 associates. Our partner compensation system is primarily based upon working attorney collections with no incentives or rewards for bring in clients – client origination. We have been thinking of including client origination as a new metric in our system. We would like to know your thoughts regarding client origination and partner compensation.

Response:

Here are my thoughts in general.

Pros and Cons of Origination Credit

Client or matter origination credit is a touchy subject. Some firm-first or team-based firms refuse to track it at all for fear that it will open a can of worms and will be divisive. At a recent bar association presentation, the presenter and managing partner of a firm stated, “one of the quickest ways to split up a law firm is to incorporate client origination into the partner compensation system” Other firms track origination credit and use it as a factor in subjective compensation systems but do not compensate origination directly or in the form of numerically determining partner compensation percentages. Many firm’s that use formulaic or eat-what-you-kill systems do not include client origination and only include working attorney and/or responsible (billing) attorney collections. Other eat-what-you-kill firms do incorporate client origination.

Personally, I believe that a law firm should track and recognize the importance of origination  and use that knowledge to determine attorney career advancement to the different tiers (non-equity partner, managing partner of an office, and equity partner) and to differentiate different levels of income among lawyers without pursuing a formulaic or commission approach to compensation. While I believe that origination should be tracked, recognized, and rewarded, it has not been my experience that a change in the compensation system will make rainmakers out of service partners or associates.

Tracking of Origination Fee Credits

There should be an expectation that an individual’s business origination efforts and results will improve over time. Fees collected should be the controlling metric used in determining origination. Origination should be tracked at the matter level as opposed to the client level. This provides greater flexibility to share origination credits. Tracking origination should not require a formal scorekeeping system. According to recent surveys less than half of the law firms grant formal origination credits.

Duration of Origination Credits

Origination policies can cause hoarding of client relationships and matters, creation of origination credit annuities, and divisive internal competition. To mitigate this tendency firms often limit the duration of the credit and sunset the origination credit after so many years – often five years. One option is to grant the origination credit on all matters opened for a new client for the first three or five years that the client is with the firm and after that time origination credit for new matters of a client would be credited to the firm, responsible, or billing attorney.

Origination Guidelines/Protocols

It is important that the firm establish written guidelines and protocols for allocating business origination credits whether the firm is using origination directly or indirectly in compensation.

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John W. Olmstead, MBA, Ph.D, CMC

 

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