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Jan 08, 2020

Law Firm Partner Compensation and Performance Reviews

Question: 

Our firm is a fourteen partner firm in the northern suburbs of Chicago with ten partners and four associates. We are a general practice firm with different partners focusing on specific practice areas. Our partner’s compensation is determined by a three member compensation committee.  The compensation committee uses a combination of quantitative data based upon working attorney fee collections and client fee originations and makes a subjective determination regarding other contributions that a partner has made to the firm. The problem that we have is the compensation committee does not have a way to effectively measure the other contributions that are being considered subjectively. We would appreciate your thoughts.

Response: 

Your problem is a common problem. While it is easy to measure working attorney, responsible attorney, and originating attorney fee collections, billable hours, realization rates, and other hard measures of short-term financial performance, (it is hard to capture the subtler aspects of partners’ contributions such as mentoring new lawyers, firm management, idea development) and its virtually impossible to measure the long-term present value of each partner’s work and contribution.

The key is to make the subjective considerations more measurable. Many firms are supplementing the easily measured economic contributions per partner with additional measurements to determine the actual value per partner and incorporating into their compensation systems. Some firms:

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.

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

Dec 31, 2019

Law Firm Management – What Will Be Keeping Owners and Managing Partner Awake at Night in 2020

Question: 

I am the owner of a twelve attorney business litigation law firm in Northern, California. I started the firm fourteen years ago after practicing ten years in a large law firm. While the practice has been fulfilling both professionally and financially, the management side is often a challenge. As I sit here on December 31, 2019 thinking about management challenges that I may face next year I was wondering what you envision the challenges will be in 2020.

Response: 

The following were the common challenges that owners and managing partners advised us that they faced in 2019:

  1. Talent Management – Attorneys and Staff
    1. Hiring
    2. Training
    3. Motivating
    4. Compensating
    5. Keeping (retaining)
  2. Firm Succession and Transition
  3. Getting and Keeping Clients and Additional Sources of Business
  4. Managing Cash Flow
  5. Satisfying Hard to Please Clients
  6. Balancing Time Between Servicing Clients and Managing the Firm
  7. Getting Paid
  8. Competition from Other Law Firms and Non-Law Firm Service Providers
  9. Proving High Quality Legal Services at an Affordable Price and Avoiding Malpractice Claims
  10. Finding Time for Personal Life and Family

In 2019 the number one challenge was talent management and I believe this will continue to be the case in 2020. The other challenges that I have listed will continue to be the major concerns of owners and managing partners in 2020.

Here are some links to a few of our resources that you might find helpful:

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

 

 

 

Dec 11, 2019

Law Firm Financial Management – Financial Red Flags

Question: 

Our firm is a twelve lawyer firm in Chicago and our practice is a business litigation firm. We have eight partners in the firm and we are managed by a three-member management committee that was just formed this year. I am a member of the committee and I am responsible for the general financial oversight of the firm. I am trying to get a handle on law firm financial metrics and especially what are the financial warning signs that I should be aware. If you have an outline or list that you would be willing to share we would appreciate it.

Response: 

Here is a short list of what I call financial red flags that you might find helpful:

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

Nov 27, 2019

Law Firm Contingency/Practice Continuation Succession Plan for a Solo Attorney

Question: 

I am an attorney in solo practice in the Southwest Missouri. I am forty five years old and I have two paralegals working for me in the firm. The practice is a general practice firm that I started ten years ago. I have been advise that I should have a succession plan. What exactly do I need to be putting in place? Any thoughts that you have would be appreciated.

Response: 

Due to the number of baby boomers approaching retirement much of my writing has been on succession and exit planning for this group. Based upon your age I think you are talking about contingency or practice continuation planning which is succession planning for the short-term. Since you are a solo you have no backup within the firm if something were to happen to you today. So you should form a relationship with another attorney or law firm to provide coverage if and when needed.

Generally a contingency plan or practice continuation plan is an arrangement with another law firm or attorney to step in if you become sick, disabled, or die. A basic contingency or practice continuation plan involves having written instructions designating another competent lawyer to temporarily assume the responsibilities of your practice and notify clients in the event that you become disabled or die. To prevent neglect of client matters in such situations, the ethical duty of diligence  requires in many status that each sole practitioner prepare a plan, in conformity with applicable rules, that designates another competent lawyer to review client files, notify each client of the lawyer’s death or disability, determine whether there is a need for immediate protective action, have a receiver appointed in some cases. Many states are making such plans mandatory.

A contingency or practice continuation agreement with another attorney or law firm should include:

Here is an article on practice continuation plans.

