Some Questions ' and Answers ' on Managing a Law Firm

As law firms have continued to grow and the practice of law has become even more of a business, firms are now giving serious attention to how to manage the firm. As they cope with this issue, firms raise many questions. Here are some of the ones they most frequently ask us as consultants ' and our answers.

Some firms say they have adopted the corporate model of governance. Has this been successful?

A corporation has defined lines of authority and a high degree of structure. Decision-makers are clearly identified and their responsibilities are generally defined in job descriptions. Their authority comes from the positions they hold. In even the largest law firms today, management structure and lines of authority are seldom defined as clearly as they are in a corporation. The leaders' authority rarely comes from the position they hold but from their leadership skills and their ability to build consensus.

The partners (shareholders) are not only owners but, unlike in most corporations, they also work in the firm and want to be involved in decision-making. As a result, only a small number of firm chairs or managing partners have the title of Chief Executive Officer or are allowed to function as the CEO would in a true corporate model.

Another issue in law firm governance is the amount of management experience and training the leaders have. Senior executives in a corporation arrive at their positions after years of management training and experience. Furthermore, they are usually (although not always!) selected because they have demonstrated management ability. Most law firm leaders have little, if any, management experience and, until recently, there have been no programs to give them management training. In far too many firms, they are elected to senior management positions principally because they are big rainmakers.

What management training is available to lawyers today?

A growing amount. One example: Reed Smith, the Pittsburgh-based firm with more than 1000 lawyers, worked with the Wharton School at the University of Pennsylvania to form Reed Smith University (RSU). RSU offers an executive education program tailored for the firm and the challenges it faces. Another example: The American Bar Association is now offering certain Harvard Business School books through the ABA Web store. And The Harvard Business School has selected Philadelphia-based Duane Morris as the first law firm in more than 10 years to be named as a case study subject.

Are there any new governance structures in law firms today?

Based on the premise that managing a large law firm has become an impossible task for one person, some firms have adopted a dual-management structure with co-managing partners. One partner is generally responsible for external and client issues and the other for internal issues, practice and operations. Another change many firms are adopting is to create the non-lawyer position of Chief Operating Officer (COO) to manage all the business and operating functions of the firm.

Must managing partners give up their client responsibilities?

This depends, of course, on the size of the firm. In a growing number of the largest firms, the managing partner (MP)'s position is a full-time responsibility. But in most firms, the Chair or MP retains some client responsibility even though these firms have many millions of dollars in revenue.

It is understandable that most partners do no want to give up their practices. But even in a midsize firm, few MPs can manage effectively on a part-time basis while still carrying client responsibility. What company with sales of even $20 million would have a part-time CEO?

What are the best measures of firm profitability?

Net Income per Equity Partner (NI/EP) is one important measure of firm profitability.

However, the Profitability Index and Full Realization are also important. The Profitability Index is the NI/EP divided by the gross revenue per lawyer (GR/L). In a financially healthy firm, this figure should be at least 1.0. In most of the AMLAW 100 firms, it is well above 2.0. Even in firms that have a good NI/EP, the PI is often only .75.

Full Realization is the percentage of collections to the dollar value of billable time (DVBT), i.e., billable dollars before both write-downs and write-offs. Many firms calculate realization as the percentage of collections to billings. This overstates their realization.

How can firms achieve maximum profitability while providing maximum client service?

In the short term, a firm can achieve maximum profitability by having fewer associates and support staff and by minimum spending on technology, training and marketing. Many firms operate this way for a while, squeezing every last profit dollar out of their operations. Eventually, however, revenues begin to decline and then profits, i.e., net income/partner.

A better and more strategic goal is 'optimum profitability,' which reflects not only strategic thinking and management but also a client-focused culture. One of the keys to achieving optimum profitability, while also providing maximum client service, is leverage.

But leverage today is not just the ratio of associates to partners. It also involves maximum use of paralegals (and in certain practice areas consultants) and technology. In fact, in some practice areas, technology is the most important leverage factor.

In our work with law firms, we have always found it significant that the firms with outstanding client service also achieve consistently excellent ' although perhaps not maximum ' profitability along with high realization.

How should senior firm management be compensated?

If the firm Chair or MP still carries some client responsibility, part of their compensation should be in the firm of a fixed amount. This can be in the form of a salary or an amount based on crediting the partner with a certain number of billable hours at his or her standard rate. If the position is full-time with no client responsibilities, there should be a base salary plus a bonus based on firm performance and/or the achievement of the firm's major strategic objectives. In either case, the Chair or MP should be one of the most highly compensated partners in the firm.

How can you ensure continuity of capable firm management?

Succession planning for client responsibilities is becoming extremely important in firms today. It is just as important for management. Younger partners should be developed for future management roles by serving on major committees ' including the Executive Committee if the firm has one ' as well as through exposure to management and leadership training.

How can firms improve the quality of their management?

Include management training in their development programs. Elect the best managers, not the biggest business producers, to both firm and practice management leadership positions. Delegate more decision making to them. And compensate them well!

