Hang Together, or Be Hung Separately: The Collective Compensation Dynamic

Law firms, in many ways, mirror their clients/customers. To the extent that law firms provide the service their clients need, at the price clients are willing to pay, they will grow. Otherwise, they will be challenged to stay in business. Every law firm, like every other business, has three common functions that must be done to ensure success: Get the Work (sales); Do the Work (production); and Get Paid (finance). Lawyers need to understand the interaction between what law firms charge clients for their services, how effectively they collect their fees from clients, and how lawyers themselves are compensated for the work that they bill. The goal of that understanding should be creating an integrated approach to the entire issue of fees, collection, and compensation.

Many lawyers, unfortunately, seem to lack an understanding of this integration concept and refuse to look beyond the immediate impact of their own hourly rates. The broader implications of how fees, collections, and compensation interact tend to diminish and be depreciated. Yet nothing is more important to the future of a law firm's financial success than removing the fees issue from the individual context alone and placing it at the heart of the firm's financial life.

Individual or Collective?

The starting point for analyzing this dynamic is to look at the way a firm's lawyers are paid. Typically, most firms use one of these two general compensation models: Lockstep Compensation, in which the firm's annual profits are averaged out to determine a standard rate of compensation increase for most lawyers (compensation is the same for each 'class' of lawyer), and 'Eat What You Kill,' in which each attorney is rewarded individually for the business he or she personally brings in.

Any firm that encourages lawyers to maximize their own individual compensation may have more rapid near-term growth. But a willingness to approach compensation as an institution (lockstep compensation) makes for firm longevity. Many firms never really develop a collective approach, and that has a direct, negative impact on three essential tools that can be critical to enhancing overall profitability: CRM systems, knowledge management systems, and client teams.

Client Relationship Management

Client Relationship Management ('CRM') technology has the potential to bring consistency and efficiency to law firm business development. Shared CRM databases on computer desktops make available the client data and contact history of any prospect to all firm members. These data are the type of information that used to be stashed away in individual Rolodexes and address books. Such information is the foundation of cross-referring services and reinforcing contact relationships. However, in most individual-oriented firms, partners jealously guard client information rather than share it, because compensation and governance remain highly individualized. For CRM to work, these firms must give up the 'my client' mentality in favor of a community, 'our client' approach. Clients and prospects want to do business with firms that will serve them with effective cross-office and cross-disciplinary teams. An effective CRM system will facilitate such service, but not if every lawyer zealously works toward maximizing individual pay.

Knowledge Management

A similar dynamic shapes the contribution that Knowledge Management ('KM') systems can make to firm profitability. Knowledge Management means the systematic organization of a firm's entire work product, prepared for all of its clients, so that the collective research and advice of all lawyers are available to each lawyer ' and so clients don't have to pay for reinventing the wheel. KM requires that every record of information in a law firm, every brief, pleading, contract, and form prepared for each specific matter must be shared systematically and universally. That aspect of KM runs contrary to traditional compensation viewpoints. In small or solo law firms, lawyers know where the files are and think KM is unnecessarily complex. In larger firms, many believe that managing a file after the matter is completed is not billable time, so they either do not do it or do it incompletely. They are also reluctant to use potentially billable time for a task that could boost the bonus of another lawyer. Such viewpoints conflict with what corporate clients demand, and firm profitability could suffer as a result.

Client Teams

Senior rainmakers in an 'eat what you kill' compensation system often don't want to share information on clients or prospects with the next-generation lawyer who might 'steal' business before the first senior attorney is ready to step away from active practice. Meanwhile, the next generation of lawyers is shut out of the client relationships, does only the work assigned to them, and has insufficient marketing skills. The idea is lost that clients belong to the firm, not to a partner. Firms that service major clients with teams (not just a single rainmaker) can cross-sell between teams according to a strategic plan, and can give clients a complete and virtually seamless service package. Client billing is simplified, and bonuses can go to those teams that get results. This type of approach institutionalizes client billing, profitability, and compensation. The firm doesn't face sudden disaster when rainmaker partners retire ' and clients are better served.

Commodity or Value?

CRM, KM, and client teams may be at odds with law firm traditions, but they define both what clients want from their lawyers today and what they are willing to pay for. That's important because in recent years
the 'two Cs,' Convergence and Commoditization, have become major concerns for law firms. Convergence is the trend among corporate clients to reduce their legal expenses by paring down outside counsel firms dramatically. The survivors are expected to provide certain work with relatively steady volume (such as patent filings or employment cases) at fixed rates over a certain period of time, turning these matters into the legal equivalent of a commodity. Commoditization is also increasingly becoming an issue for solos and small firms. Spend any time on the Internet and you'll see a whole host of legal services for individuals (wills, bankruptcy filings, even divorces) being offered by law firms at low, fixed prices.

