Although the law business is booming, two issues implicit in successful law firm governance remain unsolved in many firms, and, in fact, have as much to do with the financial future as does the state of the economy. The first issue is what I term the co-equal conundrum, meaning that among partners there is frequently no one with the ability to bring about changes in attorney behavior critical to the firm, especially when some of the co-equals do not contribute to business development. This lack of a "sales manager" role -- someone who consistently inspects revenue production and coaches team members to fulfill their marketing obligations -- spawns a culture of uneven performance that for many (mid-sized particularly) firms bodes poorly for longevity. In this culture, key partners defect, and experienced associates seek futures elsewhere because they either do not have a book of business, or do not see a viable place for themselves as future partners. This churn erodes profits even in a good economy.
The second issue is part of the same fabric: the lack of an objective performance appraisal process that motivates firm members to live up to their reciprocal obligations of ownership. The appraisal process is often too narrowly answered at the end of the year by means of distributions. Now that the thrumming anticipation of partnership distributions has waned (for some), the grander issues implicit in partner compensation and appraisal are worthy of discussion. No matter what manner of compensation formula is used for distribution purposes, lock step, eat what you kill, or pure magic, a larger question should be honored given the reciprocal rewards and risks of "partnership": What exactly should equity partners contribute to the firm beyond new fee generation, and how should those contributions be evaluated?
To my mind, not answering the foregoing questions thoughtfully, continually and objectively, is a grave risk for a firm of any size in any locale. From a purely economic viewpoint, consider that the financial existence of a firm rests on the pediments of client retention and employee (read partners, et al.) retention. The client retention half of the equation as it relates to ownership obligations means that collaborative marketing, cross-selling for example, must take place, and that the minimum level of attorney competence has been ratcheted upward by client demands, and will not regress. The notion of owner contribution parsed by rainmaker vs. non-rainmaker fits like a pair of bad shoes. There is much more to this consideration than fees alone.
On the second side of the profitability equation, concerning employee retention as it affects financial existence, firms risk the defection of key owners if the obligations of partners are not evaluated in a multifaceted, defined manner. Nor will worthy associates remain in an environment in which there is no rational evaluation and succession plan, particularly in a tight labor market. Increasingly for firms, having a reputation for being a less than good place to work and remain, will severely undercut both the present existence and future succession of that firm. In a very critical sense, the owners of the firm need to lead, demonstrate, and be practical models of ownership obligations if a firm is to have a present and future life. Times have changed.
To succeed into the future, and to weather economic cycles both nationally and internationally, firms need to look carefully at the issue of vesting someone (or group) with the leadership position -- literally, vesting a partner with "first among equal" status -- on the business development inspection. Then, evolve a process of performance appraisal that is consistent with the financial objectives and values of the firm. What, really, does ownership entail?
"Ownership" in a partnership imputes certain responsibilities that can be translated to observable criteria that stretch beyond fee origination for oneself. I believe that there are at least five criteria that should be considered, which, when scored in an objective manner and paired with a financial analysis of a practice, pave the way for using year end evaluations to determine distributions in a calmer, more intelligent manner:
- Client and employee retention: since both retention rates underpin a firm's profitability, the rate at which an attorney churns through either can be a severe detriment to the lifeblood of a firm. The rainmaker who cannot retain administrative help, or one whose outbursts or demands drive associates away is as significant a contributor to red ink as the attorney who eschews marketing. How do you clock retention? Count defections, and look at non-recurring, unexpanded clients, particularly in transactional practices, and inspect litigation clients who remain only litigation clients.
- Team player: does the attorney contribute to firm growth by cross-selling additional services? To do this, a lawyer has to consider the client as a whole, do research, and hold client reviews and sales calls to expand the menu of proffered services. Other attorneys have to be introduced to the client. Don't know your rainmaker's clients? When you ask to meet a client, get the cold shoulder, or "I like to work one on one"? These responses are not those of a team player responses and bode poorly for the future of the firm. Often these responses are emblematic of poor client service and leave the firm hostage to the whimsy of one partner's ownership of a client. Feel uncomfortable?
