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To Maximize Appeal to Clients, Lawyers Should Develop Basic Knowledge of Business and Business Practice

August 16, 2018

To Manage or Not To Manage
Legal organizations often suffer from a lack of knowledge of and focus on the business and management issues of their clients and of their own firms. That should come as no surprise. Lawyers are not taught business or management principles in law school. They are generally not encouraged to develop business knowledge or management skills until well-into their careers, if ever. Indeed, any exposure to true and effective business management most lawyers have (especially those in private firms) is most often accidental.

This lack of exposure has definite consequences. While the price paid may differ somewhat depending on whether one is considering a private firm or an in-house corporate law department, it is a cost which can mount over time and which can result in lost opportunities. In the worst cases it can lead to serious problems. These are prices that need not be paid.

The Private Law Firm – Missed Opportunities
Law firms often miss or forego opportunities to build and maintain their client base by failing to fully understand and appreciate business processes in general as well as the specific business of their clients. Too often, firms fail to invest the time and effort necessary to develop their base of business/management knowledge. As a result, they are unnecessarily limited in their ability to appreciate their clients’ business objectives and how the firm might best help in achieving those objectives. These points are echoed by James Sander, General Counsel, GNC who observed:

Firms that gain our repeat business are those who have a basic understanding of our business and our business goals and a business practical legal strategy. These are the firms we believe will be able to provide practical advice, help us quickly and most effectively, and manage to do so within an established budget.

Law firms need not learn, in great detail, the business of every single client or prospective client. But in order to maximize their appeal to clients – especially corporate and other business clients – they would do well to develop within their ranks a basic knowledge of business and business processes and a more intimate knowledge of their most important clients and those with whom they hope to develop a broader relationship. They should demonstrate an appreciation that the matter(s) assigned to them must be addressed within the context of a set of business objectives and, even if the business plan is not fully shared with the firm, those within the firm should understand the business context within which they must operate.

Private firms will also enhance their appeal to business clients by managing themselves as a business. Generally, associate turnover rates are relatively high (especially in a strong economy), morale is low, and there are often internal struggles which partners mistakenly believe are not seen by those outside the firm. These problems all affect the firm, its performance, its appeal to business clients and ultimately its bottom line. They can also be attributed, at least in part, to management issues.

Law firms may effectively manage discrete legal issues, legal projects and litigation, but overlook the opportunities presented by having a reasonably well-developed business plan, and promoting meaningful internal leadership which seeks to develop, coordinate, and carry out some discernable overall “firm” strategy. The fact is that clients — especially corporate clients – are much more likely to develop broader and longer-lasting relationships with firms that are well-managed and well-led. These firms are, most often, those that, among other things:

Develop and maintain an internal leadership and compensation structure that encourages, even demands, the development and execution of an overall plan/strategy and a culture (yes, culture matters) that facilitates the plan’s execution.

Tend to work well among themselves, using the entire pool of resources available to the firm to most effectively represent their clients’ interests. These firms will almost always have more than a single point of contact with its significant clients versus a contact point consisting of a single partner and maybe his/her secretary.

Seek to develop internal leadership (as well as legal) talent at all levels and thus have relatively low turnover rates among associates and support staff.

Understand the client’s business objectives and develop and maintain well-thought out systems to monitor client relationships and satisfaction and to react to the results.

Most business and corporate clients understand that, with few exceptions, low cost lower service legal services are widely available. In order to obtain the kind of broad and practical service they need, these clients will increasingly engage firms who understand business processes, who understand or have the demonstrated capacity to understand the client’s business and who treat their firms as business enterprises that require the same level and kind of attention as other businesses. Those firms can often provide high quality results at cost effective prices. This results in repeat business to the firm. Firms that miss this point and opportunity run the risk of losing business from existing clients (or gaining new clients referred from their existing clients), sometimes without even knowing why.

Corporate Law Depts.

In-house corporate law departments can also pay a price for a lack of business and management focus. That price often takes the form of a perception by the rest of the company that the lawyers, (collectively and individually) are detached, unapproachable and even obstructionist and arrogant. The business managers may perceive the lawyers as gate keepers to the “no sales department” who perceive their job as avoiding any and all risk to the company and who thus fail to provide practical and workable business alternatives and solutions. As a result, managers may avoid consulting the in-house lawyers, subjecting the enterprise to unacceptable risk or worse.