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

Nov 12, 2019

Partner Compensation in Law Firms – Objective vs Subjective Approaches

Question: 

Our firm is at a crossroads concerning partner compensation. We are a twelve lawyer firm in Richmond, Virginia with nine partners and three associates. We are in our second generation of partners as the original founders have retired over the years. We do not have a managing partner or management committee – management decisions are made by all the partners. Our compensation is based upon compensation participating percentages set at the beginning of each year based upon the recommendation of a rotating member compensation committee recommendation which must be approved by the full partnership. These percentages are then used to allocate each partner’s share of firm profit. Monthly draws are taken against projected allocations and the calculations are trued up each quarter and at the end of the year. There is nothing in writing and it is unclear what is taken into consideration by the compensation committee. However, in general the primary metric is individual working attorney production collections. Supposedly, other metrics and subjective factors are taken into consideration but no one knows what they are. The majority of the partners have been relatively happy with the system but a few are not due to the vagueness of the system. I am wondering whether we should move more to a formulaic approach. What are your thoughts?

Response:

The trend in compensation, particularly in larger firms, is toward subjective or hybrid approaches and a movement away from strictly formulaic – eat-what-you-kill – objective systems. These systems are fine in “lone ranger” firms but often are unsuccessful in firms that are or want to be “firm first” or “team based” firms. The unhappiest partners that I see are in some of the firms with eat-what-you-kill objective systems. It sounds like your system has worked fairly well and a majority of the partners have been satisfied with the system. However, it may not be reinforcing the behaviors that you would like to instill in your partners if the only metric used, or is perceived as the only metric being used, is working attorney collections. Your firm is very partner top heavy and I would not be surprised if your utilization of paralegals as effective billable revenue producers is minimal. You are encouraging personal production period. What about delegation, new business origination, leadership, contribution to firm management, mentoring and training of associates, etc? Subjective or hybrid approaches often do a better job of dealing with overall contribution to the firm if they are setup properly.

I would suggest you fine tune your existing system. Consider the following:

  1. Put your system in writing. Outline the performance factors that are considered and the general importance or weights of each. This includes objective or directly measurable factors and the more subjective or harder to measure factors.
  2. Make more of the intangible or subjective factors measurable by requiring that a personal plan be submitted by each partner and reviewed with and approved by the compensation committee. This plan should contain specific measurable goals and objectives that are specific, measurable, attainable, rewarded in the compensation system, and on a specific completion timeline.
  3. Require that the compensation committee conduct personal partner interviews each and every year prior to their deliberations on compensation. This interviews should be mandatory. Self evaluations with related narrative should be provided by the partner being interviewed prior to the interview and the approved plans should form the basis for the discussion and reviews.
  4. The full partnership should either approve – up or down the compensation committee recommendation – not be allowed to pick apart or modify. If the partnership does not approve the committee’s recommendation the committee starts over and submits another recommendation. There should be a provision for what happens if a decision cannot be make – for example used last year’s percentages, etc.
  5. There should be an appeal process if a partner has a complaint with regard to the decision concerning his or her compensation.
  6. Consider extraordinary bonus pool for exceptional performance rewards.

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

Oct 31, 2019

Law Firm Financial Management – Creating a Budget the First Time

Question:

I am the firm administrator for an eight attorney firm in Nashville, Tennessee. I started this position approximately six weeks ago. While I have worked in the legal field for many years as a paralegal, this is my first position as a legal administrator. I have done bookkeeping for several firms over the years. The firm has never had a budget and has asked me to prepare one for the upcoming year. I am not sure where or how to start. Any help or ideas that you may have would be appreciated.

Response: 

You will want to consider two budgets. The first will be an operating budget which is a revenue and expense budget that will contain the income and expense accounts that are listed in a profit and loss or income statement. The second will be a capital budget which will be a budget for capital expenditures that are typically listed as assets on a balance sheet such as furniture and equipment.

Here is a process that you might want to use.

