Strategic Options for "Increasing the Pie"
by Joel A. Rose
"Who gets what amount?" and "Is there enough money to go around?" are two of the most difficult questions that confront managing partners and members of compensation committees in most law firms, regardless of size and specialty.
Obviously, if the proverbial "pie" is adequate, everyone shares accordingly, each in reasonable proportion to their effort expended in the firm's financial success, including the added benefits that accrue by being part of a group. However, if the "pie" is less than adequate to compensate partners in relation to their perceived and real contributions, many difficult issues have to be addressed.
Attorneys join firms to achieve results that would not be possible if they practiced on their own. In addition to the economic advantage, the benefits of being a member of an organized firm practice include an opportunity to consult with one's partners, to acquire a diversity of skills, to take advantage of the accumulated expertise and reputation of a firm, to enjoy the camaraderie and fellowship of one's peers, and the opportunity to attract larger and more prestigious and profitable clients, etc. While these objectives are reasonable on the one hand, they may also be characterized as the ideal that is sought by a majority of lawyers.
Over the past decade, the advantages of group practice have contributed significantly to the increase in numbers and sheer size of general practice and specialty law firms. Without regard to the actual size of the firm, any level of growth poses inherent problems involving the management of the individual lawyers, facilities and resources. The attorney in the smaller firm may be able to keep informed about the firm's activities by personal observation and involvement, while his and her counterpart in the larger organization may have to rely more on the official lines of communication. In a manner appropriate to the circumstances, each of the attorneys will be adequately served so long as some formalization of the management processes have been imposed to ensure adequate control over all of the firm's affairs.
The basics are basic. Once lawyers join forces, good management practices in a law firm cannot be achieved unless the privileges, obligations, and responsibilities of all its members are established and agreed upon. Effective management begins with organization. For a law firm, organization begins with identifying a managing partner who may function as a chief executive officer, an executive committee that may serve as a board of directors, or a representative committee system that receives direction from the managing partner or the executive committee. The need to make distinctions among ownership, management and professional practice becomes readily apparent as a firm increases in size. Generally, there are two types of rights and responsibilities involved in a partnership form of organization. The first kind is those arising from the partnership agreement, and is proprietary in nature. The second kind arises from the method of firm governance which includes functional responsibilities of certain partners for managing the day-to-day and long-range planning activities and substantive areas of practice. In addition, attorneys must be willing to subordinate some degree of control to designated individuals for the satisfactory operation and ultimate good of the firm.
Many lawyers are less proficient in managing their own firms than they are in serving their clients because of the organizational nature of the partnership form of business. Law firms, organized as partnerships or structured as professional corporations that function as partnerships, may enjoy financial success and growth because of the close association between the client and one or more of the partners who bind the firm to that client. Although the partnership type of organization may be effective for maintaining client relationships, it frequently fails to clarify the differences between the equity position of attorneys and the organizational structure and management obligations of partners. For this reason, a relatively loose organization involving a purely democratic relationship, although desirable, is oftentimes not practical for handling many of the firm's internal affairs and for assuring the desired growth and profitability. The firm's structure must be formalized and key individuals must be willing to assume leadership and responsibility for its functioning.
What happens when the economics of the practice are less than ideal, and there simply isn't enough to go around? The lawyers begin to feel frustrated and thwarted in achieving their personal and professional objectives because of what they perceive as the absence of sound management and administration of their firms. The firm management may at this point begin to examine more closely the "business" side of running the practice.
While both are aiming in the right direction in an effort to pinpoint the source of the problem, they may want to keep one critical point in mind. Many of the administrative and financial type problems experienced by law firms are of the attorneys own creation. Too often, attorneys are willing to relegate the business affairs of their law firms to the bottom of the pile. They pride themselves on being so busy with client matters that they simply don't have the time to look after their own administrative and financial affairs. This kind of benign neglect may result in serious consequences. Generally, the symptoms of less than adequate planning and management are readily traced to the following areas: setting objectives, utilization of staff and budgeting for expenditures.
