Tag Archives: leverage

Planning for the New Year: An Approach for Small Firms

This is an article that contains a methodology that I first published in 2000. Nineteen years on, during a time of change, we often forget the basics, those things that made us successful in the first place. Time to revisit.

Small firms (and many larger ones) are being challenged by service commoditisation, increasing insourcing of legal services, increasing costs, and growing pressure from cheaper, new law providers. Having said that, some firms are booming, busier than they have ever been. We at Edge International have observed over many years that the better-performing firms are usually those that have these features:

  • A well-thought-out strategy: They know what they want to be and what they don’t want to be;
  • A leverage structure with a balance between relatively junior solicitors and senior solicitors, not all one or the other;
  • An understanding by all fee earners of ‘minimum acceptable contribution’;
  • A clear pricing strategy, regardless of methodology (fixed fees, hourly rates, scale, perceived value or whatever). The best performers keep all of these possibilities in their tool kits;
  • An understanding of cost of production;
  • A management structure with clear objectives and the support of partners;
  • Leadership as well as management; and
  • Good financial housekeeping (price, WIP and debtor management).

None of this is all that surprising. However, many firms fail to implement strategies that they know will benefit their businesses: they think ‘It’s all a bit too hard’. It’s not rocket science (as they say). Running a successful law firm has always been about implementing systems to get the work, do it efficiently, bill it and collect the money. I doubt this will change in my working lifetime.

In my experience the best self-help first step in the practice-improvement process is planning. I am not talking about a multi-volume document brimming with colourful flow charts, management clichés and motherhood statements. On the contrary, I am talking about a discussion that results in a one-page summary that tells every partner (or sole practitioner) where they are headed. The plan will guide those who have been delegated the responsibility of implementing it.

I recommend a discussion around the following decisions. Meet as a partnership (or with a key advisor if you are in sole practice), away from the firm, somewhere where partners won’t be distracted by staff or clients. Give each item full and frank consideration.

What type of work – refers to the type of matters the firm is seeking to offer. In considering this, look at those services that you offer now. Consider what you would like to stop doing or stop doing within 5 years. Having done this, consider what you do wish to be doing, and add these offerings to the ones that you want to keep.

Partner numbers – refers to the number of equity partners. You may wish to include salaried partners here, but I usually put them into the “Employed fee earners” section.

Gross fees – refers to the total fee billings of the practice (excluding disbursements).

Net profit per partner – refers to the desired profit per partner. When you are considering desired profit, remember that as a principal you should receive a reasonable pay for your time and effort and a reasonable profit.

Employed fee earners – refers to the number of employed solicitors, associates, non equity partners and paralegals. (Full time equivalent so someone may be 0.5 ‘paralegal’ and 0.5 ‘support’.)

Support staff – refers to all support staff in full-time equivalents.

Space (sqm) – refers to the office space required. The average Australian firm uses about 25sqm per person (including public space, like reception and meeting rooms). This is not ideal though. I suggest that you allow for about 18sqm/person. We are told that best practice space utilisation is about 7sqm/person, but this requires significant cultural and operational change.

IT commitments – refers to any foreseen expenditure on technology such as PMS, litigation support, marketing data base, etc.

The best way to approach these discussions is to fill out the actual numbers for this year then do year +5 first. Come back and do year +1 next, then simply ‘join the dots’.

Armed with the plan it becomes a matter of execution. Your firm will have greater success if you appoint a managing partner to drive agreed change. This is not a promotion or an elevation in status, it’s a job. I’ll chat about the ‘ideal managing partner’ next time.

A director of FMRC for 20 years, Edge Principal Neil Oakes, PhD assists law firms with strategy and profit growth, partner/director management and profit sharing, key talent management, management structures, and succession management consulting. He regularly conducts law firm planning retreats and helps large and small, private, corporate and government legal organizations to function optimally.

Lawyer-to-Partner Gearing or Leverage. Yes or No?