Operating Budget 

  1. Print out a general ledger chart of accounts list and profit and loss statement
  2. Using the chart of accounts list (income and expense accounts only) setup an Excel spreadsheet with the following columns.
    1. Account Number
    2. Account Name
    3. Prior year actual year to date
    4. Proposed upcoming year budget
    5. Final upcoming year budget
    6. Planning notes
  3. Account number and account name columns. List all of the accounts from the profit and loss statement in the account number and account name columns.
  4. Prior year actual year to date column. Enter figures for the prior year in the prior year actual year to date column for revenue/income and expenses.
  5. Proposed upcoming year budget. Start with revenue. However, in the budget worksheet have a revenue account for each revenue producer (attorney and paralegal) – not necessarily in the general ledger but on your budget worksheet and project their billable hours/collections expected. If you are a contingency fee practice this will require an analysis of the cases in process and estimated case outcomes and timing. This is a good place to get commitment and establish realistic revenue goals for the year. You may want to have a discussion concerning this in a firm meeting. I believe that the revenue goals are the most important part of the budget and where most firms need to focus.
  6. Proposed upcoming year budget. Enter proposed expenses. You can start by examining last year’s actual figures. Give consideration to any growth (typically lawyer and staff headcount) for the upcoming year and any anticipated changes in expenses. Develop a payroll spreadsheet listing each attorney and staff members receiving W-2 pages, their compensation last year, a anticipated salary and bonus for the upcoming year, with columns for calculation of appropriate payroll taxes. Anticipate new hires during the year. Then enter in to the proposed upcoming year account columns.
  7. Planning notes. As you develop the budget note your assumptions, etc. in the planning notes section.
  8. Submit for discussion and approval. Submit the budget worksheet to your managing partner, executive committee, partnership, etc. for discussion and approval.
  9. Enter approved budget in the Final Upcoming Year Budget Column. 
  10. Enter approved budget in to the General Ledger System, QuickBooks, etc. You can now enter the approved budget into your accounting system and simply include budget on your profit or loss statement for systems that provide this function or in QuickBooks print a Budget v Actual Report with your monthly reports. When you enter the approved budget into your system you can take the quick and dirty way and enter the annual amount for each account and have the system allocate the budget equally to each month or you can allocate to each month when you anticipate the expense – for example an insurance premium for the entire year might be allocated to the specific month when the policy will come up for renewal rather than equally to each month.

Capital Budget

This is often just a simple list in a spreadsheet and manually tracked. Many of the general ledger systems only allow budgets for income and expense accounts.

Good luck with your project.

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

 

 

Oct 23, 2019

Associate Attorney Compensation – Incentives Beyond Billable Hours and Working Attorney Collections

Question: 

I am the owner of a five attorney firm, myself and four associates, in Bakersfield, California. While we are a general practice firm, much of our practice is focused on commercial real estate, estate planning/probate, and corporate/business law. All of the associates have been with the firm over five years. The associates are paid a salary plus a bonus based upon their individual working attorney collections that exceed a quarterly threshold. While there have not been any complaints with this system I am not sure that it is the best system and that I am providing the right set of incentives. I would appreciate your thoughts and any ideas that you may have.

Response: 

Many firms use a system such as your system. However, other firms add more factors into the equation. A system that focuses on billable hours or individual working attorney fee collections often creates a firm of lone ranger attorneys that:

You might want to consider additing a component that recognizes delegation to paralegals and other attorneys (responsible attorney collections) and client origination (originating attorney collections). Some firms rather than rewarding client origination directly pay a bonus for handling new client intakes and successfully closing new business in the form of a flat dollar bonus after designated thresholds. You could also pay flat dollar bonuses for contribution to firm and business development – not time or activity – but for specific results such a having articles published, implementing a document assembly system, or writing a procedures manual. If you wish to avoid a formula approach simply use a discretionary bonus to reward firm these other factors and firm contributions. However, be clear about the factors that are be rewarded and the importance/weight of each.

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

 

Oct 10, 2019

Finding and Training in a New Estate Planning Attorney

Question: 

I am the owner of an estate planning firm in the Western Chicago suburbs. My practice is a specialized practice that focuses on estate planning, estate administration, estate litigation, and elder law. While I was a solo practitioner for many years approximately four years ago I brought in an associate that had three or four years experience with an other estate planning firm. Unfortunately, he just gave me his notice and advised that he was leaving to join another firm. We have too much work for me to handle by myself and I am going to need another attorney with estate planning experience. How do I go about finding this person. Any suggestions that you have will be appreciated.

Response: 

I have assisted several of my Chicagoland estate planning law firm clients as well as clients in other parts of the country and I can tell you that experienced estate planning/administration and elder law attorneys are like gold and hard to find. This was even the case during the 2008 recession when recent law school graduates and experienced attorneys with other skill sets were having difficult times finding jobs. Now, with the current job market, finding experienced estate planning/administration and elder law attorneys is even more difficult. Many of these attorneys tend to work in small firms, are loyal to their firms, and less mobile. They tend to stay put and often remain with one law firm for their entire careers.

I would start your search for an experienced attorney by:

  1. Putting the word out through your professional network. Ask around.
  2. Prepare an ad for the position
  3. Post the ad with www.indeed.com, ISBA.org Career Center, LinkedIn, local suburban bar associations, and local law schools.
  4. Have resumes come to you electronically.
  5. After initially reviewing resumes and narrowing down to candidates of interest use a telephone interview as your first interview and face to face for a subsequent interview if appropriate.

If after thirty days or so you are having no luck you might have to consider using a local headhunter or simply looking for a recent law graduate and investing the time to train a new attorney.  Several of my estate planning/administration and elder law clients are having to hire new law graduates and train them. Many have been quite satisfied with the results and now believe it is the best way to go. Recent law graduates start with a clean slate and do not bring in any baggage or bad practices or habits picked up in other law firms. They are often more loyal and stay with the firm longer.

