New Associates and Your Firm

Even a free lunch only drew small groups when I first offered my New York CLE certified course on the business and economics of law firms in 2002. Today, an ever-growing number of law firms cover the topic in their new associate training or as a matter of internal professional development. This article is a guide for developing and improving that training in your firm.

If Your Firm Does Not Teach It, It Should

Associates quickly become the face of your firm. Quite simply, they are able to add more value when they understand the drivers of their own business. Law firms spend large amounts of money to recruit associates with the elusive “ownership mentality” work ethic; investing a few hours to share an “owner's” perspective will enhance that investment. After all, in a world where even junior associates are expected to build the foundation for lasting personal relationships with clients, no firm can afford for its associates to not connect their daily practice to the strategic goals and directions of the firm. Moreover, with the explicit expectation that attorneys understand their clients' business, ensuring that associates understand the basics of their own business is foundational. Show them how to be business partners.

'What to Cover

Associates should be taught both the basics of law firm economics and business operations generally, and then specifically about your firm's operations. Having your CFO or Executive Director share their decision-making process will personalize the business backbone supporting the legal work.

'Fortunately, the financial performance and business operations of law firms are relatively straightforward and can be covered quickly. Consider that firms generally have only one primary revenue stream, a core group of operating expenses, possibly one or two kinds of debt, and usually only one class of owners. Make clear that these numbers reflect the judgment and decisions made by management. Clients operate in the same way.

Foundational Concepts and Economics

Legal Structure of a Law Firm

Start with the legal structure of your firm. What are the basic tax and liability consequences of your structure, whether LLP, PLLC or something else? An understanding of potential liability may heighten the care utilized by associates. Provide part or all of your firm's partnership agreement; if the firm is not comfortable doing that, consider reviewing a model agreement.

Basic Flow of Money

Big picture points to highlight include: 1) The partners are the owners of the partnership and have capital invested and at risk. 2) Partners, associates and other billers work to generate revenue. Discuss billable hours and different types of AFAs. 3) The partnership pays out salaries and other expenses. 4) Revenue left after all expenses and debt service have been paid is net income, most of which is distributed to the partners as their annual “income.” 5) If your firm retains capital each year, note this and discuss its purpose. Here again, discuss capital contributions and highlight the fact that partners have invested their own money (and often borrowed to do so); this personalizes partners' commitment to the firm and what its success and endurance means to them.

Revenues

Revenues are critical, so dig into some of the terms:

Utilization Rate. Explain that prior to the start of a fiscal year, management designates how many hours they believe each “fee-earner” (or office, practice group, etc.) should bill in the coming year. A key point is that these projections are used to build the annual budget for the year ahead. Utilization rate allows firm leaders to measure how their projections are faring so they can adjust and plan.

New Time Value & Realization Rate. Create an example of “revenue leakage” starting with new time value and moving on to cash collected. Realization Rate is critical for associates to understand, as is the treatment of written off hours in the assessment of associates. This also provides a contextual opportunity to review your firm's practices on recording time records. Beyond the imperative for timeliness and integrity, time records can demonstrate to clients and to the partner the value that the associate is adding. Good (and poor) examples are critical, tied into a realization rate example with dollars attached. The goal is to show associates how the quality of the descriptions of their work is directly connected to the ultimate collectible value of the same piece of work.

Expenses

Address the big expenses of fee-earner compensation and benefits, administrative and support staff compensation and benefits, rent, technology, marketing, and others. Highlight the “cost per attorney” to underscore that profit generated by an associate is not simply gross minus salary. Address, or be prepared to address, when a firm becomes “profitable” on an associate ' there is much lore on this topic. Is it really three years? Discuss the type of debt the firm may have and how it is used and the plan to pay it off. You may also want to highlight that without fee earners, there is no revenue at all to even cover fixed expenses, so associates are important.

Business Operations

Closely tied to expenses are actual business operations. Consider a subsequent program to review the basics and recent decisions. What rent do you pay per square foot for your office and what are the implications for adding another location? Have you moved your “back-office” out of downtown? If you have contract or staff attorneys, explain their relationship to the firm and the cost implications for clients of different types of attorneys. Where is your back-up technology center?

Governance, Ownership and Profit Splitting

Review how members of your Executive Committee are elected and its core powers; where else are important powers situated? Define “non-equity partners,” if any, in your firm and their role and expectations. This may be an opportunity to point out “what it takes” to become an equity partner, or owner, of your firm. Of course, a favorite topic around real and virtual water coolers is partner compensation, so spend some time tackling this.

Compensation of Equity Partners

While potentially challenging for many firms to address, associates can easily read about different approaches to partner compensation. Share with them at least the basic process in your firm and factors considered. Again, show that although partners may get a draw, their real “income” is a share of the money that remains after all expenses and interest have been paid. With the recent publication of the partner compensation “spread” at many larger firms, you may want to consider discussing it and how it came to be at your firm.

Conclusion

Some readers may feel uncomfortable about the level of transparency I recommend. Certainly, some details should remain private and it is up to each firm to find its comfort level. However, consider that partners need associates to play at a higher level ever more quickly. Treating them as business partners by sharing some private information while teaching them about your firm can help them get there. You will also be enabling them to serve as stronger advocates for your firm and in that way, strengthening its foundation for the future.

Bruce Elvin is a Senior Lecturing Fellow and the Associate Dean and Director of Duke Law School's Career & Professional Development Center. He has lectured on the business of law practice at NALP conferences, Yale Law School and elsewhere, and has consulted for law firms and a law school career center as well.