True, legal risks should be identified and assessed. Indeed, in-house counsel sometimes must simply draw the line between what can and cannot be done legally. But the vast majority of situations do not require an “all or nothing” approach. In most cases, in-house counsel’s job is to ensure that legal risks are properly assessed AND to work with the business manager to develop and implement a business strategy which allocates, avoids or contains that risk to the extent possible, consistent with the business objectives.

In order to fill this role, in-house counsel must be fully engaged in the business itself. This means at least that in-house counsel must be:

–Intimately knowledgeable about the business itself as well as the competitive and regulatory environment in which it operates so that issues are identified and dealt with timely and effectively. This, after all, is the core value of in-house counsel.

–Available to and approachable by the business managers. It’s not enough to simply be in the building or on the premises. In-house attorneys need to avoid being closed off or separated from their business brethren.

–Involved in the development of business strategies and tactics..

Most importantly, in-house lawyers must win and keep the trust of the business managers that he/she is committed to advancing the commercial enterprise that employs them. That does not mean that counsel escapes any obligation to prevent illegal activities or even activities which represent some acceptable level of risk. It does mean that in-house lawyers have a much more demanding job than simply approving or disapproving all or part of some business plan.

Corporate law departments that miss the opportunity to properly counsel their business managers on business practical legal alternatives risk being by-passed by the business mangers whenever possible.

Effective management of legal service organizations – whether a private firm or a corporate law department – is essential. Providing adequate or even good legal service is simply not enough.

By Jim Jarrell, Esq., Legal Services Consultant with Legal Network and a former General Counsel with 21 years managing sophisticated legal departments and a purchaser of a large volume of legal services from law firms.

The Hatfields & The Mccoys: Law Firms And Associates Surveyed On Different Compensation Strategies

June 24, 2018

One of the most critical issues facing law firms today deal with associate compensation. Law firms created the problem by driving salaries up by 45% in some cases over a five to six month period, initially in response to the perceived threat from dotcoms, but then in order to remain competitive with other comparative law firms and retain associates. The Internet fueled an associate lust for salary knowledge never seen before in the profession on bulletin boards aptly called the ‘Greedy Associate.’ Now, the smoke is clearing. Many large to mid-size law firms have substantially raised their salaries, with smaller firms providing modest increases. The dotcom threat has diminished following March’s Nasdaq correction. Lately, there seems to be consensus from many large law firms in the press that the increases were too large.

So what can law firms and associates do to better co-exist? Despite the seriousness of the issue, these two groups seldom have a dialogue on this topic. In September separate presentations were given in Pittsburgh, Pennsylvania to law firm management and then to associates on these issues. They were asked to evaluate 18 different strategies being used by firms around the country. Below are some of the highlights from the surveys taken at the presentations. 1

SHOW ME THE MONEY: 86% of associates feel the best way to compensate them is higher salaries, and 94% of those feel strongly about it. The troubling aspect of this result is they voted this way despite following a 15 minute explanation on how increasing associate salaries are harming law firms (diminished profitability), clients (higher legal fees), and associates (more hours and less jobs). Law firms were not as pleased with this strategy although there were differences between firm sizes. Firms with 10 – 50 attorneys (‘Mid-Size Firms”) were extremely displeased with this strategy. Firms of greater than 100 attorneys (“Large Firms”), mildly agreed with this strategy. Perhaps mid-size firms can ill afford to lose money on associates, while larger firms have grown to accept losing money on associates during the first few years.
WORK HARDER: The reaction of some firms to the salary increases was to acknowledge they had made a mistake but that associates would have to work harder to pay off the increases. 2 95% of the Associates surveyed do not agree with this strategy, and 73% strongly disagree. Large Firm associates were almost uniform in condemning this approach. This could indicate the Large Firms are currently putting the pressure on their associates to work much harder. 60% of firm management was generally neutral to this approach, but Large Firm management tends to think it is acceptable to make their associates work harder.
CLIENTS SHOULD PAY FOR THIS: It is not much of a surprise that associates don’t seem to mind this strategy and 76% do not disagree with this strategy. 53% of management was neutral or against this strategy, perhaps nervous by the public outcry in this region from companies who do not want to pay for associate salary increases. If clients don’t want to pay for the increases, then this strategy is problematic no matter what associates and management think.
LET THEM EAT CAKE: Nationally it has been reported that pro bono services are at risk due to rising law firm salaries 4 Both associates and management are in agreement that this is not an area which should suffer: 87% of firms and 86% of associates are not in favor of cutting back pro bono hours. However, in both groups over two-thirds were basically indifferent. The Model Rules of Professional Conduct are clear that attorneys owe a duty of public service. 5 Even with firms and associates in agreement that pro bono hours should not be cut, the culture of maximizing billable hours to pay for salary increases creates powerful incentives for associates to invest all time in billable matters and avoid pro bono work.