Lawyers want legal services to be seen as unique because of the attorney-client relationship, because of specialized skills required to handle a specific challenge, or because the client has some constraint that few lawyers can accept. Yet, when clients increasingly want to see the dynamic shift toward the commodity model, the momentum can be hard to resist. The best way to do it is by providing tangible, value-added services like CRM, KM, and teams. When the client perceives the services the firm provides as having high value, the firm will likely get more highly focused and 'high-end' work that will result in higher revenue and profits. It's simple Business 101 ' but too many law firms ignore the lesson because they are focused on short-term, individualized compensation.

Corporate Model

If a firm wants to promote the kind of cooperative effort that supports CRM, KM, and teams (and thus increases billings and profitability), it must change to a more cooperative compensation model; base compensation must be tied to the effectiveness of a collaborative, team approach to delivering legal services to clients. This allows for blended high and low rates on client work, which maximizes profitability and collections. Such a compensation formula can be based on an office/practice group profit-center model. The head of each profit center receives the percentage of the firm's overall profits that the profit center generates, and uses flexible parameters to divide it among profit center members. In this corporate model, compensation is paid based on what is generated for the organization, not for any one individual.

Such a compensation approach doesn't just happen. The compensation committee or the managing partner must affirmatively state that a requirement of being a member of the firm is that other members of the firm be involved in all matters involving 'x' dollars exposure, minimum expected attorneys' fees, or certain types of cases, and so on. As this approach expands, the firm must shift the emphasis of its recognition programs from individual to team rewards. Even individual rewards should acknowledge people who are effective team players, freely sharing their expertise.

Hanging Together

Legend has it that at the signing of the Declaration of Independence, Benjamin Franklin exhorted the signers (who represented self-centered, independent states): 'We must all hang together, or surely we will all be hung separately.' In modern parlance, one can use a sports metaphor, comparing teams composed with one or two self-centered, freelancing stars with those teams with no stars, but great cooperative skills. While it is possible for the former to have a good season (often followed by a collapse), it is the latter model that is more satisfying and longer lasting. The latter model provides the greater satisfaction because of the seemingly unlikely nature of the achievement, but also because it seems to stay at the top longer.

The fairest compensation approach gets away from a star system that rewards only the individuals who stand out from the crowd because they are out for themselves, by also rewarding those individuals who help the crowd perform better. This creates a more profitable firm, from which all firm members benefit. In today's competitive legal marketplace, it's the dynamic in which billing, profits, and compensation all hang together.

Ed Poll is the President of LawBiz' Management Company (www.lawbiz.com and www.lawbizblog.com) and a longtime member of the A&FP Board of Editors. He may be contacted at 800-837-5880 or [email protected].

Law firms, in many ways, mirror their clients/customers. To the extent that law firms provide the service their clients need, at the price clients are willing to pay, they will grow. Otherwise, they will be challenged to stay in business. Every law firm, like every other business, has three common functions that must be done to ensure success: Get the Work (sales); Do the Work (production); and Get Paid (finance). Lawyers need to understand the interaction between what law firms charge clients for their services, how effectively they collect their fees from clients, and how lawyers themselves are compensated for the work that they bill. The goal of that understanding should be creating an integrated approach to the entire issue of fees, collection, and compensation.

Many lawyers, unfortunately, seem to lack an understanding of this integration concept and refuse to look beyond the immediate impact of their own hourly rates. The broader implications of how fees, collections, and compensation interact tend to diminish and be depreciated. Yet nothing is more important to the future of a law firm's financial success than removing the fees issue from the individual context alone and placing it at the heart of the firm's financial life.

Individual or Collective?

The starting point for analyzing this dynamic is to look at the way a firm's lawyers are paid. Typically, most firms use one of these two general compensation models: Lockstep Compensation, in which the firm's annual profits are averaged out to determine a standard rate of compensation increase for most lawyers (compensation is the same for each 'class' of lawyer), and 'Eat What You Kill,' in which each attorney is rewarded individually for the business he or she personally brings in.

Any firm that encourages lawyers to maximize their own individual compensation may have more rapid near-term growth. But a willingness to approach compensation as an institution (lockstep compensation) makes for firm longevity. Many firms never really develop a collective approach, and that has a direct, negative impact on three essential tools that can be critical to enhancing overall profitability: CRM systems, knowledge management systems, and client teams.

Client Relationship Management

Client Relationship Management ('CRM') technology has the potential to bring consistency and efficiency to law firm business development. Shared CRM databases on computer desktops make available the client data and contact history of any prospect to all firm members. These data are the type of information that used to be stashed away in individual Rolodexes and address books. Such information is the foundation of cross-referring services and reinforcing contact relationships. However, in most individual-oriented firms, partners jealously guard client information rather than share it, because compensation and governance remain highly individualized. For CRM to work, these firms must give up the 'my client' mentality in favor of a community, 'our client' approach. Clients and prospects want to do business with firms that will serve them with effective cross-office and cross-disciplinary teams. An effective CRM system will facilitate such service, but not if every lawyer zealously works toward maximizing individual pay.

