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Save The Firm Webinar
Thank you for attending our “Save The Firm” webinar. Below you will find answers to the questions from our discussion, as well as free resources that you may find helpful.
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Q&A From Our Presentation
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I like this idea because it provides for a certain transparency and clarity. I think it could be successful if most or all attorneys are participating in the activities being compensated and believe they are valuable. It would also help if the compensation allocated is a relatively small part of the overall compensation.
The challenge with any form of compensation for activities that don’t directly result in revenue is the compensation is subjective and could be perceived as arbitrary. Also, are the activities compensated truly productive? People are being compensated for work, but is it the most important work? How does it contribute to the bottom line? If it wasn’t done, would the firm’s bottom line suffer? Or would it get better? Would it be better to allow attorneys to decide what non-billable work would most help their production so that they did not need to be compensated for it?
The book, “10x is easier than 2x” advocates for identifying the 20% work you do that is the most productive and joyful, and eliminating or delegating the rest. Which category is the non-billable work for which the firm is compensating people?
As I understand the decentralized autonomous organization (DAO) as it applies to law firms, it is an organization where all decisions are made by blockchain according to rules established by the firm. I am not aware of any firms actually operating in this way, or even if it is currently permissible to do so under bar rules. The way I’ve seen this model described, it seems to be inherently equity based: each member buys tokens entitling them to voting rights similar to traditional equity. The funding is used to invest in projects that help the firm like staffing or marketing. All well and good.
I haven’t seen anything that fundamentally changes the considerations in every law firm for how the members are compensated. Since DAO firms inherently have equity, some return must be provided, which presumably is defined by the blockchain contracts. However, a firm that compensates solely on equity likely will become top-heavy and inadequately compensate for performance. In that way, it becomes much like a lockstep firm. But the DAO need not be limited to compensating based on equity. The blockchain contracts can also define how to compensate the finder, minder and grinder as well as a mechanism for compensating intangible results, if the firm chooses. The contracts could also include voting or other mechanisms to change how compensation components are weighted. For example, members could be awarded tokens for defined performance levels.
I like to think of law firms as collections of professionals who are more or less free agents in the long run. Most experienced lawyers can establish client relationships and have the opportunity to open their own practice or join another practice with better terms. In this environment, trust is largely the glue that binds a firm together, much more so than complementary practice areas or similar factors. My own firm emphasizes the importance of trust by not having a written partnership agreement. If DAO and the blockchain can cultivate that level of trust, it may support successful law firms. If not, it seems to me it adds little value to the models we have today.
Bottom line: I do not see that DAO fundamentally changes the considerations for law firm compensation.
As I understand it, the question is what to do with the unallocated originations. This could go in a lot of directions based on the firm structure. One logical approach would be that the unallocated originations would go into the equity pool (if the firm has one). This may be influenced by whether the firm paid for receivables when the partner left. In my firm, the departing partners continue to own their receivables and are given draw credit when the receivable is paid.
It is a common accounting practice that associates and paralegals are treated as the firm’s overhead and the revenue from their work offsets overhead. There may also be an overhead “pool” that includes the associates and paralegals. My view is the best practice is to treat associates and paralegals as a separate profit center and assign overhead to them in that structure. That way, you can easily assess their profitability.
In my experience, what happens when someone is frustrated that they are not being treated fairly is they leave and find a firm where they feel they will be treated better.
By production, I mean dollars collected. In my view, law firms work much better on a cash basis. The best way to assess the efficiencies of different lawyers is what the client actually pays for.
When overhead is allocated to all billers (including associates and paralegals), overhead for a mid-size firm is reasonable at 25% to 35%. Above that, it begins to feel burdensome. Average overhead is 35% to 55%, which means most lawyers carry a burdensome overhead load. I have seen small firms and solos achieve overhead of 10% to 20% and still be productive. There is a point where overhead can be too low, and lawyers get mired in unproductive tasks. It’s not a bad idea to test where that line is, because it’s easier to add productive overhead than to take away unnecessary expenses.
No. This model treats any amounts paid to shareholders as a draw against profits earned. Ideally, the partner’s draw account should always be positive, but some ability to borrow against receivables can soften a pure “eat what you kill” system.
