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December 2017

Dec 27, 2017

Associate Attorneys as a Succession/Exit Strategy

Question: 

Our firm is a Tucson, Arizona business litigation firm. We have four founding partners and four associates. The partners are in their late fifties and early sixties. All four of us are contemplating retirement in the next eight to ten years. We are assuming that our associates will be willing to step up and buy-out our interests. We have not had any discussions with our associates concerning this. Your thoughts will be appreciated.

Response: 

Do you have the right associates on the bus for the long term? In other words, has the firm hired associates that want to be business owners and own a law firm? Many owners and senior partners in law firms are approaching retirement age and are beginning to think about succession strategies. As they examine their associate lawyer ranks, some partners are often surprised to learn that there may be few takers. While their associates may be great lawyers, they may not bring in business or even be able to retain clients that the firm has. They may not be interested in ownership or partnership. Such firms have hired a bunch of folks that just wanted jobs and have no interest in owning a law firm. While this hiring approach may have satisfied the firm’s short-term needs – it may fall short in the long term.

While partnership/ownership is still important to many – do not assume that all your associates will even want to be equity partners – especially if it means a hefty capital contribution and signing personal guarantees for a large amount of firm debt.

I suggest that you talk with your people – individually and as a group – and see where they really stand. Help them to begin developing client development and business skills. Depending on you and the other partner’s retirement timelines – you may have to consider other options such as laterals or merging with another firm.

A key suggestion is to look for entrepreneurial associates when hiring future associates. The desire for ownership of a business is often in a person’s blood. Do not start the interview with a discussion from law school until the present. Dig deeper into hobbies, family, etc. that will provide clues as to whether you may be hiring someone that just wants a law job or someone that eventually wants to own or be a partner in a law firm.

The sooner you begin the better off you will be especially if several partners are close to the same age and looking to retire about the same time. Not only does it take years for associates to be groomed for management and client transition it can also take years for them to be able to pay for their ownership interest.

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

 

Dec 20, 2017

Law Firm Associate Billable Hours – Estate Planning and Probate Firm

Question: 

Our firm is a six attorney estate planning/probate firm in Mesa, Arizona. There are three partners and three associates in the firm. We have had associates for the last eight years and have never made money from our associates. Last year we decided to implement a billable hour expectation of 1800 hours for the associates. A year later no one is even close. Only one associate will even reach 1500 hours. Is our expectation reasonable? You insight is appreciated.

Response: 

The national norms for all practices is in the 1700 range for associates. Litigation firms range from 1800-2000 hours and up with most firms having a 1800 or 2000 minimum billable hour requirement.

I believe that 1800 billable hours is high for a small estate planning/probate firm if the attorneys are only expected to work forty hours a week and the firm does not charge for initial consultations or intake interviews. Many of the estate planning/probate law firm’s that I am working with are struggling to get to 1500 billable hours – many associates and partners alike are under 1400 hours. I believe that an estate planning/probate practice should be able to expect 1600 billable hours.

I think that a forty hour work week expectation for attorneys is part of the problem. Most professionals service providers (attorneys, CPA’s,  management consultants, etc.) work more like fifty hours – not forty. It is hard to be a successful professional with a forty hour a week attitude. In addition to billable hours non-billable time has to be spent on client development, continuing professional education (CLE for attorneys), and firm administration.

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

Dec 13, 2017

Law Firm Owners Use of a Leadership Team

Question: 

I am the owner of a fourteen-attorney law firm in South Bend, Indiana. The firm is a health care firm that represents various medical facilities in the area. All of the other attorneys in the firm are associates. Currently I function as the managing attorney and make all of the management decisions. I also bring in the bulk of the clients into the firm. I am wanting to retire in the next five years and I would like to sell my interests to three associates in the firm. However, I am not sure that they would be good partners with each other, whether they have the management skills and client development skills to lead the firm, or whether they would even want to be partners. My other option would be to merge with another firm. However, I would prefer to sell my interests to the three associates rather than merge if at all possible. What are your thoughts?

Response: 

I appreciate your situation. I think you need to sort of “pilot test” the three associates. If you had other equity partners I would suggest that you form a three member management committee to begin transferring some of your management responsibilities and client relationships. Since you don’t have any equity partners I would not create or label a management committee which is usually a decision-making body with each member having a vote. You might consider forming a committee that you call the Leadership Team with the three associates and yourself serving as members on the team. This would be an advisory group with you retaining control. You would try to run the group by consensus but you would still be the ultimate decision-maker. I would start by starting the team with limited areas of management, responsibility, and authority. Teach them how to work as a group and gradually increase the team’s responsibility and authority. See how it goes and observe the interpersonal dynamics. After a year you should have a good idea whether they can work together as partners and whether an internal succession strategy will work for you. You might want to create a different category for these associates – senior associate or non-equity partner at the time that you do this as well.

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

Dec 06, 2017

Law Firm Partner Compensation – Dealing with an Overpaid Partner

Question: 

I am a founding partner of a two partner firm in Springfield, Illinois. We are finishing up our third year since we started the firm. We have six associates and our practice focuses on health law. My partner and I each have a fifty percent interest in the firm and our compensation is based on our ownership percentages. We split firm profits fifty-fifty. Ever since starting the firm I have been bringing in substantially more fees that my partner. This year I will bring in sixty-five percent of firm fees. I am getting frustrated and feel that our compensation system is not fair, not working, and needs to be changed. I would appreciate your thoughts.

Response: 

It sounds like you are referring to origination of client business and referencing fees resulting from business that you brought into the firm. Most firms do not consider fee origination as the only partner compensation variable. Working attorney fee collections as well as other contributions such as firm management, mentoring and developing associates, developing firm systems, etc. are also considered when determining partner compensation. Many firms actually give more weight (credit) to working attorney production that to origination while others may give no credit at all.

I think you need to keep in mind overall contributions of each partner – not just client origination. Pull working attorney statistics and include these in your analysis as well as firm overhead consumed. Consider other contributions that each of you have and are making and see where the data takes you. Don’t look at just one year – look at the data over the long term – say three year trends. If you still feel that the compensation arrangement is no longer fair, you and your partner need to sit down and have a heart to heart discussion.

The best approach may be to simply realign your compensation percentages after you have come to terms with the compensation factors that you consider important to the firm and the metrics you are going to use going forward.

If you and your partner can’t sit down and have such a discussion consider getting outside help.

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

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