Andrew McDermott

It’s a common problem.

You’ve sent invoices to your clients, but you haven’t received payment. You’re a professional, so you pick up the phone and call your client.

You’re hit with the news.

Your client states they haven’t received your invoice. You look into the problem and you discover that the invoice was automatically rejected due to the missing budget for a matter on the invoice.

Are you compiling and guiding your invoices?

You know invoicing is complicated.

The billing workflow in many law firms is a multi-step process.

1. Timekeepers track/reconstruct their time (if reconstructed, firms lose as much as 70 percent of their income if they wait one week to record their time)
2. Accounting creates pre-bills for managers/partners to review. These invoices then are submitted to clients
3. Accounting runs into errors with their eBilling systems and has to document them. Managers/partners have no idea that clients haven’t received their bills. Collection with accounts receivables is delayed
4. Accounting reaches out to timekeepers to resolve the issue
5. Collection teams attempt to collect on an invoice the client (a.) has never received (b.) is completely unaware of. Collection activity stops temporarily as teams work to resolve the issue.
6. If they’re lucky, managers/partners in the firm are aware of the problem at this stage, they’re unhappy. Clients may feel they’re treated unreasonably or that the firm has acted unprofessionally.

Several issues stand out here:

• Firms have lost 70 percent of their income due to attorneys reconstructing their time after just one week (many wait a month pushing losses further)
• Accounting runs into billing issues but the appropriate parties aren’t notified. Without appropriate reconciliation procedures, firm leadership may not identify the problem quickly
• Accounts receivables are delayed, disrupting cash flow. Multiply this scenario by 25 to 100 invoices and cash flow is severely disrupted
• The client/firm relationship is harmed. This leads to a breakdown in the relationship, adding yet another barrier to client retention.

Are you seeing this?

This is a common problem for many law firms. There’s a disconnect that exists at each stage of the workflow.

Compile Invoices accurately, shepherd carefully

The success of your billing workflow depends on both. There are simple strategies you can use to eliminate unnecessary disruption.

Compile invoices accurately

1. Verify and monitor contemporaneous (as-it-happens) billing in your firm. Timekeepers should track their time automatically, as-it-happens. Your practice management software should provide you with the reporting you need to audit timekeepers in your firm. Provide your accounting team with the access they need to verify compliance.
2. Provide managers/partners with timekeeping reports at specific intervals (e.g. daily, weekly, monthly, etc.).
3. Verify billing guidelines are met and that invoices are prepared per client guidelines. Work to minimize/eliminate eBilling errors and mistakes. Use a task management system to notify involved parties (e.g. managers, partners and timekeepers).

Shepherd carefully

1. Create a map of client billing expectations. Identify, ahead of time, what’s allowed, what requires client approval, and what’s forbidden. Identify the stop words and hidden rules that immediately flag your pre-bill for review. Then revise them.
2. Treat timesheets like precious cargo. Think of your time as products in a store. Each and every shred of time generates revenue. Each line item is a unit of revenue. Every improvement timekeepers and accounting teams make to timesheets/invoices increases firm realization rates and revenue.
3. Deliver unexpected news to clients before they receive their invoice. Have timekeepers and accounting review pre-bills before clients are invoiced. Verify that invoices are accurate, confirm to billing guidelines and are received by clients.
4. Use a task management system to maintain swift communication with accounting teams and timekeepers.

Is this really necessary?

Aren’t timekeepers supposed to stay focused on billable work? It seems like timekeepers are being punished with more non-billable work. They’re already overloaded is this necessary?

Absolutely.

These issues crop up at specific times in the attorney/client relationship.

1. With new clients
2. Changes to existing client relationships

In the beginning, you’ll need to pay close attention to the requirements and guidelines your clients have laid out. It requires careful attention until everyone on a client’s matter is acclimated to the way things need to be done.

Paying close attention in the beginning reduces the amount of work you’ll have to do in the end.

It’s a win for everyone.

Your invoices should be compiled accurately and shepherded carefully

It’s never a set and forget ordeal.

If you’re like most law firms, your billing workflow is a complicated, multi-step process. Give your invoices the attention they deserve.

All it takes is a little bit of your attention.

Give your invoices the upfront attention they need and you’ll reap the rewards. A 50 to 70 percent increase in revenue, a decrease in non-billable work (over time) and higher realization rates.

It’s another way to stand out.

You’re a professional. If you’re focused on serving your clients and serving your firm, you’ll do what it takes to compile invoices accurately and shepherd them carefully. With some upfront attention and a bit of effort, you’ll have everything you need to achieve sky high realization rates.

Are you overpaid? It’s an assumption your clients frequently make. They see your hourly rates, the large dollar amounts on their invoices and they pause.

It’s an easy assumption to make.

In reality, it’s actually the opposite. A large majority of attorneys are overworked and underpaid. Many simply aren’t receiving the revenue they actually deserve.

Your clients don’t see the full picture

They don’t see the large amounts of time, effort and resources you pour into their matter. They’re largely indifferent to the heavy losses you endure on a regular basis.

Your effective billing rate is partially to blame.

Attorneys are working for less than they deserve because they’re in the dark. When I use the term effective billing rate you know what I mean. I still want to make sure we’re all on the same page.

Here’s the formula.

Total annual revenue ÷ Total number of hours invested = effective billing rate

See what I mean?

When you use this formula to calculate the amount of time (billable + non-billable) you spend on a client’s matter, the results are less than ideal.

Why is that?

You’re spending (losing) a significant amount of time to a variety of sources/causes. Address these causes and you increase your effective billing rate, it’s that simple.

Here are two ways to do it.

Strategy #1: Minimize and optimize incentives

Discounts, write-downs and write-offs are a common part of attorney life. Clients use a variety of excuses to maximize their incentives.