The concept of lawyer-to-partner gearing or leverage – the number of lawyers a firm employs for every partner – continues to go through changes. It is not uncommon to hear partners say things like “My clients want partners on their jobs“, “My type of work is too complex for non-partners“, “I simply don’t have the time to manage lawyers; I have legal work to do“, and so on. You’re equally as likely to hear partners in some firms speaking out very strongly in favour of gearing. In most jurisdictions it is common to find firms in both camps.

However, over the past ten years or so we have seen a steady decline in average gearing levels in the world’s largest legal market, the USA. At one point a few years back, the average gearing amongst AMLAW 200 firms dropped to .6 lawyers on average per partner. In a majority of these firms it appears that non-partner lawyers operate as an available pool of associates: i.e., they are not allocated to a particular partner. We understood the arguments of those law firms to be that due to high starting salaries of associates, it simply was not economically viable for them to gear up. Unfortunately, I believe this development in the US market has had a direct impact on the flow of traditional legal work away from traditional legal service providers to non-law firms. More on this, below.

By contrast, in the Australasian market, it is not uncommon to find average gearing figures of 4 to 6 lawyers per partner. More often than not, lawyers are also allocated to particular partners – albeit not exclusively so. Surveys of clients in these jurisdictions, and general counsel in large organisations in particular, point to a good level of client satisfaction as to the service they are getting from firms. Generally there has not been the move away from using law firms for legal work towards alternative suppliers.

So where does that leave us? There are arguments in favour of and against gearing, depending on the circumstances, the culture of a firm, and local market conditions. On balance, however, I would argue that the benefits of gearing, subject to some prerequisites, far outweigh the negatives. I would even go so far as to say it is a strategic necessity for the large majority of firms, save in absolutely exceptional circumstances.

First, what are some of the arguments against gearing?

  • ‘Clients only want partners to do their work’;
  • ‘Partners do not have time to train juniors’;
  • ‘There is unyielding fee pressure on partners to meet partner budgets and hence they clutch clients and work to their chests’;
  • ‘Typical law firm partner styles and attitudes do not encourage the building of a functional team under a partner which will be fed work in an effective manner’;
  • ‘Due to client work and budget pressures, partners simply do not take enough time to train up their lawyers so that they progress to higher and higher levels of work’;
  • ‘Partners are loath to introduce their key clients even to junior lawyers with the fear of losing those clients and thereby putting pressure on their ability to meet budgets’;
  • ‘Partners argue that their particular work is not conducive to having more junior lawyers work on it’;
  • ‘Given the asking price for associates or lawyers out of top law schools it becomes uneconomic for firms to employ them on a geared basis’.

Whatever the merits of these arguments, trends to lower gearing have limited the ability of law firms to service the needs of their clients. Take a simple example: picture a firm with a gearing of one lawyer per partner. What this means is that for that partner to service a wide range of client needs, he or she can only offer a support lawyer with one level of expertise, one level of experience, and at one charge-out rate. This limits the range of work that can be done for that client. Clients will be tempted to look elsewhere, even outside the traditional profession.

While it is clear that factors other than gearing have also played a part, clients have moved a large slice of their work (in the USA the shift is understood to be as high as 50%) to non-traditional legal services suppliers; i.e., non-law firms. These alternative suppliers have eagerly taken up this opportunity, supplying service at different experience-points and price-points.