WHO NEEDS SUPPORT STAFF?: A Texas survey reveals support staff raises 6 were disparately lower than associate raises. With low unemployment nationally, support staff have numerous job opportunities. Neither associates (81%) nor management (93%) wants to limit support staff raises most likely due to a well-founded fear of losing their staff. Substantial associate raises can’t help but create the perception among support staff that they aren’t valued.

PARTNERS TO PASTURE: A study in Philadelphia noted that many firms have instituted mandatory retirement ages for partners ranging from age 65 to 72. 7 71% of associates did not approve of this strategy; in particular, associates at Large Firms dislike the idea. Perhaps associates at large firms get the most mentoring from senior attorneys, and this group doesn’t view experienced partners as costly overhead. 60% of management is fairly neutral to this strategy. Mid-size Firms are strongly against this strategy, possibly indicating management knows each other well, which humanizes the issue of telling partners they have to retire.

WHO NEEDS FIRST YEAR ATTORNEYS? Some consultants have identified a way to quickly boost profits by eliminating money-losing first year attorneys. 8 62% of associates were pretty neutral to this strategy. 73% of management was not against the idea and Mid-size Firms strongly support this strategy. It could be those firms feel the pressure of the salary increases more than larger firms and can’t carry the losses junior associates generate.

DON’T INVITE AS MANY ATTORNEYS TO THE PARTY: Extending partnership tracks is a strategy widely accepted among two-thirds of the Amlaw 100. 9 86% of management is basically neutral to the strategy, with Mid-size Firms showing slight approval. However, 95% of associates do not approve of this approach.

MAKE MORE OWNERS: In contrast, some entrepreneurial firms are making partners sooner. 10 Their view is ownership makes entrepreneurial attorneys less likely to leave. Just over half of the associates expressed approval of this strategy. Why associates do not overwhelmingly approve this seemingly pro-associate strategy could mean either they don’t see benefits from partnership or they are not looking to make partner. 87% of management was generally neutral to this idea, with only firms between 51 – 99 attorneys (“Large Mid-size Firms”) mildly approving the strategy.

OUTSOURCE SOME ASSOCIATES: The use of contract attorneys can have a substantial impact on a firm’s bottom line, make the firm more flexible for good and bad times, and enable firms to make intelligent hiring decisions based on job performance. 11 As we might expect, 87% of management is not opposed to contract attorney usage; more surprising, perhaps, is that 71% of the associates are also not opposed. Furthermore, surveys show corporate clients overwhelmingly approve of this strategy and recognize the efficiency outsourcing brings to companies. 12 Associates, management and clients approve of this tool. Firms should utilize outsourcing more to control costs and increase profitability.

LESS MONEY FOR LESS TIME: 13 Some firms have offered to keep salaries constant in exchange for less billable hours. 62% of associates were supportive of this idea, with Large Firm associates strongly in favor of this. This indicates Large Firms are working their associates fairly hard. Management has not formed a consensus yet: their responses were scattered, with 40% approving and 47% disapproving.

PAY FOR PERFORMANCE: Bonus pools are a way many firms are attempting to make increasing salary costs more variable. 14 In good years, associates are handsomely rewarded without breaking the bank in slower years. 79% of associates are not opposed to this strategy, with only Large Firm associates expressing some concerns. In comments, some associates noted bonus plans are more prone to being manipulated by management and often times they can not control how much they work.. 60% of management was in favor of this strategy, with all of the large firms not opposed. With both sides in favor of this strategy, firms might want to consider being more aggressive with this strategy.

