Incentivising the New Normal

As law firm leaders valiantly struggle to overcome the consequences of market changes, and maintain their firm’s market share, they face several obstacles:

• Law firm partners don’t enjoy losing the autonomy to run their practices as they wish, even when alternative approaches are demonstrably more lucrative for the individual partner and better for clients
• Many firms take an undisciplined “whack a mole” approach to driving change, responding primarily to variable client demand rather than engaging in a systematic, strategic process for business transformation
• There are minimal rewards for partners to change behavior, and numerous rewards to maintain the status quo

We won’t address the discipline of change management here, other than to say this: Leaders can’t drive change if they lack a comprehensive understanding of their law firm ecosystem and how each business function connects and interconnects with all others. Without a multi-faceted and multi-year master plan, the odds of landing on the appropriate formula are significantly diminished. But even if we assume such a plan exists, now what?

Follow the money

If we hope to thrive in the new normal, we need to know how we make money, and how this process has changed given the market disruptions. Law firms tend to rely on a scant few performance metrics, most of which are focused on production, most of which are wholly internally-focused, and most of which are inefficient proxies for what we really wish to measure: profitability. For our purposes, profitability isn’t a crass or one-sided measurement. It’s a scorecard that reflects how well the law firm has deployed its unique assets to meet a market need in a way that’s mutually beneficial to the buyer and seller. Calculated properly, profits are a measure of long-term client satisfaction, not of “beating” the client in an adversarial game.

So we must understand the building blocks of our business, working ever backward from aggregate results, to the practices and offerings generating those results, to the matter types and activities contained therein, to the efforts necessary to win more of these activities. When we truly understand all that we do, and what we do well, and where we can improve, we can start to identify the critical behaviors necessary to generate greater success.

Acknowledge different contributions

Many law firms were built by exceptional lawyers who were as accomplished at generating business as offering legal advice, who were exceptional mentors and coaches, who were as adept with strategy as with operations. This is not most of us.

A successful law firm is comprised of different roles, different skill sets, different contributions. It’s necessary to understand the combination of contributions that generates success. Otherwise we risk the false assumption that “Success is primarily driven by business generation” or its opposite fallacy “We’re successful because we have top practitioners.” Of course these are true, just as a dozen other factors play a critical role. Only by understanding the unique combination of contributions by different lawyers with different skills can we establish a roadmap for replicating our success. However, we must acknowledge a fundamental truth: some contributions are more valuable than others, and this value may differ by practice, by matter type, by business cycle, by client industry, by year. Our objective in identifying critical behaviors is to maximize the contributions of all lawyers, rather than dilute our performance by asking, or allowing, lawyers to pursue that which is not their highest and best use.

Drive and reward

Law firm partner compensation schemes, whether lockstep or eat-what-you-kill, subjective or formulaic, open or closed, tend to share one overriding flaw: they fail to proactively and transparently define the behaviors expected of partners in order to drive such behavior. Instead, rewards are issued at year-end, in a process oft-shrouded in mystery, to partners who may not know what specific actions were valued, and how their specific contributions were valued relative to their peers. Changing lawyer behaviors requires leaders to set expectations in advance and to identify the rewards associated with the desired behaviors. Lawyers, generally acknowledged as averse to risk and uncertainty, are more likely to be dissatisfied when the incentive scheme is opaque rather than transparent. Managing expectations in this manner also helps to reduce feelings of inequity, because partners know the rewards associated with various behaviors and those willing to adapt can access different rewards.

There’s an old saying: If your compensation plan and your business strategy aren’t in alignment, then your compensation plan is your business strategy. This isn’t a reflection of selfish partner behavior. In fact it’s the opposite. Sensible partners trust that their leaders have established an incentive scheme that rewards lawyers for activities that are beneficial to the firm. When leaders expect partners to act against their economic self-interest “for the good of the firm,” this isn’t boorish partner behavior. This is simply inept management. It’s the leaders’ obligation to create alignment. The goal: What’s good for the partner is what’s good for the partnership. Settling for anything less than this outcome, and what’s good for the partnership might actually be better leaders.

Author

Timothy B. Corcoran is the immediate past President of the Legal Marketing Association and an elected Fellow of the College of Law Practice Management. Tim delivers keynote presentations, conducts workshops, and advises leaders of law firms, in-house legal departments, and legal service providers on how to profit in a time of great change.  

Contact Tim at +1.609.557.7311 or at tim@corcoranconsultinggroup.com.

Portions of this article previously appeared in ALPMA’s Survival Guide for Legal Practitioners blog and in Compensation (Re)Design for Law Firms, published by the Ark Group, with permission.