A few suggestions concerning recent law school graduates:

  1. Look for candidates that took elective courses in estates/trusts/elder law.
  2. Look for candidates that had meaningful clerking experience with law firms specializing in estate planning/administration and elder law. Not running errands but meaningful experience.
  3. Develop a comprehensive training plan with specific timelines designed to get the attorney billable and productive as soon as possible in easier forms of work (possibly guardianship) and then gradually move the attorney into simple estate plans and more complex areas over time.
  4. Be patient – the process will take time – consider it an investment.
  5. It will take time for you to make money from the new associate. Be happy if you cover the cost of the associate in the first year.

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

Oct 03, 2019

How to Handle the Messaging and Public Relations When a Law Firm Partner Leaves

Question:

Our firm is a twelve attorney litigation defense firm in Phoenix, Arizona. We have eight partners in the firm and I am a member of our executive committee. Yesterday at a partner meeting we were advised by four partners that they were leaving, would be starting a new law firm, and would be taking several key clients that they handle with them. A couple of associates and staff members will be going with them. What do we tell people and how do we go about it? You suggestions are most welcomed.

Response: 

My first suggestion is to move very quickly otherwise the rumor mill will get started and rumors will get ahead of you. You must get in front of the message to all audiences. The remaining and the departing partners should meet immediately, come to terms and agreement with the message, and be prepared to answer the following questions:

  1. Who is leaving
  2. Why following
  3. Whether the relationship is contentious or amicable
  4. How the departure is going to effect clients
  5. Whether the departing partners are named partners
  6. Future name of both firms
  7. Where the two firms will be located
  8. Contact information

I further suggest that you:

  1. Plan and advance and drill
  2. Identify your audiences and appropriate messages for each
    1. Clients
    2. Employees
    3. Legal community
    4. General public community
  3. List anticipated questions that your audiences will have
  4. White out the answers to the questions
  5. Write out the message for each audience
  6. Designate a single spokesperson to respond to the press and others so that messaging remains consistent from firm management.
  7. Identity clear lines of authority.
  8. Ensure that you follow the rules of professional responsibility in regarding client communications.

Situations such as this can be very stressful for all concerned. Try not to let your personal feelings cloud your vision and get in the way of a properly planned transition. There will be a lot of work to be done on the part of the remaining partners and departing partners. A well designed project plan will be helpful in managing all the tasks that will have to be handled and managed. The public relations should be at the top of the list.

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

Sep 25, 2019

Succession-Exit Options for Law Firm Solos

Question: 

I am a solo real estate practitioner in Long Beach, California. I have one paralegal that works in the firm. I am 70 years old a would like to retire in the next couple of years. What are my options?

Response:

Solo practitioners have the greatest challenge since they have no associates or anyone in place to transition the practice. Therefore, the practitioner must both hire and groom an associate that could buy the firm or become a partner and buyout the owner’s interests, sell the firm to another firm, or merge with another firm. Other options would be to become Of Counsel with another firm or simply close down the practice. This takes time.

Hiring and Grooming an Associate

Hiring and grooming an associate can be problematic for the solo. If he does not have sufficient business and the associate does not originate business, the associate will be an expense and the owner’s net earnings will suffer. Other issues include:

Sell the Firm to another Lawyer or Law Firm

The owner can sell the firm to another lawyer or law firm. This option works best when the practitioner is actually ready to retire and quit practicing. Often this is not the case and the restrictions on sale of law practice levied by a state’s rules of professional conduct, in particular Rule 1.17, may make this option undesirable. Locating desirable candidates will take time and a well-planned search process may have to initiated. Our experience has been that this can take a year or longer.

Solo practices are often very personal practices with little annual repeat business. Clients of law firms advise us that they hire the lawyer and not the law firm. This makes buyers very cautious due to their concern that the clients and referral sources will not stay and the revenues will not materialize after the owner sells the practice. Therefore, many buyers are not willing to pay cash for a law practice. Our experience has been that most of these practices are sold with payouts over time based upon a percentage of revenues collected over a certain number of years. Usually, the seller stays on in a consulting capacity for a year to help insure that clients and referral sources stay with the new owner.

Merger with another Firm

Merger with another lawyer or law firm is another option. This is often a better option for solos that want to gradually phasedown yet continue to practice for a few more years. In essence, they join another firm as either an equity or non-equity partner, member, or shareholder and subsequently retire from that firm under pre-agreed to terms for the payout. The odds are improved for clients and referral sources staying with the merged firm and the merged firm is more committed that a buyer might be under a payout arrangement based upon collected revenues. The solo practitioner has more flexibility with regard to the ability to continue to practice longer, reduced stress, additional support and resources, and gradual phasedown to retirement.

Of Counsel with another Firm

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

One option is not necessarily better than the other – much depends upon “fit” and individual circumstances as well as a little luck.

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

 

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