Associate Advancement and Client Dissatisfaction

Is your firm aware of client dissatisfaction with the way your associates are developed and advanced? The signals of dissatisfaction are all around us, yet most firms just manage the symptoms, without restructuring their associate talent development model. Your firm can get ahead of this problem with a solution that leading firms have adopted – a “levels and promotion” system.

What are the signs of client dissatisfaction? One clear complaint from clients is that “We’re paying for first-year associates to be trained.” In frustration, many corporate counsel have simply banned first-year associates from appearing on any bill.

Another complaint is that associate billing rates go up each year according to the seniority of the associate. The client sees no connection between another year on the job and advanced competency. In other professional services organizations and the client’s company, advancement results from increased competency and promotion over one’s peers. Clients rightly complain, “Why are we paying a higher hourly rate for a fourth-year associate just because they are a year older?” This leads clients to demand a contradictory regulation of their bills: “Push work down to more junior associates.”

Selling the First-Year Associate

Instead of capitulating to client “bans” on first-year associates, firms can respond in two ways. One is to provide intensive training, at firm expense, in the summer program and the first three months of the associate’s full time job. Summer programs can improve what associates already do reasonably well – research and writing. What they lack are hands-on client assignments and intensive supervision. Leading firms also develop competency standards for legal analysis and writing. They provide one-on-one outside coaching for some. Firms like Skadden and Milbank demonstrate what can be done in the first year. They have external training programs, matched with firm assignments that bring first years “up to speed” more quickly in performing valuable tasks.

A second response is to develop data on the relative cost of a trained first year doing a legal task like “writing a diligence report,” compared to a second or third year. However, we need to know the average time and cost for that task at each level. Is it really true that a third year can perform a task in half the time of a trained first year? If firms can demonstrate that a competent result can be achieved on a task at a lower total rate, why should it matter that the first year spent 80% of the time on the task and a supervising third year spent 20% of the time?

Many clients are still not convinced – based mostly on anecdotal evidence. So they stick with the first-year ban. That’s why firms that have upfront training and the data to support the cost of legal tasks have an advantage. They can sell the client on using a first year because of both competence and costs.

Levels and Promotion, not Just Seniority

Levels and promotions systems for associates have been around for about ten years, but they have not penetrated firms outside the AmLaw Top 50 to a great degree. Orrick was one of the first firms to adopt such a system, and despite “being different” when they go into the recruiting market, they have not retreated.

In brief, how do these talent-advancement systems work? First, they are based on competency more than seniority. Firms develop explicit competency statements and standards, both in broad legal skills (e.g., writing, communications, analysis) and in practices (e.g., facility with practice-specific documents). Associates are then evaluated according to competencies, not just years on the job. There are specific levels of advancement and one gets promoted at several levels of increased skill and knowledge. The promotion levels will sound familiar: Junior Associate to Midlevel Associate; Midlevel to Senior Associate; and sometimes Senior Associate to Counsel or Income Partner.

Why is this different from a seniority system? The difference is that the highly competent junior lawyers can advance faster, despite a lack of seniority. An associate with 2.5 years of experience can become a Midlevel. An associate with 5-6 years may become a Senior. And it cuts both ways. An associate who is not progressing through the competencies will be held back. So a third or fourth year might still be titled a Junior Associate and paid accordingly.

These systems take time and expertise to establish in the first place, and ongoing investment by the lawyers to evaluate and promote their lawyers. But when it comes time to raise the billing rates of their associates, leading firms have an answer that their corporate clients understand. “On July 1, Jill’s billing rate will increase because she got a promotion to Midlevel Associate.” The firm will educate their clients on the competencies that Jill has attained and will celebrate her formal promotion. Clients see this type of advancement in other professional services and in their own backyards. They will be sold and the dissatisfaction irritant will go away. Beyond that, Jill’s firm should have a competitive advantage.

Tailored Talent Supervision

While working with counsel at a top global firm recently, I asked them: “What is your best tip for supervising associates?” I received some terrific ideas, but one that stood out was this from a transactional lawyer: “I ask them what they need from me.” This counsel had turned the normal supervision wisdom upside down. Instead of assuming that the senior lawyer knows best, he wanted to know what actually worked best.