Good question. Some contingency firms require attorneys to track time to assess productivity and/or to allocate the revenue from contingency cases. I tend to think that’s a good business discipline. If you don’t do that, how do you allocate the spoils of a case? Or are you set up so that generally only one attorney works on a case, so they can “own” the revenue and risk from the case. Another issue I see in contingency firms is cherry-picking, where a partner, who is generally the main rainmaker, keeps the good cases to him/herself, and hands off the losers to others. Having been burned by this one, the only answer I know is to be careful about the case assignments you accept!
The scenarios reflect a certain amount of fees collected by the firm. For each dollar collected, that dollar is allocated separately to an originating attorney, a responsible attorney and a working attorney, and then the dollar is shared among those roles after any equity share and overhead are paid.
This is a great question. Good performance is hard to measure for minders. The obvious metric is the amount of work they manage that is collected. But are those clients happy? Do they come back with new work? I’m an advocate for keeping it simple. Some firms don’t compensate minders at all. Others offer a small percentage in recognition of the extra work involved in case and client management. A larger “minder” percentage might make sense with large institutional clients like insurance companies or big corporations where the minder role is a significant amount of work. My firm handles this situation by transferring some of the origination credit after a partner manages the client relationship for a period of time.
As you describe it, this is effectively a Hale & Doerr model. Subtract overhead from revenue and divide the profit among the finder, minder and grinder. I have a few questions about the details. Are the associates purely on salary or do they also assume an overhead load? How is overhead divided among the partners? Pro rata? Proportionately? Or by actual usage?
I like having a bonus plan that is based on the Hale & Doerr factors. It can be purely formulaic or can have flexibility for intangible factors or just for shucks, it’s the Holidays.
Agreed. I don’t know a lot of firms successfully using this model anymore for precisely that reason.
I would think those expenses belong in overhead with the appropriate depreciation schedules. The firm should maintain cash reserves or lines of credit to pay for the initial expenses.
Yes, a firm may choose to do that. The scenario essentially says, “we receive a dollar in revenue, how do we divide it among the attorney who originated the dollar, the one who managed the client and the one who did the work?” These could all be the same person, of course. In that case, she would receive the full dollar, minus overhead and equity contributions, and presumably would get some equity back.
The person who did the work for which the fee was collected.
Revenue collected.
The question is how does the working attorney get paid if the working attorney is not the originating attorney? Maybe that doesn’t matter if all the attorneys originate in similar amounts. But how do you compensate a young associate who doesn’t have a book of business yet? I suppose with a salary.
Yes, the scenarios are cash basis. If the system is based on hours worked or time billed, the risk of non-collection needs to be addressed. Some big, otherwise successful firms have failed because they paid people based on receivables and not cash. I really like the discipline of cash.
I like a system with a transparent draw balance based on dollars in the door. As long as the partner has a positive draw balance, that money is theirs to take. If they have a negative draw balance, now the firm is managing risk and should look at it largely like a bank looks at a loan. The firm may choose to finance a negative draw account if there’s sufficient collateral in the partner’s receivables or equity. I am grateful my firm did this for me at difficult points in my career. But at a certain point, the partner becomes a credit risk to the firm, and the firm should politely and compassionately decline to extend credit. If the firm is disciplined about this, its poor performing partners will self-select to more suitable opportunities and everyone will be happier.
Originating attorney: the attorney who brought the client to the firm. The finder, the rainmaker.
Responsible attorney: the attorney who manages the matter, typically the one who is sending the bills and managing payments. The minder.
Working attorney: the attorney who does the work on the matter. The grinder.
There may be multiple attorneys in each role for a particular client or matter.
In a production-based salary/bonus system, the salary should be set at a level where the expected production will comfortably cover the salary, but not be radically below market salaries (let’s say 80% of total compensation at budget). I like paying bonuses twice yearly, with a smaller mid-year bonus, and a bigger year-end bonus. The biggest consideration is not to pay too large of a bonus mid-year or anticipate too much 2nd half production so that you wind up underwater at year-end or even worse, clawing back a bonus.
Successfully using a production-based compensation system requires a cultural buy-in from everyone. In other words, everyone in the system needs to believe it is the right thing to be compensated based on how much you produce. That may mean you are paid less as an associate (not necessarily), but you make up for it as a partner. Otherwise, the associate may be tempted to move to firms that subsidize associate compensation, even though they will make less in the long run.