Before considering some of the arguments in favour of gearing it is important to consider some prerequisites for qualitative gearing to work successfully:

  • Gearing is not just about numeric ratios. It should be “qualitative” – that is, high-calibre lawyers, fully utilised, doing high-quality work for quality clients;
  • Whichever way one structures one’s firm, it is important to look at this issue from clients’ perspective, not the firm’s or partners’ perspective;
  • Partners need to be convinced of the benefits of such structures;
  • Clients also need to be educated or coached as to the benefits of using lawyers at different levels of experience and price points to do different parts of their work assignments. Firms which have achieved qualitative gearing have done this well;
  • These structures do not function optimally with a pool of lawyers accessed on a random basis by partners as they deem fit. Inevitably, the stars get the best work and late bloomers struggle to succeed, resulting in some under-utilisation and disillusionment, and poor engagement for some lawyers, with obvious impact on employment brands;
  • A properly geared structure requires some form of structural and philosophical framework governing the behaviours, thinking and interaction styles of partners vis à vis lawyers allocated to them. To this end we have developed the Responsible Partner® program and philosophy which is a proven internal “engine” for these purposes. Even this, to succeed, needs to become part of the firm’s DNA;
  • No question, running a qualitatively geared firm is an ongoing, challenging exercise, constantly requiring attention, monitoring and tweaking. The rewards however can be immense.

In considering the advantages of a qualitatively geared firm, let us assume a firm with average gearing of, say, three lawyers (junior, mid-level and senior) to one partner.

  • Clients of that partner can be offered lawyers to do work assignments at different experience and price points depending on the nature of the task. Provided staff are trained and managed properly and tasks delegated appropriately, and the requisite relationship of trust exists between the client and partner, it becomes less likely such a client will look to alternative suppliers;
  • Young lawyers can come through the ranks in such a partner team, learning and progressing as they go, steadily being exposed to more and more complex work and operating on a more independent basis. Their leadership and management skills can be developed under close monitoring by the partner concerned;
  • Provided the pre-requisites mentioned above are met, lawyers in such environments are more engaged, which in turn strengthens the firm’s employment brand;
  • Partners in such structures are generally responsible and accountable for the development of lawyers allocated to them. This requires them to take a personal interest in such matters, which ensures that nothing is left to chance in regard to the development of young lawyers, and no-one “falls through the cracks”;
  • Within such teams, leadership development and succession management for the team and for the firm starts to happen naturally and organically;
  • There are numerous other benefits which flow from such arrangements, but what partners and such firms greatly appreciate is that not only do the strategies benefit clients but financial outcomes are unquestionably positive.

I have worked in, managed, run and worked with numerous firms over the past 30 years which have successfully converted from extremely low gearing levels to highly qualitatively geared structures –with success, including financial. I have no doubt that, properly done, this strategy can lead to significant benefits for a firm, for its clients, for partners and also for lawyers at their different stages of development.

Perhaps it is time to gear up!

Employing Graduate Solicitors

educationQuestion: What are most of the graduating class of 2015–16 doing now?

Answer: The same part-time jobs that they had as students (i.e., Baristas not Barristers)

Suggestion: ‘Give a kid a shot at the title’

Australian Big Law loves graduate recruitment. In 2016 the intake of graduates among the largest 50 firms is up 14% of the 2015 intake (according to the Australian Newspaper’s partnership survey). That said, there are now more than 40 law schools in Australia, so the 550-odd graduates employed by Big Law must be a drop in the bucket.

Many of the small firms (one to ten partners) that I encounter are relatively busy, and aware of all of the ‘management 101’, ‘leverage is good’ principles of profitable practice, but are continually searching for an employee solicitor with ‘about five years experience’. Why? They’re hard to find, relatively expensive and usually highly portable.

I would encourage all firms to consider a graduate-recruitment programme. I know that attrition rates are high among Year 1 and Year 2 solicitors. I know that graduates require supervision, coaching and support. I know that some graduates can be a little bit precious and I know that Gen Y are, well … challenging. But I also know (a lot) about profit margins in law firms.

It is not unusual for a graduate solicitor to return $2.50 for every salary dollar paid in their first year. An associate will usually return $2.50 and a non-equity partner $1.70-ish. In years 2 to 5, it is not unusual for returns on salary dollar paid to approach $4.00. These numbers, of course, assume appropriate delegation, supervision, support and leadership. These numbers increase under fixed fees or scale fees.