If you are a partner or senior enough to be supervising associates, it is not that easy to adopt the wisdom of “tailored talent supervision.” You may have several associates and little time. Associates come and go – from your matters and your firm – so it may be frustrating to invest in more individualized attention. And even if you go down this path, the associates may not be frank with you in asking questions or giving you feedback. Here are some thoughts on how you might move from “standard supervision” to tailored supervision.

First, the senior lawyer needs fundamental skills in delegation, ongoing supervision and feedback. Furthermore, skilled supervisors pay attention to ongoing career development of their team members. Many law firms now teach these skills, but if necessary, seek an outside program. For example, if you do not have a core delegation system or a well-conceived approach to feedback, you will not have a base from which to customize your talent management. You want to acquire the full Swiss Army knife first, then use the right tools.

As each associate gets better with your assigned legal tasks, you will use a lighter touch. You’ll have fewer check-ins. Perhaps you’ll delegate with more shorthand. In my own training program on delegation skills, we discuss “situational delegation”. But how do you know when you are supervising at too high or too low a level for the tasks and the individual?

I recommend a conversation with each of your associates, using some recent delegated tasks as examples. Some of these tasks should be recently completed, but one or two can be in progress. Your goal in this conversation should be to find out what each associate needs. However, if you ask a broad question, like “How is my delegation and supervision going?” most associates will play safe and say “fine.” Instead, try narrower questions that are harder to duck. Here is an effective series of questions.

“I am trying to tailor the way I delegate work, supervise and give you feedback. I want to have some of our recent assignments in mind, including at least one that is ongoing. Thinking of those assignments:

1. Has there been enough clarity in my delegations so that you do not have to ask many later questions – to me or others?
2. Thinking of my supervision or your matters, am I sufficiently (a) available to you, and (b) responsive in a reasonable time?
3. On a scale of 1 to 10, where 1 is very “hands off” and 10 is very “close” supervision, where would you rank my ongoing supervision?  Follow up: Are there situations where you need me to lean to less or more supervision?
4. While I cannot give you feedback on all your tasks, is my feedback to you (a) timely (within two weeks of completed work) (b) specific enough to help you develop you future skills?”

The answers to these questions should lead to a summary of your listening back to the associate: “From what you are saying, you need me to….”

Then make your own bullet point notes and strive to follow those needs in your future delegation, supervision and feedback. But after a year, the tailoring will have to be updated and you should revisit this conversation with each associate.

Why Aren’t Associates More Profitable?

I had occasion to be on a panel with several other consultants and some managing partners recently.  One of the consultants said, “As you all know, every law firm loses money on associates during their first three years of practice.”   The panel (me included) smiled and nodded acknowledgment of this commonly accepted belief: all young associates cost more than they produce in revenue.

But it got me thinking…could this be true?  What is the strategic logic of hiring associates who don’t produce profit?  One of the first rules of business states that the easiest way to make money is to stop losing it.  So, if all law firms really lose money on associates during their first three years of practice, why don’t they just fire the lot of them and enjoy a nice increase in profits?

Do We Really Lose Money on Associates?
Unfortunately, this is the point where theoretical accounting and functional accounting collide, producing quite a wacky result.  It makes sense to spread the costs of operating a law firm over the entire staff of attorneys and paralegals and then derive a cost-per-timekeeper (fee earner outside the U.S.).  But if a firm fires an associate, the firm saves the associate’s salary (lets say $100,000 per year for round figures), benefits, taxes (say another $25,000), plus half the cost of a secretary (maybe another $30,000).  Suppose this firm even maintains a magic lease that allows it to add or shed office space at will, precisely matching its lawyer count. That equals another $10,000 in savings.  The sum of this savings adds up to well less than $200,000 total.  Yet, most firms should receive at least $300,000 for the associate’s time, thus producing a negative cash flow of $100,000 if the firm fires the associate.  So, why do firms think they regularly lose money on associates?

As law firms attempt to become more “business-like,” they also attempt to apply industrial cost accounting techniques to the practice of law.  The difference is that law firms are structured with owner operators, which produces a distinctly different result than does an investment owner model.  Cost accounting for law firms simply cannot be figured in the same way as it is for a Buick plant.

