Law Practice Management Asked and Answered Blog

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January 2014

Jan 28, 2014


Law Firm Partner Compensation – Separate Silos – Profit Sharing

Question:

Our firm is a 9 attorney firm in Orlando, Florida. We have three equity partners and six associates. Currently partners are compensated in accordance with their ownership interest percentages which are 35%, 35%, and 30% respectively for the newest partner. There is growing discontent with this arrangement. We have already evaluated several alternative approaches to compensation and do not believe that they would work for us. Two of the partners share common goals for the firm, have compatible practices and clients, and use almost all of the associate attorney's time and other firm resources. The other partner has a transactional practice (the other two of us are litigators) and operates more as a lone ranger and a separate silo. We are considering creating two profit pies for each of these two silos. I would appreciate your thoughts concerning such an approach.

Response:

I don't run into this approach as much as I did 30+ years ago. In essence this is the profit (or silo) approach to partner compensation. This approach is typically found in firms that believe that the cost of production and consumption of firm resources are disproportionate. Usually there is strong competition in these firms. Small personal injury plaintiff firms are sometimes structured in this fashion.

Using the separate silo (profit center) approach fees and costs (overhead) are allocated to each partner (or partner group or silo) profit center and profit determined for each profit center resulting in separate compensation pies for each profit center. Then each partner draws his or her profit center pie or participates in a sharing arrangement with other partners that are members of the profit center in accordance with an agreement of other partners in the profit center or silo.

The devil lies in the details and the trick is to develop a fair and balanced allocation formula that can be used to allocate fee revenues and costs to the silo or profit center.

Silo, lone ranger, or pure profit center approaches usually results in separate firms operating with a firm (a confederation), each sharing overhead in various proportions. Such firms are usually divisive and the form of organization does not encourage specialization or sharing of work. More often than not there are frequent disagreements over fee and overhead allocations.

Often this approach is the next stop to separate firms – separate books – space sharing arrangement.

Thirty years ago I worked in such a firm – the firm is no longer in business.

So proceed with caution – develop written allocation guidelines and test run the numbers before jumping off the cliff.

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

 

 

Jan 20, 2014


Law Firm Associate Compensation – Incentives for Improving Production

Question:

I am the managing partner for a 18 attorney insurance defense firm in Atlanta. We have 6 partners and 12 associates. Most of our associates are seasoned associates and have 10 years plus experience. We are presently paying them a salary plus discretionary bonus. We are having problems with six of the associates not reaching performance goals. (1800 minimum billable hours per year.) While we have some attorneys billing 2400+ hours per year – these six are not – some are billing 1400 hours. What sort of incentive should we be thinking about to improve their performance?

Response:

The incentive is to get to continue their employment, maintain a full work schedule, progress to partnership, and to receive future pay raises and bonuses.

I know of some insurance defense firms that pay a billable hour bonus above a certain level. However, this approach often causes other problems such as milking hours in client files and overbilling often resulting in client dissatisfaction and potential loss of key clients. In addition other factors are also important – quality of work, results obtained, teamwork, client relationships (minding) etc. that are often not considered and left out of the equation. Before charging off on such an incentive approach I would first see if you can determine the reasons behind the low hours of the six associates. Do they have enough work? Do they put in enough hours? Are they good time managers and good time keepers? If they have enough work – then meet with each of them – lay out the expectation of 1800 hours and consequences for non-achievement. If they have issues with time management or time keeping impress upon them the importance of improving these skills – in the meantime they may have to simply put in the extra time to get in the hours.

Suggested consequences:

  1. For those not meeting expectations. Manage and coach them in real time- but be firm about your expectations. You are paying them a salary for a certain level of expectations. If there is not enough work reduce their working hours and compensation. Consider production in future salary reviews and bonuses. Don't pay them an incentive bonus to perform the work you are already paying them to do.
  2. For those exceeding expectations. Reward them with a discretionary bonus. But when advising them of the bonus advise them specifically what it is for and that is it a variable bonus and award for specific performance exceeding expectation. 

Often motivation is more about getting the right people on the bus than incentive programs. See article on the topic below.

 Click here for article on compensation and motivation

Click here for our blog on compensation

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

Jan 14, 2014


Law Firm Administrator/Business Manager – Essential Skill Sets

Question:

Our firm is an eight attorney firm located in Minneapolis. We have 5 partners and three associates. I serve as the managing partner and frankly I do not have the time or the skills to do an effective job. My performance as managing partner is marginal at best. We have recently been discussing hiring a professional legal administrator to manage the firm. What are the essential skill sets that we should be looking for?

Response:

Larger firms that have several administrators/managers can have the luxury of having specialists – for example a HR manager, a IT manager, a Marketing Manger,  a Finance/Accounting Manager, Executive Director, etc. In a firm your size you need a hands-on generalists that can perform all of these roles. The top three skill sets that you should look for are:

  1. Accounting/Bookkeeping/Financial Analysis Skills
  2. Human Resources – especially leadership and strong interpersonal skills
  3. Marketing

I would look for someone with 5 years or more experience in managing a law, CPA, or other professional services firm and a B.S or B.A. degree in business, management, or accounting.

Click here for our blog on governance

Click here for my article on leadership

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

 

Jan 07, 2014


Law Firm Marketing – Improving Advertising Results

Question:

I am the owner of a 5 attorney estate planning/elder law firm in Boston. Our business volume is been stagnant for the past several years and down substantially this past year. We try to do all the marketing that we can. I do at least one seminar a month, we are in key directories, have a good website, send out paper and print newsletters, etc. In the past we have experimented with TV and radio advertising where we used professional narrators/actors. The results were dismal at best. Frankly, I feel we need to spend more on advertising but we are undercapitalized and funds are tight. I would appreciate your thoughts.

Response:

I am working with several firms that are facing similar challenges. Here are a few comments and thoughts:

  1. A different strategy is required for firms marketing to smaller wealth clients than larger "well-healed" wealthier clients.
  2. Advertising can be effective for the smaller wealth clients that have never had a relationship with an attorney. However referrals from referral sources and past clients are still the primary source that generates the majority of new client business.
  3. Advertising is less effective in generating business from wealthier clients. A majority of business from these clients is typically generated from referrals from referral sources, past clients, and relationship marketing activities. 
  4. Some of my most successful estate planning firms, especially those that represent wealthier clients, spend almost nothing on advertising and their major marketing investment is on relationship nurturing.
  5. You might want to look into a cable TV ad or Radio Program but proceed with caution, only if you can afford to have a sustained program, only if you are in the ad and the ad is done in a way that creates a relationship with the client (not perceived as a commercial), the results and effectiveness are measured, and an effective system is put in place for responding to inquiries on a 24/7 basis.
  6. Before investing in radio or TV ads – do all that you can with the website. Insure that it enables your clients to get to know you (personally and professionally) and feel that they have a relationship with you. Consider educational FAQ videos and a video center on the website. You might use these as "baby-steps" to TV advertising.
  7. Create a marketing plan and budget to focus your activities and help you avoid random acts of marketing.
  8. Insure that your client services are top notch and actually measure client satisfaction. Since referrals is often the major source of new business, you cannot afford to have unhappy clients or referral sources.

Click here for our blog on marketing 

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

 

 

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