• I shouldn’t have to pay for justice! These clients feel they’re innocent of wrongdoing. In their head, that means someone else (you, adversaries, anyone but them) should be forced to pay your fees for representation.
• “I’ll return the favor and refer additional clients your way.” This sounds like a fantastic deal, it really isn’t. It could be true but that isn’t the point. The referrals you receive are likely to be more thrifty clients who are looking to minimize your fees and maximize the amount representation they receive.
• “We’re part of the same [club/group/ethnicity, etc.]” This can work if there’s a quid pro quo arrangement. Typically what ends up happening is the opposite. You’re expected to provide a significant amount of representation in exchange for little to no money. Kneel down to accept this arrangement and these “clients” will never let you stand up again.
• “I simply can’t afford you.” This manipulates social norms in a way that solely benefits the “client.” With a little bit of implicit nudging and a lot of social pressure, attorneys are maneuvered into a position to offer their services at a (heavily) discounted rate. If this objection works once it’s used repeatedly to extract incentives and value from the firm.
• “Why is my bill so high? I’m not paying that.” Clients either haven’t received the appropriate level of communication or they’re simply unwilling to pay more than they expected for legal services. These clients know firms are afraid of losing them so they use this to squeeze more value out of the attorneys handling their matter.

Minimize discounts, write-downs and write-offs by using:

• Developing a strong value proposition: Provide clients with a proposition that is: (a.) something they want (b.) something they can only get from you (c.) something they believe you can provide (d.) something they understand. This typically requires two things: (1.) doing what other firms can’t (2.) doing what other firms won’t
• Offering bonuses, incentives and rewards instead of discounts, write-downs and write-offs. Bonuses, incentives, urgency and psychological triggers motivate clients to take action. discounts, write-downs and write-offs enable and reward poor behavior (e.g. non-payment).
• Choosing clients very carefully. Attorneys accept poor behavior from bad clients. These clients are accepted by firms because there isn’t enough business to go around. These poor quality clients wouldn’t be tolerated if attorneys and firms were filled to the brim with high-quality leads from outstanding clients. Outstanding business development gives firms the ability to say ‘No’ to bad clients.

Strategy #2: Optimize or eliminate costs and expenses

Clients today are demanding more.

They don’t want to pay for research, costs and fees. They’re unwilling to pay for first-year/junior associates. They’re using AI to reduce their need for outside counsel. They negotiate for (dramatically) reduced rates.

Here’s the problem.

You still have to pay your employees for the research. You still have to cover your expenses/fees and the licensing arrangements for the software you use. Clients continue to demand discounts.

Your margins are growing slimmer.

Reduce the amount you’re spending on research and your margins go up. Find a way to provide clients with the value they need at a reasonable price they’re willing to pay.

• Renegotiate with vendors. Request volume discounts or reduced licensing fees with your vendors and technology providers (e.g. a reduced rate in exchange for an extended contract).
• Use alternative fee arrangements to increase your rate at a price that’s affordable but repositions your client’s
• Improve attorney productivity. There are simple strategies you can use to achieve big wins in a short amount of time. Here are three easy ideas: (1.) Firms lose 50 to 70 of their revenue to time leaks. Research shows switching to contemporaneous (as-it-happens) time tracking boosts law firm cash flow and recovers previously lost revenue. (2.) Use practice management software to track and optimize attorney performance. (3.) Firm employees waste 11.2 hours per week dealing with document management issues. A document management system eliminates these challenges.
• Counter their offer. Your prospects and clients are going to push for discounts and write-downs. Counter with a better offer you’re sure they’re willing to accept. How do you do that? You use a client intake questionnaire to identify your client’s primary, secondary and tertiary problems. Then provide an innovative and cost effective solution to their secondary and tertiary problems. It’s difficult, but it’s worth it.

Eliminate your productivity challenges, optimize the performance of your legal practice and your effective billing rate goes up. Your employees are able to spend more time on billable work and are able to complete work in an efficient manner.

Effective billing rate improvement bonus strategies

• Bonus strategy #3: Improve your firm’s utilization rate: Several studies show an unpleasant truth. Attorneys are paid for less than 30 percent of their day. Optimizing your firm’s utilization rate goes a long way towards boosting firm earnings.
• Bonus strategy #4: Improve your firm realization rates: You can do this by following billing guidelines, follow billing best practices and implement excellent systems and procedures to minimize disputes.
• Bonus strategy #5: Outsource work to freelancers and AI, further reducing expenses and overhead. Here are a detailed set of instructions you can use to outsource and automate huge segments of your billable and non-billable work.

Your clients can’t see the full picture

They’re not seeing the large amounts of time, effort and resources you’ve poured into their matter. Their indifference isn’t malicious, they’re simply unaware.

You’ll need to train your clients.

Create a strong value proposition. Focus your attention on optimizing your firm. There are easy strategies you can use to create big wins for your firm. Don’t rely on your client’s faulty assumptions. Ignore naysayers who state inflated costs are part of running a firm.

You can do better.

With the right approach and a clear set of strategies to follow, you’ll have the tools and resources you need to boost your effective billing rate dramatically, no billing complaints necessary.

Will you let them help you?

Your employees want to send you an avalanche of fresh leads, new clients and more revenue. They’re eager and willing to send you more business than you can handle.

They want to see your firm grow.

They’re willing to do this and more for you. There’s just one simple condition they’d like you to meet for them. It’s reasonable, fair and appropriate.

They want the credit.

Many partners take origination credit unfairly

Kristi Dosh, a former attorney, shares a disturbing picture of origination credit gone awry.

“I brought in my first client at the end of my first year as an associate. I wasn’t actively out trying to land my first client, but I had gone out and found some pro bono work in an area the firm didn’t really practice: historic preservation.

A paralegal on my team found out about that pro bono work and introduced me to someone she knew who was attempting rehabilitation on a historic property and needed assistance with the tax credit aspect. I went to lunch with this gentleman and his business partners – alone. When I did it, I had no idea it would turn into work. Otherwise, I would have taken a partner with me. Instead, it was presented as an opportunity to network and to give a little advice to a friend of this paralegal.

Except the lunch turned into a bona fide client engagement. Exciting, right?

I can’t remember how one of the partners on my team found out about the new client, but he did. He called me to his office and told me he was having the form changed to identify him as the originating attorney.

His reason? Because it was his paralegal who introduced me.“

If you’ve found yourself on the receiving end of this you know how it feels. It is absolutely infuriating.

A partner in her firm who had never met the client, spoken with the client, or done anything remotely close to historic preservation decided to steal the credit for her work.

The result?