The Economics of Ownership
In truth, the overhead costs of running a law firm are the responsibility of the owners.  They make the decisions of what costs are incurred and accept the business risks of maintaining unused office space, obsolete computer systems, etc.  Owners accept this risk because it is justified by the reward of profit sharing.

Unfortunately, many law firms have lost their ownership mindset and gone overboard with leverage models.  Conventional wisdom holds that the reason New York law firms are so profitable is because they have three or four associates for every partner.  In point of fact, the reason New York law firms are so profitable is not simply because they have more associates; they are profitable because their partners are capable of generating so much work that the partners can’t do it all themselves. Therefore, they must hire associates to accomplish all the work to be done.

This is a concrete point.  It is fundamental to a law firm’s profitability.  Suppose that attorneys Moe and Larry leave the practice of law and decide to open a hot dog stand.  They don’t worry about the allocation of overhead because they know the cash they generate by working at the hot dog stand must exceed their costs in order to produce a profit.  When sales increase to such a degree that they cannot handle a single additional customer or sell one more hot dog, they hire an employee.  In hiring the employee (who is, of course, called Curly), Moe and Larry’s hope and expectation is that there will be sufficient demand for hot dogs that the new revenues created by having Curly will exceed Curly’s cost, thus generating additional profits (the law firm leverage model).  At some point, Moe and Larry look each other in the eye and agree they will come up with enough business to keep the new guy busy.

Using Accounting that Makes Sense
The reason I bring this up is that as law firms become more sophisticated in their use of practice groups, they are increasingly tracking revenues and expenses to those groups and making management and compensation decisions based on each group’s profitability.  Managing profitability of a law firm at the practice group level makes complete sense, but only if the means of tracking both revenues and expenditures is completely appropriate for a professional service firm, and not more applicable to a manufacturing company.

Unfortunately, I see many firms that simply divide the total non-timekeeper compensation expenses of the firm by the number of timekeepers, or worse, by the total number of billable hours.  The result is that partners are able to push their overhead costs to the non-owner timekeepers, thereby making themselves look more profitable.

The truth is, a firm must base its system for measuring the success of segments of its organization on more than simplicity of calculation.  This means that, if a law firm is going to measure profitability at any level other than firm-wide, the firm must first consider three basic concepts:

Overhead belongs to the owners.  The costs assigned to the worker bees are costs related to their presence.  The test is, if the attorney leaves the firm, do the costs go away?  If they don’t, it’s overhead.

Everything paid to partners cannot be calculated as a compensation cost in measuring profitability.  Partner compensation is based on three factors: how hard they work, i.e., how much money they bring in as a working attorney; how much business they generate for others to do; and their capital at risk.  The only one of these factors related to the cost of work performed is the portion of compensation based on how hard they work.

This is important because partners, as owners, are paid from profits.  It is a zero sum game — if firms count total compensation as an expense, there will be no profits.  In this case, the measurement would be based not on the profitability of the practice group, but the accuracy of the firm’s compensation system.

Revenues must take into consideration originations by the group, not just work performed.  One of the key roles of a practice group is business generation for themselves and other practice groups.  Basing profitability solely on revenues generated for work performed will inevitably result in the balkanization of the firm into the practice area silos most firms are working to eliminate.

Granted, I appreciate that the above may sound theoretical, but I consistently see firms making strategic decisions on which practice groups to grow and spend money on based on very questionable cost accounting.  Bottom line, look at the numbers – look at them hard – but don’t let them get in the way of common sense and business judgment.

The Younger Generation

A great deal has been written about why associates, and even young partners, have a different set of aspirations and values than previous generations.  It is further suggested that law firms must adapt themselves to these generational shifts if they want to successfully recruit and retain lawyers and staff.

But suppose that the issues we blame on the changing outlook of young lawyers are, in fact, the result of changes in the structures and values of law firms and the way we run them.  Could it be that many of the concerns we have about Generation X lawyers may be products of our own creation – and within our capability to correct?

