Archive for the ‘Legal Profession’ Category

Pricing

June 23rd, 2014 by Jim Cotterman

Pricing should reflect a fair value to the client for the product/service/result provided and the market in which they are provided.  Thus hourly rates vary by location, practice specialty, practitioner experience and work/issue sophistication.  They are also sensitive to market factors.  For example, insurance defense rates are less and slower to move for a given practitioner than rates charged for similar work paid by the client directly.

Hourly rates have long been augmented by alternatives such as contingent fees and fixed fees for certain practice/market specialties.  And interest in moving beyond the hourly model is accelerating.  Law firms are investing resources in more sophisticated tools to understand cost of services and in people to analyze and structure pricing options.

The key is finding a means to best address a client’s needs for predictability, cost reduction and risk sharing in its legal spending.  How does the client define value and how can the firm better define the value it provides to the client?  Conversations with clients are critical as needs, issues and priorities vary.

The Trouble with Billing Rates

June 9th, 2014 by Jim Cotterman

The long historic ability of the legal profession to raise rates well in excess of inflation year over year has largely ended.  Two factors combine to raise a practitioner’s hourly rate –

1) an elevator lift of all rates to reflect an overall increase in pricing structure (pre-recession averaging each year 4.5% and higher than inflation’s 3.2% and post-recession from a bit more than one-third to a bit less than one-half of that which was pretty close to inflation), and;

2) the up escalator increase reflecting an additional year of experience (2% to 5% for each additional year depending on where the practitioner is in their career).

Realization, a law firm’s ability to collect those rates and the opposing force against increases, has been on a long steady decline from 95% in 1985 to 82% recently.  With pre-recession increases well in excess of inflation, the minor one-half of one percent annual decline in realization was largely ignored.  However, now that rate increases are modest the decline in realization is more noticed.  Increased price discounting at the front end and more aggressive push back from clients on bills on the back end reflect increased pressure for lower cost and better value. 

Collected hourly rate increases fueled revenue growth on a per timekeeper basis.  Thus making it possible for high year over year compensation increases.  Concurrently, demand, at least as measured by average billable hours, is diminished.  Result:  Modest revenue per timekeeper growth and in some pockets real challenges at holding the status quo.  The consequence is that unless overhead and the service delivery model are radically altered, there will be little room for the historic annual compensation increases.

Financial transparency

May 24th, 2014 by Jim Cotterman

Law firms are somewhat unique in the amount of information that is publicly available regarding their finances.  Most closely held businesses do not operate in such an open manner.  Of course, the accuracy of that publicly available information is a separate matter to consider, particularly when obtained from unofficial sources.  Here each firm must decide what is appropriate for public disclosure and how to best convey that information.

Yet, transparency in the governance and operation of a law firm is a good practice for the owners of the firm.  They are a large group relative to their firm’s total employment and are all active and personally invested in the firm.  But such disclosure is not sufficient to avoid financial distress.  Two additional factors are also important.

First, lawyers are not schooled in accounting or financial analysis.  If transparency is to have meaning, partners must be able to understand and interpret the financial information and metrics.  Firms should Invest in training sessions to acquaint partners with the financial reports and operating information, how to interpret that information, banking covenants and the metrics the bankers rely on, and how to reconcile the tax return, year-end financial statements and internal financial reports. 

Second, and possibly most important, is a culture where 1) firm leaders welcome questions from partners and others about the firm and 2) where integrity and honesty is embedded in the ethos of the firm.  Transparency assists accountability, but it also establishes responsibility.  The responsibility to ask and then act when action is required.

Retirement is not a moment in time

May 1st, 2014 by Jim Cotterman

The evolving role of a senior partner as s/he transitions away from the private practice of law takes many paths. Some are specific and short – “In a year I shall retire to my cabin in the woods.” Others are longer duration – “I would like to slow down and phase out over the next five to seven years.” And still others are indefinite – “I want to maintain a part-time practice with a few of my cherished clients as long as I can.” Obviously, there are many permutations on these. And what works best depends on the specific path taken. It is likely that each firm will have multiple paths in process and thus require flexibility in dealing with these differing situations. Compensating senior partners requires a view that considers that chosen path and recognizes that most partner compensation arrangements are designed not for this transitional role, but rather for the full on partner.