Graduates are relatively easy to get and you can go direct to the factory: you don’t have to deal with a broker (and their placement fee). In the absence of internal HR professionals, one would be well advised to build selection skills among those charged with the responsibility for recruitment, but these are learned skills that one can develop internally at relatively low cost. So getting graduates is not hard. Keeping them is a bigger challenge. Here are some tips:

  1. Look closely at profit margin

The ideal of cradle-to-grave employment where a graduate joins your firm, works hard, stays and one day buys a partnership, and eventually retires (gracefully) probably won’t happen. Of course people will leave. Young lawyers want variety in their careers, why wouldn’t they? Managing attrition requires a targeted approach. Aim to retain them for four or five years by implementing the strategies below. If they stay beyond four or five years, great (subject to acceptable performance). But if they don’t, it’s no big deal, so long as others are coming through to take their place. If your firm is average, attrition will be about 14% (14% of employees will leave annually); 10% is closer to ideal.

  1. Find round pegs for round holes

We all have a hard-wired skill set. Some people thrive in an organised, process-focused environment, some people thrive in a client-service-focussed environment, some people thrive in a creative environment and others thrive in learning or intellectually challenging environments. Determine what the role involves, and recruit someone with the appropriate behavioural skill set. Test shortlisted candidates to ensure that they fit. Don’t put a highly intelligent, creative kid into a job that requires attention to detail, tenacity and repetition. They will hate every minute of it and leave.

  1. Paint a clear picture of the first five years

You are significantly more likely to retain graduates if you can create a picture of their first four or five years with your firm. What will they be doing in Year 1? What will they learn? What will they be doing in Year 2? Show them your graduate-development plan that includes professional and personal skills. At the end of Year 2, send them on a three-month holiday overseas (with appropriate pocket money), and explain what their job will look like on their return for the following two years. If you build the vision then, there is a pretty good chance that they will structure their life around it. If you do none of the above they will build their own vision and typically it will be short-term and opportunistic. By the way, I have seen this exact model working well in several regional firms (including the long holiday at the end of Year 2).

  1. Pay well

This is pretty obvious. Pay people well and money ceases to be an issue, pay them poorly and it will fester into discontent. Aim to pay competitive market salaries and enforce minimum acceptable performance standards. If employed solicitors can’t perform at acceptable levels, replace them with people who can.

  1. Build a relationship with graduate solicitors

Get to know your talent. People will want to work for you if they like you and if you like them. It’s not hard. Take an interest in their lives (without interfering), help them save and structure a wealth-creation plan, learn a bit about their out-of-work interests, encourage them, etc. In short, care about them.

  1. Leave the budget out of it

I wouldn’t bother a graduate lawyer with a budget. Explain what minimum acceptable contribution looks like AND that nobody ever progressed in their career by achieving minimum acceptable contribution. Acknowledge good contribution with pay rises, minimum contribution with no pay rises, and below-minimum contribution with termination.

Don’t expect graduate lawyers to develop their own practices. They won’t. (Neither, for that matter, will most employed lawyers.) You will have to delegate sufficient work to enable them to be productive. Getting work is the responsibility of partners. In my experience the more work you delegate the more they will do.

Meet with graduates every morning (initially) to compile their daily to-do list, and recognise performance and achievement in these discussions. When you are confident that they can cope, lengthen the lead and meet weekly. Maintain weekly meetings and weekly to-do lists for the first four years of their career.

  1. Do unto others

We’ve seen significant development in HR strategies in law firms in the last 20 years. Engagement has replaced fear as the primary motivator of young lawyers; flexibility is now a corporate virtue and employer of choice the new mantra. Talent management has become an industry!

This is all well and good but managing and leading employed lawyers is, in a pragmatic sense, no more complicated than ‘do unto others’; treat people the way you like to be treated and you’re pretty much there. Note I said ‘Treat people the way you like to be treated’, NOT ‘Treat people the same way that you were treated’; there is a subtle but important difference.