Setting Economic & Practice Objectives
Every firm that strives to be profitable must make the effort to formulate, identify and express its objectives in terms of revenue, firm-size, management structure, type of practice, staffing, etc. This means answering what may be some difficult questions, such as: Which areas of the practice should be retained or reduced? Which attorneys are able, and willing, to contribute to the firm's objectives? What should the firm be doing to attract more business and enhance its reputation? What are the sources of difficulties with clients? Are any of the partners directly responsible? How can these partners be weaned from the relationship without the risk of losing the client? Are the department/practice area heads actively involved in managing the practice areas or is their function merely titular? The answers to these kinds of questions are essential in formulating a plan that provides direction and is compatible with the personal, professional and economic objectives of the partners. The point of defining and establishing objectives is to ensure that maximum effectiveness can be achieved in the day-to-day operations of the firm.
Utilizing Professional Staff
A firm's success in providing quality legal services in an effective and timely manner is directly related to its ability to manage and control its lawyer personnel. Firm management must be willing to manage the firm and ensure that its members accept their responsibilities and satisfy their obligations for the management of administrative and practice areas. This means management must assume a proactive role for recommending policy and maintaining adequate control over such activities as recruitment, training and career development of associates; staffing of the firm's practice areas; allocation of work to attorneys; assuring adequate administrative support; developing an associate evaluation program; utilization of paralegals and law clerks; establishing criteria for admission to partnership; developing a compensation plan and benefits program; assuring adequate communications between partners and associates, etc.
A law firm's profits are fundamentally linked to its ability to successfully utilize the professional personnel complement. If there is any slackening in leadership and firm management is perceived as lacking direction and the necessary skills to be effective, the result will be little or no organization and the effort will ultimately fail. Most attorneys will readily subordinate their independence for the benefit of the firm, if they see tangible evidence of management's effort to meet their objectives. The benefits are obviously of mutual advantage.
Budgeting for Revenue and Expenditures
Management of the firm's financial affairs begins with careful monitoring of its past and present activities and establishing projections for the future. This involves reviewing the present and potential monetary aspect of each client matter. In addition, a systematic review of receipts, disbursements and productivity data will enable the firm to make decisions that will assist it in formulating and ultimately achieving practical objectives. Most firms routinely develop projections for financial goals for the year ahead. In order to develop the information necessary to establish the budget, the firm may be required to take a long and objective look at itself to determine whether its current volume of business will generate sufficient income to meet the partners' expectations and pay all the operating expenses. A firm must maintain a volume sufficient to fully utilize the time of its attorneys. The most efficient system will not result in a satisfactory net income unless the volume and value of the matters is plentiful.
Adequate financial planning includes consideration of the firm's present client base, its billing and collection procedures, and specific method for managing the firm's finance's. Efficient and effective management involves overseeing such matters as the day-to-day activities of the accounting staff; advising on the firm's capital requirements, and annual budget and fee policies; assessing the results against the budget; developing fee policies for various practice areas; determining controls over billing performance including profitability, unbilled time and costs, receivables, delinquencies, write-offs, etc.
One other critical aspect of financial planning involves maintaining adequate controls over costs. Management must be persistent in tracking overhead costs. Generally, overhead rises more rapidly than revenue. The increases may be warranted, however, and are most often assessed by determining whether the overhead charges serve the partners in supporting their efforts to provide a satisfactory net income. Regardless of the size of the office, overhead should be controlled by means of a budget for each type of expense. This means developing a budget for such items as nonlawyer employment costs, occupancy costs, library, equipment, and other direct and indirect costs, etc. This budget should be established as part of the annual financial plan and should represent the total expenses required to support the expected level of revenue producing activities.
Checklist of Strategic Options
As a management consultant to law firms, it has been the author's experience that the following list of options, when considered by lawyer management and implemented individually or in combination, will increase the "pie" and enhance the distributable profits available for partners.