Generally, what a partner leaves behind is the client and referral relationships built up over a career. Those relationships have value if the successors can retain them and maintain/grow the revenues and profits from them. There are variables to consider. For example, founders may have some additional value attributed to the risk and start-up costs that successors do not incur with an established business. The area of the law may also alter what and how value is recognized. For example, an estate practice has value in the will bank and contingent fee practices have significant investment locked up in cases that can span years. It is appropriate to consider if and how to deal with the compensation deferred by virtue of a start-up and/or locked up in unique practice assets.  

Another key financial aspect of retirement is the return of capital. Senior partners carry disproportionate amounts of the total capital invested in the firm. With buy-outs that tend to occur faster than buy-ins, it is easy to foresee the stress retiring boomer partners are likely to have on capital structures. Add to this mix additional stress points such as the increased use of non-equity partner, thus delaying or eliminating potential future sources of capital, as well as the generally increasing capital needs of law firms. Law firm financial leaders need to be conversant with capital planning.

Beyond the valuation and compensation aspects of retirement, thought should be given to how to transfer the intangible value of senior partners – their wealth of legal, business and life knowledge; their leader, manager, mentor and steward roles; as well as their client, referral and market relationships. This requires some internal discussion as well as discussion with the clients/referrals. Professional service firm relationships are often trust-based, thus they are harder to transfer than skill-based relationships. It takes a number of touch points (face-to-face interactions) to effect a transition of trust. And the changing nature of practice delivery has and will continue to decrease the opportunity for face-to-face interaction.  This is the succession planning that firms refer to — working in a coordinated and thoughtful way towards retirement and well in advance of that retirement.

Ideally one would like the retiring partner to have worked him/herself out of a job on their last day at the firm. Good concept, but devilishly tricky to accomplish.

Should performance evaluations be linked to pay decisions?

April 22nd, 2014 by Jim Cotterman

There are a variety of views on this topic of linking pay and performance evaluations.  My general response is to link the two because pay proportional to performance(r) is a critical element of best practices in lawyer compensation.  They are both part of the ongoing cycle of plan, train, do, coach, assess, reward.  The plan and assess elements often occur concurrently — assessing prior performance and planning for future (including career development).  And it is important that the feedback from the performance evaluation and the compensation decision be consistent and understood by all, including the individual’s team leader.  

 

But to decide, first assess a number of factors.  Ask:

1. To what extent are the compensation decisions based on performance evaluations?  For example, if the associate compensation system is entirely an automatic lock-step and bonuses are tied exclusively to a billable hour formula — then there is little reason to connect the two.  The subtleties of a proper performance evaluation are not connected to changes in pay in this example.  

2. Are there other dimensions to the pay decision outside of the individual’s performance (team, practice group, department, office, firm performance) and how important are each in the overall compensation philosophy?  In this situation, the performance evaluation and the pay decision should both assess and discuss the same dimensions, how they interrelate and the relative importance of each in the overall compensation decision.

3. Is there sufficient flexibility in the compensation program for material differences in pay between high and low performers?  Even if pay decisions are heavily influenced by the performance evaluation, if there is an immaterial pay differential opportunity between those judged high performers and those judged low performers, there is little reason and high risk to connect the two.

4. Is the performance evaluation process properly designed, implemented and supported so as to be effective?  Are both performance and career development properly balanced?  Is the review cycle the proper interval?  Is there a need for a mid-period formal check-in and/or are there opportunities for informal review available?  Are the metrics sufficiently descriptive to mitigate against differing views of performance (this generally rules out the simplistic “Does Not Meet, Meets and Exceeds Expectations” systems).  Is the evaluation thorough, yet focused (remember that the partners have many, many of these to complete)?  Are the reviewers trained in completing the evaluations?  Are the individuals who aggregate the individual evaluations into a comprehensive assessment trained?  Are the individuals providing feedback trained?  Are prior year evaluations available to note progress and to provide continuity? 