Even a free lunch only drew small groups when I first offered my New York CLE certified course on the business and economics of law firms in 2002. Today, an ever-growing number of law firms cover the topic in their new associate training or as a matter of internal professional development. This article is a guide for developing and improving that training in your firm.

If Your Firm Does Not Teach It, It Should

Associates quickly become the face of your firm. Quite simply, they are able to add more value when they understand the drivers of their own business. Law firms spend large amounts of money to recruit associates with the elusive “ownership mentality” work ethic; investing a few hours to share an “owner's” perspective will enhance that investment. After all, in a world where even junior associates are expected to build the foundation for lasting personal relationships with clients, no firm can afford for its associates to not connect their daily practice to the strategic goals and directions of the firm. Moreover, with the explicit expectation that attorneys understand their clients' business, ensuring that associates understand the basics of their own business is foundational. Show them how to be business partners.

'What to Cover

Associates should be taught both the basics of law firm economics and business operations generally, and then specifically about your firm's operations. Having your CFO or Executive Director share their decision-making process will personalize the business backbone supporting the legal work.

'Fortunately, the financial performance and business operations of law firms are relatively straightforward and can be covered quickly. Consider that firms generally have only one primary revenue stream, a core group of operating expenses, possibly one or two kinds of debt, and usually only one class of owners. Make clear that these numbers reflect the judgment and decisions made by management. Clients operate in the same way.

Foundational Concepts and Economics

Legal Structure of a Law Firm

Start with the legal structure of your firm. What are the basic tax and liability consequences of your structure, whether LLP, PLLC or something else? An understanding of potential liability may heighten the care utilized by associates. Provide part or all of your firm's partnership agreement; if the firm is not comfortable doing that, consider reviewing a model agreement.

Basic Flow of Money

Big picture points to highlight include: 1) The partners are the owners of the partnership and have capital invested and at risk. 2) Partners, associates and other billers work to generate revenue. Discuss billable hours and different types of AFAs. 3) The partnership pays out salaries and other expenses. 4) Revenue left after all expenses and debt service have been paid is net income, most of which is distributed to the partners as their annual “income.” 5) If your firm retains capital each year, note this and discuss its purpose. Here again, discuss capital contributions and highlight the fact that partners have invested their own money (and often borrowed to do so); this personalizes partners' commitment to the firm and what its success and endurance means to them.

Revenues

Revenues are critical, so dig into some of the terms:

Utilization Rate. Explain that prior to the start of a fiscal year, management designates how many hours they believe each “fee-earner” (or office, practice group, etc.) should bill in the coming year. A key point is that these projections are used to build the annual budget for the year ahead. Utilization rate allows firm leaders to measure how their projections are faring so they can adjust and plan.

New Time Value & Realization Rate. Create an example of “revenue leakage” starting with new time value and moving on to cash collected. Realization Rate is critical for associates to understand, as is the treatment of written off hours in the assessment of associates. This also provides a contextual opportunity to review your firm's practices on recording time records. Beyond the imperative for timeliness and integrity, time records can demonstrate to clients and to the partner the value that the associate is adding. Good (and poor) examples are critical, tied into a realization rate example with dollars attached. The goal is to show associates how the quality of the descriptions of their work is directly connected to the ultimate collectible value of the same piece of work.

Expenses

Address the big expenses of fee-earner compensation and benefits, administrative and support staff compensation and benefits, rent, technology, marketing, and others. Highlight the “cost per attorney” to underscore that profit generated by an associate is not simply gross minus salary. Address, or be prepared to address, when a firm becomes “profitable” on an associate ' there is much lore on this topic. Is it really three years? Discuss the type of debt the firm may have and how it is used and the plan to pay it off. You may also want to highlight that without fee earners, there is no revenue at all to even cover fixed expenses, so associates are important.

Business Operations

Closely tied to expenses are actual business operations. Consider a subsequent program to review the basics and recent decisions. What rent do you pay per square foot for your office and what are the implications for adding another location? Have you moved your “back-office” out of downtown? If you have contract or staff attorneys, explain their relationship to the firm and the cost implications for clients of different types of attorneys. Where is your back-up technology center?

Governance, Ownership and Profit Splitting

Review how members of your Executive Committee are elected and its core powers; where else are important powers situated? Define “non-equity partners,” if any, in your firm and their role and expectations. This may be an opportunity to point out “what it takes” to become an equity partner, or owner, of your firm. Of course, a favorite topic around real and virtual water coolers is partner compensation, so spend some time tackling this.

Compensation of Equity Partners

While potentially challenging for many firms to address, associates can easily read about different approaches to partner compensation. Share with them at least the basic process in your firm and factors considered. Again, show that although partners may get a draw, their real “income” is a share of the money that remains after all expenses and interest have been paid. With the recent publication of the partner compensation “spread” at many larger firms, you may want to consider discussing it and how it came to be at your firm.

Conclusion

Some readers may feel uncomfortable about the level of transparency I recommend. Certainly, some details should remain private and it is up to each firm to find its comfort level. However, consider that partners need associates to play at a higher level ever more quickly. Treating them as business partners by sharing some private information while teaching them about your firm can help them get there. You will also be enabling them to serve as stronger advocates for your firm and in that way, strengthening its foundation for the future.

Bruce Elvin is a Senior Lecturing Fellow and the Associate Dean and Director of Duke Law School's Career & Professional Development Center. He has lectured on the business of law practice at NALP conferences, Yale Law School and elsewhere, and has consulted for law firms and a law school career center as well.