Have a look at your employee structure and see if you have room for a couple of graduate solicitors. I suggest putting one or two on annually. Some will stick and some won’t but if you do the above well, the majority will stay for the high-profit-margin employee years (2 to 5). The financial risk is low, so give it a shot.

The Changing Nature of “Leverage”

leverageTen years ago, profitability was relatively straightforward: leverage, price and productivity, right? The more the better. Ten years ago, one of the strongest correlates to ‘high-profit performance’ was ‘employed lawyers with less than five years experience per equity partner’.

How things have changed. It is becoming increasingly difficult to delegate work and clients to junior lawyers; an increasing number of clients are refusing to pay for lawyers they perceive as learning on the job. Regardless of pricing methodology, clients want to pay less and they want their work done by capable, senior people.

While these challenges manifest, salary margins (cost relative to fees billed) are tightening, and productivity levels are declining. The market for legal services in Australasia is declining for a number of reasons, all well documented and discussed. In other jurisdictions ‘new law’ challenges – observed in some detail by my colleague, Jordan Furlong – are contracting demand and increasing supply. I suspect that we will see some significant changes in the way we employ, pay and manage employed lawyers. If you want a prediction, here is one: in ten years time, the notion of secure, full-time employment in a successful law firm for a certain annual salary will be a fond memory, not current reality.

Despite an acknowledged lawyer supply / demand imbalance, we currently pay many multiples of the average wage, with relatively soft expectations. (Lawyers don’t believe this, but go tell a farmer or retailer or hotelier – or just about any small-business person, for that matter – that you work harder than most!) We then invest in various ‘engagement’ strategies in the hope that employed lawyers will be ideally productive. I don’t see this arrangement lasting for long.

I am encountering more firms that have evolved to a contracting model, paying hourly rates for hourly rates or cents for dollars billed, depending on pricing strategy. In these firms, flexibility and indeed ‘engagement’ are entirely in the control of the employee. I think this model will become mainstream. No doubt better firms will account for work origination relative to delegated work done, and determine an appropriate measure for non-financial contribution, though it is more likely that the latter will be an expectation included in minimum acceptable behaviour / contribution.

Firms have tried to manage the inherent risk in employing expensive senior lawyers through base salaries and bonuses (at risk pay) but this seems to meet with mixed success. You may remember my discussion in a recent Edge Communiqué around the budgeting process?

Try this on for size: “Here’s your budget. It is 3.5 times your salary. If you exceed it we’ll pay you one third of the excess billings.” Sound familiar? I see this quite a lot. Partners tell me it works well, but employed lawyers usually have a different view. They see it as unattainable, far from motivational.

Bonuses are increasingly being used as a risk-management strategy, not a tool for motivation. Rather than commit to a higher salary, firms are minimising the risk of lesser performance by paying a lesser salary with the prospect of a ‘top up’, subject to performance. This is a credible strategy but it is a risk-management strategy, not a motivational tool. Most lawyers see their worth as being their base plus the bonus. It’s difficult to motivate someone to work above and beyond by paying them their perceived worth; it’s a basic entitlement that can only serve to remove dissatisfaction.

In other industries where bonuses drive performance and behaviour (think real estate or investment banking), a common set of phenomena seem to exist. Firstly, bonuses are more immediate and more frequent, secondly bonuses are a much bigger proportion of total pay, and thirdly bonuses seem – to me – ludicrously large. We don’t have the margins to play this game, unless partners are prepared to significantly reduce their income expectations.

Most importantly though, the salary / bonus construct leaves the responsibility (and risk) of motivation and engagement with the firm. It also leaves much of the cost of flexible arrangements with the firm. It is this fundamental construct that I see changing. Given the relatively predictable nature of the demand for legal services in the next five to ten years, and the continuing oversupply of lawyers, I see it as inevitable. Employed lawyers will be responsible for large salary risk, flexibility and engagement. Firms will no longer invest in layers of HR professionals to produce these outcomes (with mixed success).