5. Have the stresses that highly integrated performance evaluation and pay programs create (tendency for less open communication, more conservative setting of performance goals, heightened focus on short-term performance rather than career development, grade inflation to achieve a desired compensation result — protection of ones key team members) been considered and mitigated to the extent possible?

Realization

March 14th, 2014 by Jim Cotterman

The profit metric that tells how efficiently work done at standard rates is converted into cash.  It does not tell you how fast this happens, just the amount of slippage that occurs from end to end.  There are key intermediate steps that are measured such as billing realization (converting time value into bills) and collection realization (converting bills into cash) and a number of variances (see below) critical to isolating and confronting slippage. 

But first a bit of history and why it is now getting so much attention.  Realization has been dropping since the mid 1980s — a long, gradual and persistent deterioration.  But until the recent recession, rates were going up much faster; yielding a collected rate increase well in excess of inflation.  Strip away the historic ability to increase rates and the realization slippage is uncovered for all to see.  To confront this problem, examine realization where the slippage occurs.  There are four general areas where losses occur that must be understood and managed.

1.  Timesheet discounts — those adjustments individuals make to the time they record when they believe something took longer than it should.  This is one area that does not show in the financial system realization numbers because it is not captured.  It prevents firms from identifying budgeting issues and training needs.

2.  Pricing discounts — the difference between standard and actual rates.  Both the frequency of use and level of discount have been increasing and accordingly realization suffers.

3.  Efficiency adjustments — those adjustments to the value of time recorded at actual rates before billing.  These are done by the billing partner.  They may be targeted or prorated across the timekeepers on the matter in proportion to their recorded time value.

4.  Value adjustments — those adjustments made by clients when they perceive that the bill does not reflect fair value for the agreed to budget for services, the services rendered, and/or the outcomes achieved.

Each of these areas require separate tactics to tackle the associated realization decline.  Terms like pricing variances, efficiency variances, value variances should accompany any discussion around realization.  The realization journey begins with client acceptance and continues on to matter engagement, work planning, staffing, project management, billing and collections.  Thus, firms should examine their policies about client selection, engagement letters, pricing/retainers, staffing, practice management, billing adjustments, AR write-offs and collection efforts.  Those policies should be administered through the practice leaders who should hold individual partners accountable.

Also consider how the firm strategically positions itself with respect to pricing.  Does it set high standard rates with an expectation of using discounts to satisfy financial and/or procurement departments in client organizations.  Just look at the medical and accounting professions where these models have been in place for many years.  Historically the legal profession did not adopt this pricing model, thus it has strived for high realization and little, if any, discounting.  Clients are now more aggressive at pursuing pricing discounts, without the law firms having a pricing model with sufficient margin to easily accommodate them.

 

Realization issues also tend to concentrate among individuals, practices, offices and clients that are struggling — underperforming.  It is important to look for outliers across these segments.  Firms should manage their way through these issues by identifying the problem and taking corrective action.  In the current market where there remains an imbalance between supply and demand for legal services, that corrective action is more likely going to be to shed the problem.  It is not fixable by changing status or compensation, which unfortunately, is what is attempted all too often.

 

So, if you are going to the Managing Partner or Executive Committee to talk about low realization; be prepared to talk about what kind(s) of variance(s) exist, where and who is the problem, and the targeted options to correct or shed it.

Some thoughts on lateral hires

May 9th, 2011 by Jim Cotterman

I was asked recently about lateral hires and compensation practices.  My response, which goes beyond compensation, follows.  If the firms don’t do these other things well it matters very little about the compensation.  And even if the compensation is well done, the other things here are critically important for the hire to be successful.