- Marketing: few firms collect and inspect monthly marketing calendars at partner meetings. This is a mistake that breeds animosity. Those who market actively will feel unappreciated; those who don't market will (or should) feel fear. These marketing activities are productive: speaking engagements, client seminars and reviews, publication of articles to fertile target audiences, and "sales" calls to expand and cross-sell. Little else works.
- Mentoring: every new hire decision should be completed with the expectation that new hire will make partner. Why else hire the lawyer? Yet, the lack of mentoring escalates a turnover rate among junior partners and tenured associates that is a financial problem to many firms, large and small. Recent research indicates that senior associates and junior partners switch firms to find a better place to work, not for money; money is way down on the list of criteria. Partners must bring associates under their wing: take them to networking and marketing events, introduce them to clients and others who may help them grow in their careers and demonstrate how to build a book of business by doing just that in plain sight. Associates need coaching too in weathering the sometimes tumultuous give and take of working with clients. In the commercial world, business people are trained in negotiation skills; they assume that conflict and discord are expected pieces of working relationships. When associates encounter difficult client discussions without coaching, over time they begin to look for a better place to work.
- Leadership: seemingly a fluffy subject, leadership is really concrete. Who among your partners steps up to the bar to spot problems, issues, and then works with others to fix them? Forget your calculator, this is a one-handed count in most firms. Leadership happens in teams, and effective leadership means the teams work, they have shared responsibilities and they create a result. If you are a managing partner and you have no junior partners nipping at your heels to assume leadership, beware. You need to parse out increasingly more responsible leadership roles to your younger colleagues in order to pass the mantle of leadership on to someone who will assure the future for all your employees.
APPRAISAL: PAIR THE CRITERIA WITH THE NUMBERS
If you score these and other criteria of your choosing, and then pair them with a profitability analysis of a partner's practice, you will have a more objective, broader means of considering the distribution issue. Take the five criteria above and score them on a one to five scale, five meaning excellent, and one meaning poor. Look at the growth (or lack thereof) of the partner's practice, and its profitability. What trends do you see? Is the practice keeping up with industry averages?
If you see an underperforming practice, note that the opportunity to change this picture should have a definable time line that needs to be part of your negotiation with that partner. Set a time line and review it with the partner every month, or every quarter, not just once a year. Using over productive practices or areas to cross-subsidize (literally, pay for) under performers is a much more time limited proposition than one would think. Cross-subsidizing has been proven a flawed strategy in both law firms and in the commercial world time and again.
Many successful firms review the numbers and the performance criteria numerous times throughout the year, not just at year end. It is a wise practice. It obviates surprises, acrimony, and defections. One managing partner I know opens a quarterly review with partners by asking, "What do you want to make this year?" Attention gotten, they then review criteria and performance numbers and work together, not at loggerheads.
I have seen other well performing firms open each partners meeting with a review of the past month's marketing tactics by partner, paired with an inspection of the upcoming month's tactics. I include a form that partners submit before the meeting and is circulated as a package at the start of every partners meeting. This public review in confines of an owners meeting both informs members of activities, and raises the collective and individual consciousness on the obligations of each person. It inherently holds the marketing calendars of partners up to inspection and comparison, which is not without problems. However, this process fulfills the "sales manager" role of the commercial world in a professional setting -- it inspects the expectations of the group.
If you implement this process, my experience shows that you will meet with recalcitrance for a number of months; partners will forget to turn in calendars. Some will lobby against the process, casting it as unprofessional or overly commercial. Interestingly, in the commercial world of sales meetings, the same objections occur. Persevere, cajole, and keep the discussion of obligations on the front burner.
List specific marketing activities* you are doing with clients or potential clients (prospects) in the next month.
CLIENT/PROSPECT ACTIVITY DATE
List the marketing actions you took last month with clients and prospects:
CLIENT/PROSPECT ACTIVITY DATE
*client reviews, sales calls, speaking, publication, client visit, meal w. prospect, etc.
Copyright 1998, New York Legal Marketing Association. Reprinted with permission.