Knowledge Management

A similar dynamic shapes the contribution that Knowledge Management ('KM') systems can make to firm profitability. Knowledge Management means the systematic organization of a firm's entire work product, prepared for all of its clients, so that the collective research and advice of all lawyers are available to each lawyer ' and so clients don't have to pay for reinventing the wheel. KM requires that every record of information in a law firm, every brief, pleading, contract, and form prepared for each specific matter must be shared systematically and universally. That aspect of KM runs contrary to traditional compensation viewpoints. In small or solo law firms, lawyers know where the files are and think KM is unnecessarily complex. In larger firms, many believe that managing a file after the matter is completed is not billable time, so they either do not do it or do it incompletely. They are also reluctant to use potentially billable time for a task that could boost the bonus of another lawyer. Such viewpoints conflict with what corporate clients demand, and firm profitability could suffer as a result.

Client Teams

Senior rainmakers in an 'eat what you kill' compensation system often don't want to share information on clients or prospects with the next-generation lawyer who might 'steal' business before the first senior attorney is ready to step away from active practice. Meanwhile, the next generation of lawyers is shut out of the client relationships, does only the work assigned to them, and has insufficient marketing skills. The idea is lost that clients belong to the firm, not to a partner. Firms that service major clients with teams (not just a single rainmaker) can cross-sell between teams according to a strategic plan, and can give clients a complete and virtually seamless service package. Client billing is simplified, and bonuses can go to those teams that get results. This type of approach institutionalizes client billing, profitability, and compensation. The firm doesn't face sudden disaster when rainmaker partners retire ' and clients are better served.

Commodity or Value?

CRM, KM, and client teams may be at odds with law firm traditions, but they define both what clients want from their lawyers today and what they are willing to pay for. That's important because in recent years
the 'two Cs,' Convergence and Commoditization, have become major concerns for law firms. Convergence is the trend among corporate clients to reduce their legal expenses by paring down outside counsel firms dramatically. The survivors are expected to provide certain work with relatively steady volume (such as patent filings or employment cases) at fixed rates over a certain period of time, turning these matters into the legal equivalent of a commodity. Commoditization is also increasingly becoming an issue for solos and small firms. Spend any time on the Internet and you'll see a whole host of legal services for individuals (wills, bankruptcy filings, even divorces) being offered by law firms at low, fixed prices.

Lawyers want legal services to be seen as unique because of the attorney-client relationship, because of specialized skills required to handle a specific challenge, or because the client has some constraint that few lawyers can accept. Yet, when clients increasingly want to see the dynamic shift toward the commodity model, the momentum can be hard to resist. The best way to do it is by providing tangible, value-added services like CRM, KM, and teams. When the client perceives the services the firm provides as having high value, the firm will likely get more highly focused and 'high-end' work that will result in higher revenue and profits. It's simple Business 101 ' but too many law firms ignore the lesson because they are focused on short-term, individualized compensation.

Corporate Model

If a firm wants to promote the kind of cooperative effort that supports CRM, KM, and teams (and thus increases billings and profitability), it must change to a more cooperative compensation model; base compensation must be tied to the effectiveness of a collaborative, team approach to delivering legal services to clients. This allows for blended high and low rates on client work, which maximizes profitability and collections. Such a compensation formula can be based on an office/practice group profit-center model. The head of each profit center receives the percentage of the firm's overall profits that the profit center generates, and uses flexible parameters to divide it among profit center members. In this corporate model, compensation is paid based on what is generated for the organization, not for any one individual.

Such a compensation approach doesn't just happen. The compensation committee or the managing partner must affirmatively state that a requirement of being a member of the firm is that other members of the firm be involved in all matters involving 'x' dollars exposure, minimum expected attorneys' fees, or certain types of cases, and so on. As this approach expands, the firm must shift the emphasis of its recognition programs from individual to team rewards. Even individual rewards should acknowledge people who are effective team players, freely sharing their expertise.

Hanging Together

Legend has it that at the signing of the Declaration of Independence, Benjamin Franklin exhorted the signers (who represented self-centered, independent states): 'We must all hang together, or surely we will all be hung separately.' In modern parlance, one can use a sports metaphor, comparing teams composed with one or two self-centered, freelancing stars with those teams with no stars, but great cooperative skills. While it is possible for the former to have a good season (often followed by a collapse), it is the latter model that is more satisfying and longer lasting. The latter model provides the greater satisfaction because of the seemingly unlikely nature of the achievement, but also because it seems to stay at the top longer.

The fairest compensation approach gets away from a star system that rewards only the individuals who stand out from the crowd because they are out for themselves, by also rewarding those individuals who help the crowd perform better. This creates a more profitable firm, from which all firm members benefit. In today's competitive legal marketplace, it's the dynamic in which billing, profits, and compensation all hang together.

Ed Poll is the President of LawBiz' Management Company (www.lawbiz.com and www.lawbizblog.com) and a longtime member of the A&FP Board of Editors. He may be contacted at 800-837-5880 or [email protected].