This act of treachery permanently destroyed her trust in this partner. This disaster soured her relationship with the firm, eventually costing the firm a talented employee.

You can avert disaster with a few innovative approaches

I say innovative, not because these approaches are new, but because they’re used so infrequently. It’s an unfortunate reality in the legal world.

But it’s also avoidable.

With a few simple and innovative approaches, you can dramatically reduce conflicts around origination. Here are four ways to approach origination plans.

Approach #1: Create a sunset rule for origination

Permanent origination credit is common in many firms. But this approach creates unnecessary headaches. It also creates bitterness and resentment resulting in the breakdown of teams and the build-up of silos.

Here’s an example.

Partner A brings in a new client. A receives the origination credit for the client’s matter and work is completed. Seven years pass and the client is now inactive. Partner B brings the client back and works with them on a new matter, however, A receives the origination credit for B‘s work. B is understandably upset.

Why would A receive credit for B‘s hard work?

Permanent origination credit.

A sunset rule would diminish partner A’s involvement over time, taking a client’s inactivity into account. If the firm received no new business in the seven-year interim, it would be both reasonable and fair for B to receive the origination credit for his work.

A sunset rule could start at 75 percent, decrease to 50 percent over time, decrease to 25 percent and then finally drop to 0. The originating partner could receive credit for a limited time (e.g. three, five or seven years, etc.).

Approach #2: Require active participation to receive credit

Unwarranted origination credits typically don’t serve the clients. Clients are often neglected, in some capacity, by attorneys who will/won’t receive credit for their work. Active participation helps to mitigate these concerns.

Here’s how.

The partner or associate should be required to maintain contact with the client or the attorney handling the work. They should work with all parties involved to bolster the client/attorney/firm relationship.

1. Bring new clients in, then refer them to the best-qualified attorney or department for handling
2. Remain involved, verifying that high-quality work is produced in a timely and efficient manner
3. Maintain persona and/or professional contact with the client, helping to develop new business opportunities
4. Ensure that reporting is done timely and within the appropriate schedule/guidelines previously set
5. Shepherd a client’s matter through the firm to ensure work is done to standard
6. Oversee timekeeping, billing and collection of fees and costs

If this seems like common sense, it’s not.

It seems obvious when it’s pointed out, but it’s not so obvious that it’s inherently intuitive.

Approach #3: Use matter proliferation credits

Incentivize partners.

Give your partners a strong and compelling reason to “proliferate” or grow new business on behalf of the firm. If partner B or associate B proliferates new business from an existing client originated by partner A they should receive a matter proliferation credit to incentivize them further.

What about client hoarding?

Won’t partner A hoard existing clients to avoid sharing their origination credit?

Yes, if the credit is shared.

You can incentivize both partners/associates if the matter proliferation credits are separate from origination credits. This provides both attorneys with the opportunities they need to provide significant value to the client, strengthening the client/firm relationship further.

This is also ideal because it keeps clients loyal to the firm. Clients who work with multiple partners are far less likely to leave the firm if a partner decides to leave.

Approach #4: Use decision by committee to resolve disputes

Origination can be messy.

The circumstances of a particular situation can be complex and difficult. It’s prudent to establish a (separate) governing body that will provide the firm with direction.

This could be:

• The managing partner
• A management committee
• A specialized compensation committee
• An executive committee

The point here is this.

You need a separate governing body that is disconnected from those disputing credits. You need an objective third party that follows an objective rule set that is written down and clearly established.

This eliminates bias.

But it also gives the firm the tools it needs to resolve any potential disputes that occur as a result of gaps or blind spots in your policies (this is inevitable).

Don’t leave this to other partners.

Take care of your firm’s employees as this is one of the most important employee retention tools your firm has at its disposal.

Your employees want to grow your firm

If you let them, your employees will send you an avalanche of fresh leads, new clients and more revenue. They’re eager and willing to send you more business than you can handle.

They’re willing and able to do this and more for you.

But, they’re looking for fairness. It’s the one condition they’d like you to meet in this regard. Be reasonable, be fair or be gone.

Your employees are your greatest allies.

They’ll do their very best to give you the results you need, just be sure to them credit where credit is due.

Give me the credit for your hard work.

This is the situation associates and paralegals run into. They bring new clients to the firm. Then, before they can receive credit for their hard work, the origination credit is ferreted away by a senior partner at the firm.

It’s a bitter pill to swallow.

Origination credit schemes are, to quote Jim Cotterman, “the single most important determinative factor in partner compensation.”

Many firms don’t know how to handle origination

Should origination credits be permanent? Do you need a “sunset rule?” If so, how long?

It’s often messy and complex.

But origination is also an incredible source of lost business for many firms. Here’s a real example shared with The American Lawyer:

“Jeffrey is a paralegal with a top 50 Am Law firm in San Francisco. While vacationing in Mexico, he met the general counsel of a Fortune 500 company who was in the market for legal representation. The two hit it off, and over the course of the next several days, Jeffrey convinced the GC to consider his firm as a contender for outside counsel. The GC had already identified a few firms with which he might do business. But he was sufficiently impressed with Jeffrey and his portrayal of his firm that he agreed to consider his proposal.

Jeffrey presented the client to the office managing partner when he returned, noting that legal fees in the first year could exceed $2 million.

Jeffrey smartly asked for some type of origination credit; he proposed an end-of-year bonus or a small percentage of the company’s billings as recognition for his business-generation skills. The firm balked—and refused his request—simply because he was a paralegal.

“In the end, it all came down to turf battles and egos,” Jeffrey said.

“The partners couldn’t stomach that a non-partner—much less a paralegal—had landed such a big fish.” Ultimately, he was so incensed over what happened that he left the firm. And the GC found representation with a competitor.”

It’s a scenario that’s repeated on a daily basis. It’s an unbelievable case of firms losing both the battle and the war. It costs firms a tremendous amount of money in the form of lost clients and lost talent.

The first step for firms?

Set specific goals for your firm. These goals should be specific and measurable.

It starts with questions.