1. Lateral candidates tend to promise more then they can deliver in terms of how much and how quickly their practice will move.  This is not an intentional overstatement as their firm is equally off at the other end on how much lost business will occur.  The clients have the final word on this matter and their response may not be what either the candidate or the firm anticipated.  Another factor (hopefully) is that candidates are inexperienced at picking up a practice and moving it.  If the partner is experienced at moving their practice that should tell you something as well!

2. Candidates may be making the change for reasons they do not fully understand (which could lead to post change remorse once it is all sorted out).

3. Firm’s due diligence is often lacking with little or no credentialing, insufficient analysis of candidate’s practice (see number 1 above) and insufficient evaluation of how good a fit this person is with group, office and firm overall (see partially number 2 above).

4. Each firm needs to have a really good handle on what it is paying its equivalently performing partners.  It is very bad for morale if current partners are paid less than the incoming laterals.  But how many times do we hear partners lament about this very situation?  And if this situation is a symptom of some problems with a current program, they are exacerbated when laterals are kept whole.

5. My personal observation is that firms will often pay very high in the market range, even above range, to seal the deal with a lateral partner.  But it is important to note that there is always someone who can and will outbid you.  Further, money does not buy loyalty — it can only arrange a short term rental.  Finally, once you set the initial compensation so high, where do you go from there and how do you recreate internal equity when the time comes to fully integrate the lateral into the firm’s program?

6. Smart candidates avoid having a target painted on their backs with a high signing bonus, high draw, high guarantee — they will look for assurance of “X” if they deliver “Y”, which is reasonable because they don’t have relationships in the firm or experience with the new firm’s particular politics.  They will be willing to share in risk and reward with the the rest of the partners to some extent and will look for a fair draw.  There is a real need to strike the right balance between comfort for the new person and full integration into the firm’s program.  Some may consider this next comment a bit unusual, but I recommend laterals have an active mentor — maybe the partner who sponsored their candidacy — to improve the integration and to catch/head off the difficulties that will invariably arise.

7. The above comment leads me to this next thought that there is really very little effort to integrate partners into the group, office or firm overall once they arrive (or at least after the initial honeymoon period).  Moreover, since they are not well plugged in they find themselves having to market internally nearly as hard as they have to externally.

North Carolina will consider ownership of law and accounting PCs

March 16th, 2011 by Jim Cotterman

Today’s PinHawk Law Technology Daily Digest had an intersting item regarding recently proposed legislation in North Carolina.  A bill, Allow Nonattorney Ownership of PC Law Firms, would provide for minority ownership (up to 49%) of law firms and accounting firms by any individual.  The bill further requires that the respective licensees “own and control voting stock that represents at least fifty‑one percent (51%) of the votes entitled to be cast in the election of directors of the professional corporation.”  The section applicable to law firms also sets out a priority of interests in the case of conflicts between the interests of owners, clients and the court:  The stock certificates or other written evidence of ownership of any nonlicensee shall bear the following language, in at least 12-point type:  ‘No nonlicensee shareholder shall interfere with the exercise of professional judgment by licensed attorneys in their representation of clients. If there is an inconsistency or conflict between the duties to the court, to clients, and to shareholders, then that conflict or inconsistency shall be resolved as follows:

1.  The duty to the Court shall prevail over all other duties. 

2.  The duty to the client shall prevail over the duty to shareholders.’

This will be an interesting bill to follow.

The Cost of Indiscretion

February 3rd, 2011 by Jim Cotterman

Read this piece on Forbes.com regarding communications.  It is an important reminder that the old adage - the best place for a private meeting is a very public place - is not something to bank on.

Technology and client relationships

January 13th, 2011 by Jim Cotterman

This links to an interesting analogy that begins with the debate on the iPhone and does one stay with AT&T or migrate to Verizon.  It then shifts to a very pertinent lesson about client relationships – A lawyer is like an iPhone.  The first part is a debate that will evolve as more details of Verizon’s offering unfold and the strengths/weaknesses of the two systems and their underlying infrastructure are explored in greater detail.  The second part on client relationships is instructive.  Linking the two is illustrative of the concern — Is the service provider really listening?