As law firms have continued to grow and the practice of law has become even more of a business, firms are now giving serious attention to how to manage the firm. As they cope with this issue, firms raise many questions. Here are some of the ones they most frequently ask us as consultants ' and our answers.

Some firms say they have adopted the corporate model of governance. Has this been successful?

A corporation has defined lines of authority and a high degree of structure. Decision-makers are clearly identified and their responsibilities are generally defined in job descriptions. Their authority comes from the positions they hold. In even the largest law firms today, management structure and lines of authority are seldom defined as clearly as they are in a corporation. The leaders' authority rarely comes from the position they hold but from their leadership skills and their ability to build consensus.

The partners (shareholders) are not only owners but, unlike in most corporations, they also work in the firm and want to be involved in decision-making. As a result, only a small number of firm chairs or managing partners have the title of Chief Executive Officer or are allowed to function as the CEO would in a true corporate model.

Another issue in law firm governance is the amount of management experience and training the leaders have. Senior executives in a corporation arrive at their positions after years of management training and experience. Furthermore, they are usually (although not always!) selected because they have demonstrated management ability. Most law firm leaders have little, if any, management experience and, until recently, there have been no programs to give them management training. In far too many firms, they are elected to senior management positions principally because they are big rainmakers.

What management training is available to lawyers today?

A growing amount. One example: Reed Smith, the Pittsburgh-based firm with more than 1000 lawyers, worked with the Wharton School at the University of Pennsylvania to form Reed Smith University (RSU). RSU offers an executive education program tailored for the firm and the challenges it faces. Another example: The American Bar Association is now offering certain Harvard Business School books through the ABA Web store. And The Harvard Business School has selected Philadelphia-based Duane Morris as the first law firm in more than 10 years to be named as a case study subject.

Are there any new governance structures in law firms today?

Based on the premise that managing a large law firm has become an impossible task for one person, some firms have adopted a dual-management structure with co-managing partners. One partner is generally responsible for external and client issues and the other for internal issues, practice and operations. Another change many firms are adopting is to create the non-lawyer position of Chief Operating Officer (COO) to manage all the business and operating functions of the firm.

Must managing partners give up their client responsibilities?

This depends, of course, on the size of the firm. In a growing number of the largest firms, the managing partner (MP)'s position is a full-time responsibility. But in most firms, the Chair or MP retains some client responsibility even though these firms have many millions of dollars in revenue.

It is understandable that most partners do no want to give up their practices. But even in a midsize firm, few MPs can manage effectively on a part-time basis while still carrying client responsibility. What company with sales of even $20 million would have a part-time CEO?

What are the best measures of firm profitability?

Net Income per Equity Partner (NI/EP) is one important measure of firm profitability.

However, the Profitability Index and Full Realization are also important. The Profitability Index is the NI/EP divided by the gross revenue per lawyer (GR/L). In a financially healthy firm, this figure should be at least 1.0. In most of the AMLAW 100 firms, it is well above 2.0. Even in firms that have a good NI/EP, the PI is often only .75.

Full Realization is the percentage of collections to the dollar value of billable time (DVBT), i.e., billable dollars before both write-downs and write-offs. Many firms calculate realization as the percentage of collections to billings. This overstates their realization.

How can firms achieve maximum profitability while providing maximum client service?

In the short term, a firm can achieve maximum profitability by having fewer associates and support staff and by minimum spending on technology, training and marketing. Many firms operate this way for a while, squeezing every last profit dollar out of their operations. Eventually, however, revenues begin to decline and then profits, i.e., net income/partner.

A better and more strategic goal is 'optimum profitability,' which reflects not only strategic thinking and management but also a client-focused culture. One of the keys to achieving optimum profitability, while also providing maximum client service, is leverage.

But leverage today is not just the ratio of associates to partners. It also involves maximum use of paralegals (and in certain practice areas consultants) and technology. In fact, in some practice areas, technology is the most important leverage factor.

In our work with law firms, we have always found it significant that the firms with outstanding client service also achieve consistently excellent ' although perhaps not maximum ' profitability along with high realization.

How should senior firm management be compensated?

If the firm Chair or MP still carries some client responsibility, part of their compensation should be in the firm of a fixed amount. This can be in the form of a salary or an amount based on crediting the partner with a certain number of billable hours at his or her standard rate. If the position is full-time with no client responsibilities, there should be a base salary plus a bonus based on firm performance and/or the achievement of the firm's major strategic objectives. In either case, the Chair or MP should be one of the most highly compensated partners in the firm.

How can you ensure continuity of capable firm management?

Succession planning for client responsibilities is becoming extremely important in firms today. It is just as important for management. Younger partners should be developed for future management roles by serving on major committees ' including the Executive Committee if the firm has one ' as well as through exposure to management and leadership training.

How can firms improve the quality of their management?

Include management training in their development programs. Elect the best managers, not the biggest business producers, to both firm and practice management leadership positions. Delegate more decision making to them. And compensate them well!