• Should origination plans be permanent or come with a sunset rule?
• What are the terms and conditions for a sunset rule?
• Who is eligible to receive origination credit? (e.g. partners, associates, paralegals, receptionists)
• What the minimum/maximum allowable percentage for origination credit?
• Will your firm offer a matter proliferation credit?
• Who receives credit if someone else upsells or cross-sells firm services?
• How will origination disputes be handled? Who has the final say?
• How will your firm handle inherited or transferred clients? What about an extended absence, disability or death?
• How should origination credits be handled for inactive clients who are activated by a new employee?
• How will origination and matter proliferation credits be tracked?

Answering these questions gives everyone in the firm clarity. That clarity is the key to creating origination policies that work.

Here are 10 policies for an effective origination plan

Origination credits should come with a set of responsibilities and requirements. These requirements reduce the bitterness and resentment that comes from a poorly managed origination scheme dramatically. Here are a few policies you can use to create an effective origination plan:

1. Award/prioritize credit to employees who add value to the client/firm relationship.
2. The attorney (or employee) receiving origination credit should be obligated to maintain (personal/professional) contact with the client or attorney handling a client’s matter.
3. Outline the terms and conditions for sharing origination credit with other attorneys or employees in the firm.
4. Allocate origination credits by matter for greater accuracy.
5. Set clear metrics outlining what will be measured and rewarded.
6. Outline destination for origination credit when the originating attorney leaves the firm.
7. Set clear requirements for exigent circumstances and extended absences.
8. Make sure origination credits work with your compensation models, never against it.
9. Create an origination plan that supports your firm culture (e.g. adhocracy, clan, hierarchy and market).
10. Use simple, objective and hard rules.

Your origination plan should drive your firm’s goals. This isn’t simply about compensation. It’s about incentivizing your team to work together.

These details are crucial.

These details show firms how to handle origination

They give your team the tools and resources they need to build stable and profitable client relationships. This isn’t the case for most firms.

It’s actually the opposite.

Origination is an incredible source of lost business. Instead of building up the firm it tears them down. Firms with poor origination plans devolve into matter bartering, bad pitch teams, siloed partners and employee departures.

This doesn’t have to be the case for your firm.

With the right policies and a clear origination plan, you can give employees the tools and resources they need to grow the firm’s book of business. Your employees have a simple request.

Give me credit for my hard work.

An effective origination plan does just that. With the right policies, you’ll have what you need to boost firm revenue, attract new clients and retain all-star talent. No bitter pills needed.

We’re not paying for that. It’s 2016 and BigLaw firm Cravath, Swaine & Moore has decided to adjust their attorney compensation model and increase the salaries of their first-year associates from $160,000 to $180,000. Eighth-year associate salaries were increased to $315,000. What caused this? Cravath associates brought the issue of base salaries up at a town hall meeting.

It was reasonable.

Associates were struggling to keep up with student loans and the high cost of living in a large city like New York.

Clients were unhappy with associate raises

It isn’t because clients are miserly or greedy.

Not at all.

It’s because these sophisticated clients are able to read between the lines. After Cravath’s announcement, other firms followed suit in a kind of soft salary arms race. Milbank, Tweed, Hadley & McCloy decided to increase first-year associate salaries to $190,000.

Clients responded negatively.

David Leitch, Global Counsel, Bank of America had this to say about these salary increases:

“While we respect the firms’ judgment about what best serves their long-term competitive interests, we are aware of no market-driven basis for such an increase and do not expect to bear the costs of the firms’ decisions.“

In other words, we’re not paying for that.

You’re probably not surprised.

What is surprising is the fact that this salary arms race isn’t doing much to stem the flow of associates leaving firms large and small. Research shows the reasons for this mass exodus have remained the same (relatively speaking) for the last 20 years.

Associates leave because they…

1. Don’t have the training and mentoring they need. Associates are looking for classroom training, mentoring from senior associates/partners and hands-on, one-on-one training.
2. Don’t have consistent, substantive feedback. Associates want clear and actionable feedback they can sink their teeth into. These associates receive cookie cutter feedback (via their year-end review) that doesn’t give them much to work with “i.e. you’re doing great!”
3. Don’t have the career opportunities they need. Attorneys are looking for career advancement. They’re looking for ways to make an impact, add value and push their career forward. The problem at most firms is the fact that attorneys aren’t getting the chance to move forward in their careers.

At first glance, it seems as if the issues above are separate from compensation.

But are they?

To find the answer, we’ll need to look at the history of attorney compensation.

How were attorneys compensated in the past?

Early in our country’s history things were different. According to John Leubsdorf author of Toward a History of the American Rule on Attorney Fee Recovery,

“legislation provided for fee recovery as an aspect of comprehensive attorney fee regulation in the late colonial period.“

Attorney fees were, at one time, highly regulated.

In the eighteenth century, most of the colonies regulated attorney fees by statute. These statutes dictated the fees an attorney could charge their clients and the fees that could be recovered from a defeated opponent in court.

This wasn’t about responsibility.

This legislation wasn’t about shifting the responsibility for fees from one party (clients vs. defeated opponents) to another. It was about limiting the fees an attorney could collect. It’s no surprise then that fees were unreasonably low for attorneys.

Why rely on legislation though? Leubsdorf explains:

“Commentators have usually ascribed this legislation to unreasonable anti-lawyer hostility, and there is no question that hostility to lawyers existed. Fee regulation, for instance, often followed attempts to ban lawyers entirely.’ Sometimes attacks on lawyers reflected hostility to their links to the government, or later to their mercantile clients. But hostility may not have been a necessary cause of regulation; colonial legislatures regulated many parts of the economy.“

Here’s the interesting part.

At this point, attorneys were quasi-public servants; their fees were very similar to the fees paid to court clerks.

“Members of both groups were in part public servants and in part private entrepreneurs. Both performed duties essential to the operation of the courts, and were, at least in theory, regulated by judges. But lawyers and clerks were also in business for themselves. Clerks at that time bought their offices and lived on their fees’ -and both were careful to collect fees for each item of service.“

Naturally, attorneys were unhappy.

Their attorney compensation model was far too low. However, courts weren’t all that interested in justifying the low level of attorney fees included in court costs.

Cue The American Rule.

Lawyers would eventually achieve a compromise. They challenged legislative limits on what they could charge their clients, winning the right to bill and collect whatever the market would bear. These compensation developments led to contingency fees and other alternative fee arrangements.