QUALITY TIME OPTIONS: Some innovative firms give their associates the choice of time off instead of money. 15 75% of associates of all firm sizes favor this approach. Management is neutral, but management at Mid-size Firms showed more of a willingness to use this strategy.

UNBUNDLE COMPENSATION: One area consultants point to as outdated at law firms is measuring associates based on their years since graduating law school. 16 Both associates (65%) and management (80%) agree that rewarding attorneys based on performance rather than graduation date makes sense. The only group that did not approve of this strategy is Large Firm associates, who make high salaries and have less incentive to change salary structures.

DIAMOND STRATEGY: Some large firms find it is profitable to hire experienced attorneys who are not rainmakers. 17 This is strategy surprisingly is agreeable to both associates and management: 95% of associates and 93% of management are not opposed to the Diamond Structure strategy . Associates may feel less threatened by experienced laterals because they perceive these attorneys as less of a threat in taking a partner slot. However, because both sides are amenable to it, it makes sense for firms to consider this strategy.

HIRE MORE NON-LAWYER PROFESSIONALS: Akin Gump has come out in support of this strategy. 18 This was given low marks by associates (67% did not approve) compared to management (64% approved) for obvious reasons. It creates less need for associates by finding other less costly means to get associate work done.

STOCK-EQUITY OPPORTUNITIES: A recent ABA Ethics Opinion legitimizes firms accepting stock from clients in exchange for legal services. 19 Firms like Wilson Sonsini in 1999 earned millions of dollars from stock. In fact, their three largest IPO’s in 1999 resulted in $2 million in profits per partner. 20 63% of associates think this is a good idea, but 67% of management does not support this strategy. Because most firms do not have a transaction practice that can support this strategy, it is not practical for most firms.

RETENTION PLANS: The salary increases came into being in an effort to retain associates in Silicon Valley. That being said, both 67% of associates and 93% of management clearly believe retention programs are key components in solving the salary issue. Opinions were strong here: of those who agreed, 64% of associates strongly agreed, as did 69% of management. There are no boilerplate answers when it comes to retention programs. What is needed is an understanding of what associates seek and a strategy to deliver these needs. Common areas identified in retention strategies are: 21
(1) reducing billable hour requirements, (2) improving mentoring/ombudsmen, (3) provide feedback to associates and peer reviews of partners, (4) allocate work to all associates, (5) better training, (6) higher quality assignments, and (7) describe the firm’s objectives and compensation structures.

We believe this comparative survey provides some insight into what management and associates feel are the best ways to rationally manage the compensation hurdles facing law firms and their employees. Retention strategies are the clear winner from both managements’ and associates’ perspectives. Both parties also greeted compensation strategies such as bonus programs and unbundling compensation with some acceptance. In addition to how firms compensate, whom they should hire also received some feedback. Hiring staff attorneys under the Diamond Structure received some favorable responses. Firms may follow the lead from other professions becoming more flexible by hiring more contract attorneys and less associates. Other strategies studied above may not have received universal support, but may be correct for certain firms.

The bottom line is the old way of increasing salaries based on what other firms do has created an unhealthy economic environment for the legal community. Rather, firms need to identify the results they wish to achieve and become creative in creating incentive programs to achieve those results.

How To Hire And Retain Lawyers: It Does Not Need To Be So Expensive

May 24, 2018

A chief complaint from mid-size to large law firms is there aren’t enough good lawyers to hire. This comes at a time when law school applications continue to rise, and there are around a million lawyers working. It’s difficult to believe they’re aren’t enough good lawyers, given the oversupply of attorneys. Perhaps the traditional law firm hiring structure and career path does not accommodate the abundant supply of lawyers. This article will analyze traditional law firm staffing, the supply issues it raises, and offer some alternative strategies to finding more good lawyers.

The Issue

A balanced law firm requires a blend of lawyers who are workers, “cerebral” technicians and rainmakers for sustained success. Too many or too few of any category can be a disaster for a law firm and clients. How can firms recruit all three types of lawyers?