A couple of years ago, within the same week, I had the occasion to interview two third-year associates at two different law firms.  Both worked for fairly large, very well-regarded and highly profitable firms.  One was a transactional lawyer who, during the previous year, had billed 2800 hours and was on track for an even higher total for the current year.  He kept an air mattress in his office and often spent the night on the floor.  In an attempt to understand what on earth a law firm does to motivate someone to work that hard and put his health and marriage at risk, I asked him why he didn’t just go home.  He looked at me like I had just asked the most idiotic of all questions and said, “The work I’m doing is so cool that I’m afraid if I go home I’ll miss something.”

Same week, different law firm – I interviewed a litigation associate who had spent the entirety of his first two and one-half years of practice working on a single case in an off-site warehouse sorting through client documents to identify those subject to the lawyer-client privilege.  Although he worked a very routine nine-to-six work schedule, he was able to bill a respectable 2000 hours in each of the previous two years.  The young lawyer did not seem particularly perturbed about the work but asked, “Six years from now when I come up for partnership, do you think some committee will sit around the table and say, ‘He’s great—he can do five boxes a day.’”

Of course these are two extremes.  But, having talked to both of these young men, I don’t think that, had they somehow been magically swapped on the first day of their first year, the interviews would have been substantially different.  They were both members of Generation X and came from remarkably similar academic and personal backgrounds, but their attitudes appear to have been largely shaped by the experience provided to them by their law firms.

Traditionally, work in law firms runs through a screening process.  Partners, who bring in most of the work, keep the most complex and sophisticated matters for themselves. The work they either don’t want or can’t do is passed along to younger partners and senior associates.  They also keep the most interesting and challenging work for themselves, and pass on what’s left to mid-level associates.  The process continues until work trickles down to paralegals (okay, certain types of work jumps directly to young associates and paralegals but we’re working with a concept here).

Law firms depend on this screening process to provide training for lawyers.  The best lawyers will be the most inquisitive and always looking for projects that will help them develop new skills and acquire special knowledge.  The associates who don’t do that end up doing the same work repeatedly and fail to progress and, if the system works, they get weeded out in the annual evaluation process.

But law firms changed one important part of this process – the weeding out.  The concept of “up or out” fell out of favor as firms, in pursuit of increased profitability, decided that if they had an associate who was willing to pump out hours and for whom the firm could get a good rate, it was silly to force them out and lose the revenue.  What resulted was a new and growing cadre of lawyers wedged between the equity partners and the associates.  Some firms call them non-equity partners or of counsel.  Others call them senior or permanent associates.

So, as firms became more selective about their equity partners but retained senior lawyers who were not elected to equity partnership, this new cadre became an inner tube around the waist of the law firm pyramidal structure.  These lawyers, who are by and large being paid to bill hours, will, if given the opportunity, sap off the best and most interesting work.  And, because this interim level is steadily growing, less and less challenging work gets down to younger associates.

Now, we can accuse Generation X’ers of a lot of things, but being stupid isn’t one of them.  They look up, see what’s happening, and find themselves with two choices.  They can accept the situation, cash their large paychecks and bonuses and learn to live with the “tsk-tsking” of partners about how young lawyers aren’t motivated anymore.  Or, they can find another job.

The brightest and best will realize that they only have seven or eight years to learn their profession.  There are no “do overs.”  They can’t push the rewind button and start over again as a first year associate. They get one shot and have to make the most of it.  That may be why many law firms have 20+ percent attrition rates.

Of course there are differences between generations molded by their experiences (including what they learned by watching their parents), and law firms must be willing and able to adapt themselves in a manner that is best for the associates while maintaining the values and culture of the firm.  And, of course, older lawyers will always chuckle about the younger generation of lawyers not understanding the concept of spending hours doing library research that is now done in seconds on the internet, or spending all night at the financial printer.  Technology has forever changed the world in which law firms operate in many ways.

But at their core, regardless of generational differences, young lawyers are just like older lawyers.  They are the brightest and best our society has to offer.  Their fertile minds require constant opportunities to learn and expand their capabilities and they want to be proud of what they do.  Provide the younger generation with a level playing field in the allocation of work and a lot of the fretting about generational differences will go away.