Why attorney compensation models help shape your future success

It’s an important question.

Why do compensation models matter to attorneys/firms? Because it’s a clear indication of value.

Specifically the question,

“What do you value?“

Remember Howard A. Levitt?

He’s the employment attorney who abandoned his prized $200K Ferrari in rising flood waters so he could make it to a hearing on time.

This is legendary service to everyone except attorneys. Their automatic response according to Sam Glover is something along the lines of “duh.” When your clients hire you to handle their matter they get all of you.

Obviously.

Levitt’s actions showed he cared more about his client’s concerns. He was more focused on the advocacy than he was on his personal details. He fought through exigent circumstances to deliver exceptional results for his clients.

Which is why he’s paid well.

What does that have to do with compensation? When you take on a client’s matter they get all of you. When an employee joins your team they should get all of you.

Do they?

Do attorneys get all of you when they join your firm? The honest answer for most other firms is No. Most attorneys aren’t paid well enough to handle the heavy load that’s placed on their shoulders.

Meaning what exactly?

• Attorneys are actually underpaid. Research tells us consistently that attorneys aren’t receiving the pay they deserve due to factors like downward pressure on firm realization rates, write-downs, write-offs and
• Attorneys aren’t receiving the opportunities they need. Attorneys of all stripes (solo, small, medium and large) are getting bogged down by the work itself, but they’re looking for career advancement and growth, the light at the end of the tunnel.
• Attorneys aren’t getting the guidance and feedback they need. Criticism, advice, mentoring – they’re all falling by the wayside as firms are fighting to survive the shifting legal landscape.

This is the reason turnover at firms hovers at a sobering 44 percent attrition after three years. Compensation is actually part of a bigger problem.

Engagement.

Your firm needs the right attorney compensation model

The model that gives them all of you.

According to Michael Anderson, author of Partner Compensation, the vast majority of compensation models fall into seven basic categories.

1. Equal partnership
2. Lock step
3. Modified Hale and Dorr
4. Simple Unit
5. 50/50 Subjective-Objective
6. Team Building
7. Eat What You Kill

1. Equal Partnership model

In this compensation model, law firm profits/bonuses are divided equally among a defined group of partners (or associates). Let’s say you’re part of a firm with 12 partners and net profits of $4 million. If the profits are divided equally each partner would receive $333,000. This compensation model is common in smaller firms.

This model relies on an assumption.

Each of the recipients in your firm contributes equally.

Strengths

The larger the pool of profits, the larger the potential payout is for any individual partner. What does this mean? The financial well-being and profitability of the firm is the primary concern. This model is effective because it enables firms to compensate for performance swings (e.g. good years and bad years) on an individual partner’s record.

It’s perfect if your firm relies on a tight-knit clan culture.

If you hate competition and the cutthroat nature prevalent in many firms, an equal partnership may be the ideal motivator for your team.

Here’s why.

This compensation model shifts the firm’s focus from how am I doing in my firm to how are we doing compared to other firms.

Weaknesses

This model has a major flaw.

Price’s law.

Derek J. de Solla Price made a significant discovery. He discovered that 50 percent of the work is done by the square root of the total number of people who participate in the work.

Meaning what exactly?

Value creation isn’t symmetrical. If you have 100 attorneys in your firm, 10 of them will produce 50 percent of the results or outcomes.

Equal partnership can work well if attorney skill sets and functions create a kind of overlap in the firm. Everyone does what they’re good at but specific attorneys handle specific matters.

And, if there is no skills overlap?

Top-performing associates and partners may be mistreated and overworked. They may choose to leave for greener pastures. They’ll seek out firms with merit-based compensation models. If this happens, it makes it more difficult for firms to retain top performers.

2. The Lockstep model

This compensation model relies almost entirely on seniority. The longer an attorney/partner stays with the firm the more compensation (e.g. salary, bonuses and incentives) they will receive. In this model, income is divided along seniority lines or levels (e.g. junior partners, middle partners and senior partners).

Strengths

This model relies on loyalty and kind of creates golden handcuffs. Once attorneys are locked in, few are willing to give up the seniority, the rewards they’ve accumulated and leave.

Like an equal partnership, the lockstep fosters internal unity and encourages external competition. This is due to the fact that there’s really only one way to increase individual incomes.

Make the pie bigger.

There’s no financial upside to client poaching or file hoarding, so everyone, partners, associates and support teams, work well together.

Weaknesses

Price’s law is a problem for the lockstep model as well. In fact, the lockstep model often de-motivates attorneys from working harder. Why work harder than necessary if your compensation will continue to climb/progress?

It gets worse.

Younger attorneys may feel a great deal of resentment towards their elders. In their mind, it seems unjust that older attorneys command the lion’s share of firm profits, especially when these older attorneys produce a steadily decreasing amount of work.

It’s a fair objection.

Left unchecked, this compensation disparity may lead to a mass exodus of young talent from the firm. Younger attorneys may strike out on their own or move towards firms with merit-based compensation models.

3. Modified Hale and Dorr model

In the 1940s, Hale and Dorr created the first incentive-based compensation scheme. The firm divided partners into three categories.

1. Finder, the rainmaker who brings in the client.
2. Minder, who’s responsible for managing the client.
3. Grinder, the partner/associate who’s responsible for doing client work.

Here’s how compensation is broken down.

In addition to a base salary, contributing parties would receive a predetermined percentage of the profits in exchange for the work that’s done. This would be negotiated ahead of time and would depend on the level of difficulty, involvement and so on.

Here’s an example:

• 20 percent of profits to finders
• 20 percent of profits to minders
• 40 percent of profits to grinders
• 10 percent to support teams
• 10 percent to a discretionary pool for top performers who go above and beyond

This could be used in combination with other compensation systems like a monthly bonus pool or team building system. The idea here is that it’s directly opposed to an eat-what-you-kill compensation system.

Strengths

The modified Hale and Dorr model rewards individual contributions, decreasing the emphasis placed on firm performance overall. The assumption with this model is that everyone will be adequately motivated by the compensation model to perform.

Attorneys know exactly how to increase their income.

This compensation model is preferable for many attorneys because it gives them a significant amount of control over their financial future. Using personal goals as a guide, attorneys are able to increase or decrease performance appropriately.