The Traditional Law Firm Hiring Model No Longer Works

Currently, law firms hire attorneys with the view that they should become owners in order to build a career with the firm. The process starts with hiring lawyers out of law school at often loss generating starting salaries caused by the high salaries. 1 Over the years, this starting class of lawyers will earn similar raises and after three years, when the attorneys become profitable, half of them have left. 2 The remaining trained lawyers work increasingly long hours for eight to eleven years when they are considered for partnership often based on their ability to generate revenue for the firm. Talented lawyers who are not rainmakers will be passed over for partnership. Some lawyers are pressured to find new employment in agonizing decisions for a firm that values their ability, but needs a revenue generator. The traditional hiring model excludes many good workers from successful careers and puts incredible training costs on an organization that constantly must locate “cream of the crop” talent.

Another characteristic of the traditional law firm hiring model is the class system. Lawyers are hired and evaluated based on a graduation date from law school. This class year system results in underpaying the best of the class to afford overpaying the middle of the class and bottom of the class. It also sets the profile for how firms often hire their lateral attorneys. Does any other organization in corporate America hire with the understanding that the year you graduate from school determines what role you will fill in that organization? A better solution might be to examine the role the associate will fill when making hiring decisions.

The Players

Many entry level and younger associates are viewed as workers on manual intensive projects and trained to be Technical Lawyers. Technical Lawyers staff document productions, document reviews, and due diligence projects. They prepare pleadings, present motions, and perform basic research and other functions. They are the “Worker Lawyers”. More experienced Worker Lawyers handle files, manage discovery and due diligence projects, draft agreements, and evaluate cases. Law firms lose money on Workers until their third to fourth year. 3

Despite the fact that newer associates are not profitable, they receive salary increases. Last year salaries increased anywhere from 20 – 40% at the largest law firms in reaction to dot.coms on the West Coast. 4 Partners at virtually every single firm in the city have expressed concern with the salaries they have to pay. 5 “It isn’t the rising star who graduated at the top of the class that hurts. It’s the B+ student who needs much more polishing.” commented one partner. That associate is grossly overpaid and as a result, most in this situation are not given a fair chance to become Technical Lawyers.

The Solution

What is the answer? One answer is to have two types of entry-level associates. One group is the top of the class and is hired at premium salaries based on law school credentials. These attorneys have a strong pedigree. Given the appropriate training, a good work ethic, and some luck, they will become lawyers who look great in Martindale Hubbell as Technicians. If they can become Rainmakers, they can be superstars in the firm. Every firm needs a supply of these attorneys.

The second group of the associates filling Worker Lawyer roles could be hired at a lower salary and offered the chance to be trained and develop at the law firm. This type of lawyer had a B or B+ average in law school, attended a second tier law school, and/or is looking for a change in career direction. These attorneys should be hired under the understanding they must work hard, be team players, and show on the job that they can learn the practical responsibilities of law in order to advance.

A lower cost group of Worker Lawyers can be hired when actual need merits additional attorneys. Contract attorneys can control firm overhead by eliminating the need to maintain a staff of Worker Lawyers and add attorneys as needed. More importantly, Worker Lawyers can be profitable immediately because of the lower salary. Firms can now afford to train and mentor lawyers based on work ethic and personality. There is also no requirement that these lawyers be entry level, only that they are willing to trade hard work and toll in the trenches, for a paycheck and possibly an opportunity to advance. In fact, this broader approach to hiring opens up larger law firms to many more candidates, suitable to become Worker Lawyers who might also be able to develop into Technical Lawyers and Rainmakers.

Some skeptical partners have reacted to portions of this strategy by pointing to the morale risk of creating a firm with different classes of lawyers. 6 Why build barriers? Law school does not create great lawyers. Law firms do. If a lawyer shows over time that they can perform, have a great attitude, and a desire to improve as an attorney, why would any firm wish to hold that attorney back as a Worker Lawyer?

