Archive for May, 2009

Alternative Fee Arrangements and Compensation

May 26th, 2009 by Jim Cotterman

Firms wrestling with alternative fee arrangements (AFAs) often raise the question about how these arrangements will affect compensation decisions.  They raise concerns about how to recognize performance if hours are no longer indicative of contribution.  But hours are not the primary consideration in most owner compensation programs in US law firms.  We know that fees collected as working and originating lawyer are the top two performance metrics for compensation purposes.  This is not likely to change in the short term. 

But in the context of AFAs, the affect of the initiative on profitability is as key a consideration as winning the engagement and generating the revenue.  Determining an effective means to assess profitability is critical.

AFAs are likely to involve risk, innovation and possibly some trial and error to ultimately bring a successful approach to market.  All three (risk, innovation and trial/error) are appropriate to consider in compensation decisions along with the profits and fees ultimately created. 

Economic Outlook

May 18th, 2009 by Jim Cotterman

Quarterly the AICPA and the University of North Carolina’s Kenan-Flagler Business School conduct the Business and Industry Economic Outlook Survey. Participants in the first quarter 2009 survey included 1,183 AICPA members employed as financial executives in industry.  The overall take on the report is a general sense of pessimism for the economy and a lengthened time-frame for recovery to begin.  Complete details of the study are available at the site.

This study is helpful to law firms in two ways.  The conditions affecting businesses are the same as those affecting law firms.  So it is helpful to see what other sectors of the market are experiencing.  In addition, this study provides insight into your clients’ situations — a likely precursor to the types and amount of future legal needs.  The comments on credit terms and covenants were particularly noteworthy.

Webinar on Law Firms In Transition

May 15th, 2009 by Jim Cotterman

Altman Weil has announced a very interesting new survey on the state of the current legal market.  The survey was designed to measure how law firms are responding to the economic downturn in terms of pricing, staffing, strategy, growth plans and business development.  We were particularly keen to better appreciate the balance between the short-term operational reactions in response to the extraordinary recessionary environment and the longer-term structural changes to the basic business model.  We also sought information regarding short, medium and long term opportunities and threats as they are perceived by firm leadership.

 The results of this effort will be discussed in an upcoming webinar.  This webinar will discuss the results, implications and take-aways of Altman Weil’s study on Law Firms in Transition.  It is based on the input of 208 respondents (30% of the 687 US law firms with 50 or more lawyers, including 32% of the NLJ 250) to an inquiry conducted during March and April of this year.  The complete, 100-page survey, with detailed breakouts of law firms in five size categories from over 1,000 lawyers to under 100, will be available exclusively to those who register for the upcoming Altman Weil webinar, The Real Legal Market 2009, scheduled for June 11, 2009.

Stepping Into the Future

May 6th, 2009 by Jim Cotterman

Professor Richard Susskind OBE was interviewed by Mark Harding, Group General Counsel, Barclays on his new book, The End of Lawyers?  This is a thoughtful commentary that may spur some introspection about the direction of the legal profession.  Such exploration is vital to strategy development.  Listen to the webcast.

Thoughts on Leadership Compensation

May 1st, 2009 by Jim Cotterman

Leadership compensation is a topic we are getting questioned about.  We thought a few comments might help get the discussions moving in the right direction.
1.  If a firm wants good leaders (defined for now as managing partners, practice chairs and office managing partners), it will not create them through compensation incentives.  It takes a talent, time and training to become an effective leader.  Compensation’s job is to appropriately recognize and reward their contributions.
2.  How to approach the compensation piece depends on the role.  The full-time world-wide managing partner role is vastly different from the 1/3 time office managing partner.  The scope and scale of the role must be considered.  Some roles can be effectively rewarded within the existing partner compensation scheme, others may require a specially conceived program.  And let’s not forget about life after leadership.  Law firm leaders used to be older when they entered the position and could easily retire afterwards.  Today leaders are  younger and have many years before retirement when they move out of the role.  Some consideration to transition in role and compensation is worth discussing when setting up the program.
3.  Compensation programs should recognize both efforts and results.  Too many programs today only consider one or the other.  Historically the focus was on effort, measured in hours required or by a time budget allotted usually creating some sort of fictitious fee credit for compensation purposes.  Other law firms defaulted to a simple stipend based on perceptions of effort required.  Not satisfied with how this worked, firms embarked on a mission to pay for results only.  The key to a results-based system is to understand what the objectives are and how they will be measured.  Unfortunately, results don’t often fit nicely within the 12 month period that compensation programs measure.  Many initiatives require extended time periods to bring about results and that can complicate the recognition and reward objectives of compensation.
4.  A final consideration is whether and when to reward failure.  The best businesses take risks — innovation and growth, responses to rapid market changes and the ability to discern longer term shifts all involve risks.  P&G’s chairman (see post 4/8) stated “You learn more from failure than you do from success, but the key is fail early, fail cheaply, and don’t make the same mistake twice.”  If law firms want to implement strategic objectives in a competitive and changing market; it will want to encourage smart strategic risk-taking and consider rewarding failure.