• If an attorney prefers to spend more time with their children while they’re young they can decrease their performance/output.
• If that same attorney later decides to increase performance dramatically to pay for their children’s education they can ramp up.

This model improves team camaraderie decreasing bitterness and resentments that come with other performance-based models. It also avoids the animosity that comes with profit-sharing.

Weaknesses

This model promotes individuality. Under this model, attorneys are focused on their individual output and less inclined to help their peers and subordinates. Under this model, partners are incentivized to focus exclusively on billable work.

Alienation is a common side effect.

Team-building and collegiality tend to fall by the wayside. To complicate things further, partners tend to hoard files, clients and work. Unsurprisingly, these behaviors create resentment and animosity between partners. Junior partners feel they aren’t getting enough work (or the work is of dubious quality). Senior partners work to protect what’s theirs.

4. Simple Unit model

The simple unit model focuses on seniority but also rewards production, rainmaking and nonbillable work. This compensation model uses a straightforward and objective calculation to reward attorneys in the firm.

For example:

• One point for each year with the firm
• One point for $X of production (fees billed or received)
• One point for $2x of rainmaking

Points are awarded on the basis that the total number of points is 3x the number of attorneys/partners. These points are allocated on the pro rata basis using the number of billable/non-billable time recorded.

These points are converted to a percentage.

This percentage is then applied to the firm’s net profit for the fiscal year. This figure is a partner’s individual income. The simple unit model is similar to the Hale and Dorr model. The focus is on individual production but the results are measured in an objective and verifiable way.

Strengths

The simple unit formula is named for its overall simplicity. It’s a straightforward calculation attorneys in your firm can use to calculate the income they’ll receive. This model uses seniority and atypical factors like nonbillable time to arrive at an objective figure.

Similar to the Hale and Dorr model, attorneys know exactly how to increase their income.

Weaknesses

The simple unit model deals with the same challenges and concerns present in the Hale and Dorr model. An (over) emphasis on individuality, a narrow focus on billable work and file, client and work hoarding.

Resentment and animosity are common.

Instead of focusing on the firm as a whole, attorneys work to protect what’s theirs, becoming a kind of legal mercenary in the process.

5. The 50/50 Subjective-Objective model

This model uses the subjective and objective components of legal work to produce a compensation model that’s fair. The objective part of this model is based on hard (objective) metrics. These metrics are used to determine attorney/partner income:

• Billables
• Collection realization rates
• Receipts

These metrics typically comprise 40 percent of attorney/partner income. Another 10 percent of these objective details are based on rainmaking and utilization statistics.

• Leads generated
• Client generation
• Utilization

This isn’t a comprehensive list. These metrics and percentages aren’t etched in stone. Firms can and do change these details. They’re varied according to an individual firm’s goals, preferences, vision and expectations.

What about the subjective details?

Another 10 percent of the (subjective) portion is based on an individual attorney’s rainmaking and/or client handling abilities. Another 40 percent (still subjective) is based on the perception of all criteria overall.

Strengths

The subjective portion of this compensation model (40 percent) has an undefined share of income. This is a very good thing because it can be used to reward any sort of unusual, over-the-top or exceptional non-billable performance. Firm management, training or mentoring junior attorneys, rainmaking and even intangible details like kindness and individual contribution.

When it’s used well, the subjective portion serves as a kind of partner evaluation.

Weaknesses

Remember the subjective details?

It’s a two-edged sword.

That same 40 percent can be used to punish attorneys/partners who aren’t perceived as a positive contributor or asset to the firm even though their objective numbers are excellent. It’s in a partner’s best interest to cooperate, to politick, to play the social game.

Why?

Because 40 percent of their income will be based on their peer’s perceptions of their overall contribution to the firm.

• File, client and work hoarding
• Ignoring firm initiatives
• Placing unreasonable demands on staff and juniors
• Ignoring firm policies
• Or simply being difficult

These negative factors may be taken into account and used to punish poor performers.

6. Team Building model

With this system, individual performance takes a back seat to the firm’s performance. Fifty percent of a partner’s income would be based on the firm’s financial health and performance. Forty percent would be based on a practice group or departments performance. Finally, ten percent would be based on individual performance.

Here’s the beauty of this compensation system.

It can be extended out to support associates and support teams. Practice groups and departments set goals and KPIs. Partners, associates and support teams are rewarded when goals are met.

This system is all about cooperation.

The metrics can be any number of things, utilization, realization, productivity, non-billable work, etc. Anything that brings teams together and produces value for the firm overall.

Strengths

This compensation model is perfect for clan cultures. It’s also simple and easy to employ. Attorneys are encouraged to focus on ensuring the firm, practice groups and departments are all performing beautifully.

There’s almost no pie splitting animosity.

This compensation model is completely objective, downplaying the role of individuals. The firm, practice groups and department leaders sink or swim depending on their collective performance.

It builds a team.

It encourages staff to put team goals ahead of individual goals. It promotes a team-oriented mindset. When we work together everyone wins!

This model fosters:

• Cooperation and collaboration
• Collegiality at the department, practice group and firm level
• Trust in one another to act in the best interests of the team

This compensation model eliminates individualistic tendencies (e.g. file, client and work hoarding). It encourages delegation, provides better value to clients, better training for juniors and greater job satisfaction all around.

Done well, it boosts group and firm profitability dramatically.

Weaknesses

Surprisingly, Price’s law is also a concern here. A small segment of each department or group will always produce a disproportionate amount of work. If there’s a skills overlap (via partners) this can be circumvented or avoided completely.

Individualists may struggle with frustration.

Individual contributions don’t play a key role in this compensation model. Individualists may leave to find a firm that rewards individual efforts (e.g. meritocracy) exclusively or rewards an individual’s efforts more highly.

As with other models, this may also disincentivize attorneys from over performing due to the fact that these attorneys see little individual upside for going above and beyond.

7. Eat What You Kill model

In sharp contrast to the team building model, the eat-what-you-kill-model focuses exclusively on individual effort. There’s no recognition whatsoever for anything beyond an individual attorney’s personal production.

It’s the mercenary model.

In the system, firms may charge attorneys a share of the overhead, but each partner pays the salaries of their support team. Attorneys also cover their individual expenses.