Successful law firms utilize paralegals to reduce costs. In the 1970’s, the idea of bringing in non-lawyers at reduced costs was far more controversial than this idea of hiring attorneys at different salary levels. Few lawyers would question what a success the introduction of paralegals has been. In addition, what client has ever asked for a lawyer’s GPA, LSAT score or what they published on Law Review? General Counsel for local corporations overwhelmingly responded on a recent survey that they would prefer contract attorneys staff projects as Worker Lawyers to higher priced young associates. 7

In fact, some corporations are now taking a hard look at how firms staff their Worker Lawyers. Recently, a Pittsburgh based Fortune 500 company put out an RFP requesting that law firms consider contract attorneys to reduce the cost of the project. Although the RFP was sent to very reputable law firms; this unusual step of suggesting how the law firm staffed a project indicates this client did not feel traditional law firms were staffed to offer Worker Lawyers at fair hourly wages.

The successful law firms needs both Workers and Rainmakers. The current hiring model locates only the pure technician who now get a disproportionate amount of attention during the hiring process at large law firms.

Up and Out Revisited

Technical Lawyers are needed to research, draft and polish briefs, learn and evaluate complex regulatory rules, set legal strategy and solve complex problems. These lawyers become Technical Lawyers after working hard to learn complex material. But they do not always generate new business. Some law firms are now offering severance packages or terminating technically strong lawyers because they aren’t generating new business to offset starting salaries for new recruits, technology investments and opening new offices.

The “up an out” mentality is flawed. Given the prohibitively high starting salaries, it is cheaper to find or retain a trained lawyer who can fill a role, than hire a newly minted lawyer and train them. Hiring skilled lawyers with 15-20 years or more experience to fill a technical role is recognized at national firms such as Akin Gump. 8 This structure has become known as the “Diamond Structure.” These attorneys are hired laterally or tested on a contract basis to ensure their work product and fit within a firm’s culture. They can also be brought in on special projects as contract attorneys when peak periods occur to round out a firm’s practice. Law firms recognizing the value and need for this technical skill can avoid the dilution of firm profits from carrying too many technical equity partners by categorizing technical skills into several levels of competence as opposed to class years. Each level of technical competence results in higher salaries based on the enhanced value the attorney’s billable hours generate for the firm. This is fair to both the owners of the firm and the technical lawyers.

One innovative firm, Washington, DC based Dickstein, Shapiro, Morin & Oshinsky, has three levels of attorneys after the first two years and no class years. 9 There is no need to advance further than any particular technical level. Clients are told that the lawyers placed on the engagement have a certain skill set that justifies the billing rate. This approach is more efficient than an “up and out” mentality. This approach also allows for retention of technical lawyers and makes it easier to justify billing rates to clients.

Rainmakers

The last group of lawyers are the Rainmakers who bring in the business. Law does not offer much training for generating business. Law firms can help in this regard by attempting to hire more rounded lawyers instead of focusing largely on law school grades. Before salaries spiraled out of control, law firms could afford to hire and train lawyers with people skills. Look at the partnership roster of any large firm. A large proportion of the partners have good academic records that may not meet the minimum hiring requirements that law firm places on new hires. This illustrates the weak correlation between grades and partnership ability. Law firms are missing a huge number of the potential partners by betting huge salaries only on top law students.

A second element to growing Rainmakers is to make the law firm competitive from a cost standpoint. By controlling overhead and salary structures, and staffing up with interim staffing, law firms become more profitable without asking anyone to bill an additional hour. As a result, young lawyers working in these efficient firms can generate work that does not seem insignificant to an overhead laden firm. They also can compete for clients with lower billing rates if overhead is reduced.

There are some problems in overemphasizing hiring for Rainmakers throughout the organization especially when the local region is only growing 4%. 10 It is well known that more business can be created by internal cross selling than from pulling lateral partners from other firms.

Conclusion

Today law is extremely competitive. Firms which fight for talent purely on hiring the best and brightest at the highest salaries are creating very expensive firm structures which do not fulfill all the work needs of a firm. Creative approaches lend a better result and a more efficient law firm. The present slow down in the market may be a great time re-examine how to do a better job in staffing a law firm’s operation.

By Karl Schieneman, Esq. (MBA) & Jill Bertani Horner, Esq. of Legal Network. Legal Network is a full service legal placement firm headquartered in Pittsburgh, PA.