July 9th, 2010 by Jim Cotterman
You know the old sayings – ”You get what you pay for.” and “You get what you measure.”
In the US legal profession the two most established and accepted partner performance metrics are client following (origination) and personal productivity (personal fees collected). They have been clearly the number one and two compensable factors in legal profession surveys over the years. Scattergrams and statistical testing for the strength of the relationship between a particular performance measure and compensation have repeatedly demonstrated that these two factors explain a significant amount of the variation in partner pay. And it is an inescapable truth that professional service firms that sell their time, expertise and experience are most profitable when their timekeepers are fully utilized with well paying work. Logically we can conclude that having a client following and working hard are necessary ingredients to a remuneratively successful law practice.
But is a measurement system sufficient? For a solo practitioner or pure space sharers it may be. There are no relative considerations to make. But in group practice, is not judgment in making such decisions equally or possibly even more important in a partner pay program? Is it important to understand the nature and extent of each partner’s efforts? How about the differing roles partners accept or should assume as their careers unfold? What value is there in taking strategically smart risks (even if each undertaking is not entirely successful)? These and other factors require judgment, possibly supported by measurement when reliable metrics can be developed, understood and placed in proper context. For example, who is more valuable — the partner with a $1,000,000 practice that puts 25% in the hands of owners or the partner with a $5,000,000 that puts 5% in the hands of owners? Measurement is a tool to be used carefully and thoughtfully.
Yet, even more tools are likely needed as law firms grapple with a changing market. AFAs (Alternative Fee Arrangements) and project management are two hot topics in the profession. Each represent important steps forward in pricing, risk allocation, value and client satisfaction. Successfully implementing these techniques is hard work. Embedding them systemically in the law firm’s processes, including pay programs, will require even more work.
It appears that AFAs designed to provide cost certainty to the client and place greater risk on the firm for efficiency and outcome are the most likely to attract client interest. However, doing so without addressing the service delivery model is a significant risk to firms accustomed to an hourly pricing methodology.
Project management techniques ferret out inefficiencies and strip out unnecessary costs. It appears that undertaking a robust project management effort can yield some impressive streamlining. Fewer people get the same job done in less time with less cost. That is great news unless you are charging by the hour in an environment characterized by work volume constraints and competition for cost conscious clients. In other words, the volumes may be lower (that $2 million practice may end up being $1.7 million) and it may not be possible to raise rates sufficiently to offset the lower volume.
Together, AFAs and project management complement each other if one can price differently and capture some higher measure of profitability while being more efficient and less costly to the client. Now here is the rub, how does the partner establish compensable value when the practice size is smaller and considerable non-billable effort has been expended streamlining the operation? Personal productivity and origination metrics may still be necessary, but are clearly no longer sufficient. So a new set of measurements will be developed, refined, tested, institutionalized and ultimately automated. Yet, judgment will still be required to apply the new metrics fairly.
It is the responsibility of each firm to determine, based on its value system and strategy, what is appropriate. But it will require informed and thoughtful judgment to make it work.