• Marketing
• Continuing education
• Personal technology
• Memberships

These are all covered by the individual attorney/partner.

A junior attorneys time is “purchased” from the firm at predetermined rates and billed to clients at a higher rate (whatever the attorney/partner feels is appropriate). Partners sell an interest in a particular file or client to another partner at a negotiated rate (e.g. 10 of whatever is billed by the purchasing partner).

Strengths

Associates are employed by the firm. Partners are completely and totally responsible for their income, expenses and clients.

It’s all on them.

These partners must produce the increase in income they desire. One way to do this is to sell the client to another partner (or get a junior to manage client on behalf of the firm). These partners receive a percentage of the billables in exchange.

What about the added benefits?

Collection realization rates tend to be higher as partners are more motivated to collect on their receivables. Everything is dealt with on an individual level, there’s no pie splitting of any kind, whatsoever.

Weaknesses

There’s no collegiality.

There’s no connection, collaboration or corporation. There’s no financial upside so most partners choose to ignore their colleagues. The work environment for staff, juniors and other partners is difficult as unwanted communication is viewed with hostility.

Time is money after all.

File, client and work hoarding is a given. This often comes with negative ramifications for the clients. Juniors receive little to no training, there is no financial upside for senior members. It’s a sink or swim environment that’s often brutal, cutthroat and self-serving.

But, in the right environment, it can work.

Bonus #1: The monthly bonus model

Most firms treat bonuses as a spontaneous and discretionary reward.

What if it wasn’t?

What if you were able to use monthly bonuses as a revenue-generating and productivity generation tool. Sounds impossible, doesn’t it? Well, that’s exactly what Phillip J. Kavesh, principal of one of the largest estate planning firms in California, does with his firm.

Here’s how he explains it.

“By utilizing monthly bonuses, you will not only make your associate attorneys more productive (by keeping their focus on producing the revenue necessary for your firm to consistently make a profit), but you will also do a better job of keeping your associate attorneys with you in the long-term.  Bonuses help make associates feel rewarded and recognized for their work effort and the way that I utilize bonuses is so that their total compensation, including their base salary, is hard to match anywhere else.“

He shares a detailed analysis of his monthly bonus program.

Bonus #2: Pay lawyers for realized bills

Most compensation schemes pay lawyers on the basis of the hours they’ve billed, rather than on the number of hours the firm collects.

What a disaster.

Collection realization rates are already taking a turn for the worse. Firms are already struggling to receive payment for their hard work. Yet, firms continue to pay their attorneys based on the hours they’ve billed.

And who cares?

Lawyers are incentivized to bill beyond their client’s wants/needs. They’ll be paid for that bad habit but the consequences of the coming write-down won’t appear for some time.

See the problem?

This makes it harder for firms to (a.) pay associates what they’re worth because they’re already overpaying (b.) survive in the face of continued financial erosion, and (c.) retain all-star talent.

The life or death question firms need to answer

It’s a question many firms do their best to avoid.

“What is the future of attorney compensation?”

A report from Thomson Reuters found many attorneys have an intense resistance to change.

The reason?

Most attorneys (and firms) have a fixed mindset rather than a growth mindset. Firms with a fixed mindset believe success depends on intelligence rather than consistent effort over time.

“According to psychologist Carol Dweck, people with this mindset work toward “performance goals,” a focus on looking smart even if there’s no learning in the process. She explained in Stanford Magazine, “For them, each task is a challenge to their self-image, and each setback becomes a personal threat. So they pursue only activities at which they’re sure to shine – and avoid the sorts of experiences necessary to grow and flourish in any endeavor.”

Firms with a fixed mindset are afraid of failure.

For most attorneys, this mindset was reinforced in law school. Their schooling rewarded intelligence and punished risk-taking. The culture in most firms remains the same.

But change is coming.

These days, clients are unwilling to pay for the things they used to. Clients are unwilling to pay for junior or first-year associates. Clients are unwilling to pay for research. They’re unwilling to pay for bills they feel are unreasonable.

Then there are external threats.

Firm revenues are facing downward pressure from new competitors entering the legal market (e.g. PwC), low-cost providers like LegalShield, technology companies like LegalZoom, and AI. Let’s not forget the army of competitors around you, all clamoring for your clients.

Every firm wants to survive.

Firms with a growth mindset will survive. They’ll embrace and adapt to change. They’ll do what it takes to get ahead of the changes taking place.

Here’s the million-dollar question. How can firms use these compensation models to grow their business?

Adapt and win, resist and fail.

How do you do that?

1. Adapt to client demands
2. Outline your firm’s identity
3. Match your compensation model to your firm

In my previous post, I shared these details outlining the do’s and don’ts you’ll need to adopt a growth mindset. Understanding your clients, the industry and your firm is 70 percent of the work.

Understanding is essential.

With understanding, you gain the wisdom needed to find and implement the right compensation model. Should you mix-and-match these compensation models? Modify a single model to meet your needs?

Understanding gives you the answer.

Clients are unhappy with associate raises

It’s a signal.

An indicator that clients and law firms are misaligned. No one wants to pay more than they have to, but attorneys need to provide clients with value.

Your compensation model is a sign of something deeper.

More and more, clients are focused on paying for value. They’re unwilling to pay for extras and unnecessary items. They’re focused almost exclusively on results.

Most firms aren’t ready.

Their compensation model is misaligned. They’re at odds with their clients, they’re at odds with their team. You can be ready. With the right compensation model, you have what you need to attract, retain and utilize top-tier talent.

Match your compensation model to your employees and your firm. Keep the talent you need, and you’ll find you attract the clients and revenue you want.

How do you transition from the compensation model you have now, to a compensation model that’s best for your firm? What are the specific implementation steps you’ll need to follow to ensure the transition is a success?

It starts with understanding.

A successful compensation model transition isn’t accidental

Many large firms make a common yet understandable mistake. Firm leadership decides to make radical changes –  without meeting the necessary prerequisites first.

It’s typically harmful.

These changes create an unnecessary shake-up with employees across the firm. Support teams, associates and partners are left reeling from these changes.

Isn’t that inevitable?

It is for firms who choose to skip the appropriate implementation steps. But here’s the key point.

It doesn’t have to be.

With the right approach and a bit of foresight, firms can safely transition to a compensation model that best meets the needs of the firm.

But how?

Step #1: Outline your firm’s identity

If you’re looking to transition from one compensation model to another you’ll probably want to (a.) find the model that works best for your firm and (b.) adopt that compensation model successfully with minimal disruption to your firm’s operations.

There’s a simple way to do this. You ask a question.

“What do we value most?”

Seems like a simple question doesn’t it? How can this one question help to outline your firm’s identity?

Easy.

This question sheds light on four distinct areas of your firm. The answer enables you to…

Identify your culture. Robert E. Quinn and Kim S. Cameron at the University of Michigan at Ann Arbor discovered there are four types of organizational cultures.

1. Adhocracy cultures are temporary and driven by change. They’re often characterized as “tents rather than palaces.” These firms reconfigure themselves rapidly in the face of change. They’re adaptable, flexible and creative in the face of uncertainty, ambiguity and
2. Clan cultures are family-like. There’s a focus or special emphasis placed on mentoring, nurturing and investment in the growth of those in the clan. It’s all about doing and accomplishing together. Prioritizing employee development is crucial. Viewing clients as partners essential. An emphasis on engagement, commitment and loyalty non-negotiable.
3. Hierarchy cultures follow a set structure. These firms are focused on perfection, efficiency, stability and doing things the right way. Clear lines of decision-making authority, standardized rules and procedures, control and accountability mechanisms. These are seen as the keys to success.
4. Market cultures are often utilitarian and primarily focused on results. The internal environment in market cultures is competitive, achievement-focused, and driven by outcomes and prestige. “In the words of General Patton, market organizations “are not interested in holding on to [their] positions. Let the [enemy] do that. [They] are advancing all the time, defeating the opposition, marching constantly toward the goal.“

Map your firm’s personality. The big five personality traits are predominantly viewed as the prevailing standard for individual assessment. Leaders, essentials and influential employees shape the personality of the firm.

Firms high in…

• Openness have a higher degree of intelligence and intellectual curiosity. These firms value knowledge, experience and data more than others.
• Extraversion are skilled connectors. They’re able to build relationships inside and outside their industry. Influential partners are able to connect with influencers, leaders and essentials who are able to provide these firms with a significant amount of leverage.
• Agreeableness are socially minded. There’s an emphasis on taking care of their own (employees/clients). They’re cooperative, easy to work with, polite and compassionate.
• Conscientiousness have a significant amount of self-discipline. These firms are reliable, trustworthy, organized and efficient. These firms thrive with proper planning.

Assess values in your firm. The implicit and explicit thoughts, beliefs, ethics and morals of your firm. Don’t make the common mistake of ignoring this. Of all of the details we’ve discussed so far, values have the greatest impact on any change or transition in your firm.

Why?

It’s the hardest to uncover.

Think about it.

• How many employees are eager to share these details with their employer?
• Do employees at every level in your firm feel the practice is fair? Balanced? Compassionate?
• What do your employees (e.g. support, associates and partners) value most?

Some don’t want to know.

But these are the details you’ll need to uncover to transition to an innovative yet ideal compensation model. The goal here is simple. Get detailed feedback on your employee’s values.

This is key.

The intelligence you’re able (or unable) to uncover will determine the outcome of your transition. Use internal surveys, employee reviews (via sites like Glassdoor) and one-on-one interviews to find the answer.

Step #2: Match your compensation model to your firm

Why did we focus on details like culture, personality and values? Isn’t it a waste of time to place our attention there instead of on the specific steps we need to transition?

Not at all.

The details covered in step one ensure that your transition will be successful.

How so?

The compensation model you choose needs to fit the culture, personality and values of your firm. Let’s take a look at a few compensation models.

1. Eat what you kill: In this model, compensation is determined primarily by individual performance/production. The better an individual employee performs the greater their rewards. This works well with market and hierarchy cultures where competition and conscientiousness (specifically industriousness) are encouraged.
2. The lock-step system: In this model partners are rewarded with a growing share of the firm’s profits – based almost entirely on seniority. The ideal environment for this compensation model follows the hierarchy model. The firm’s personality is high on conscientiousness (specifically orderliness) and low on openness. Employees are comfortable with the established rules and norms already in place.
3. The team building system: In this model, individual contributions take a backseat to the firm’s performance as a whole. With the team-building system, 50 percent of a partner’s compensation relies exclusively on how well the firm does financially. This compensation model works well with clan cultures that are high in trait agreeableness, high in openness and high in extraversion. The focus isn’t on the individual, it’s on the team.

See what I mean?

This is the issue many firms run into. They shoehorn the wrong compensation model into an incompatible environment.

The results are devastating.

Employees reject the new norms. Firms lose top tier talent to competitors and partners rebel against new mandates put in place by management.

Understanding is 70 percent of the work.

When you know your firm and your team finding and implementing the right model is simple and straightforward. There are really only two steps you’ll need to follow.

1. Change the culture, personality and values of your firm.
2. Choose the compensation model that fits the culture, personality and values of your firm.

That’s it.

See why understanding is 70 percent of the work?

It’s perfect, then!

Not quite. There are a few basic truths you’ll need to remember, regardless of the compensation model you choose.

• Some of your employees and partners will be unhappy regardless of what you choose to do
• Tie your compensation model to your firm’s identity and meeting goals become easy
• Give your team the opportunity to buy-in (even if they don’t have control) and acceptance rates go up
• Attempt to force, bully or tyrannize your team and attrition rates skyrocket. Include those who are affected by the change
• Make these changes simple, easy and enjoyable to increase widespread adoption

See the difference?

This is how you transition to a new compensation model

The prerequisite steps for a successful transition?

Understanding.

The implementation steps you’ll need to follow to transition to a new compensation model successfully?

Matchmaking (or change if you’re unhappy with the environment in your firm).

This is how you do it.

Many large firms make a common yet understandable mistake. Leadership decides to make a radical, firm-wide change without meeting the necessary prerequisites first.

Why shake things up unnecessarily?

Follow the simple, two-step process we’ve outlined and you’ll have the know-how you need to make important fundamental changes to your firm’s compensation model.