Five hard questions for associate compensation in law firms

Posted on February 6, 2012 by nkclark

In our compensation practice, my colleagues in Walker Clark and I are seeing associate performance emerge as a central, far-reaching issue that links directly to profitability.

Two specific, but related, questions almost always float to the surface of the discussion:

  • Do we need to include a performance component in the base compensation or salary that we pay associates in order to motivate them?
  • How can we offer a separate performance bonus without it degrading over time into an expectation or assumed entitlement?

There are three other subtler, but more important questions that many law firms overlook:

  • What specific performance should we reward and how can we measure it accurately and equitably among a group of associates with different practices?
  • Even if we offer handsome financial incentives for performance, do our associates have the skills that they will need to earn the rewards?
  • How can we introduce a strong performance element into associate compensation without producing an “eat what you kill” environment that could be destructive of our firm’s professional culture?

To some extent, partner compensation has become even more complex than partner compensation. In addition to rewarding past performance, associate compensation should also have a forward-looking perspective, which incentivizes and rewards the development of business and professional skills and performance that associates will need to become fully productive partners. As suggested by the final “hard question,” the cultural implications of how a law firm rewards associate performance could last for a long time, especially after the performance-driven associates become partners and inherit custody of the culture of the firm.

Norman Clark

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Good news, bad news

Posted on February 3, 2012 by nkclark

Good news

This morning’s announcement that the U.S. unemployment rate continued to decline in January 2012 is certainly good news. It is a reason for optimism about the continuing, but still somewhat delicate, recovery in the U.S.

That optimism is dampened a little by some fundamental issues that remain largely unaddressed by the U.S. government. (See Paul Krugman’s column in the New York Times yesterday.) Whether or not these issues are ever handled in a serious manner in the near future will depend, to some extent, on the outcome of the U.S. elections in November. Even if President Obama is re-elected (which is more likely but still uncertain despite the stampede of Republican candidates to the extreme right of the American political spectrum) and has an obstruction-proof Democratic majority in Congress (which is much less likely), I do not expect any progress on the structural causes of high unemployment and economic sluggishness in the U.S. anytime soon.

But, let’s take comfort that the unemployment numbers for January are improved. That is good news, even if happy days are not necessarily here again.

Bad news

Also this morning, Bloomberg reports that the Greek fiscal crisis and its threat to the euro remain a deep concern, despite progress that appears to have been made recently. These measures probably will not be enough. Until the euro problems are fixed, one way or the other, many euro-based transactions and business operations will continue to operate in the fog.

The impact on law firms

2012 is emerging as a “good news, bad news” year for law firms. The continued impact that significant uncertainties will have on law firms’  clients will also affect the ability of many law firms to plan and execute, with traditional levels of confidence, their strategy, business planning, and even some day-to-day operations. This is why my colleagues in Walker Clark and I advise law firms to adopt a posture of agile alertness in 2012, supported by contingency plans to address at least the most likely “what if” scenarios.

Norman Clark

 

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Occupy Legal Tech

Posted on January 26, 2012 by nkclark

When I first was admitted to practice in the 1970s, there were still lawyers who believed that it was “unprofessional” to use a ball-point pen. (I am not making this up.) Fortunately our profession has progressed a little since then.

If you are going to be attending the Legal Tech conference next week in New York, you must “join” Karl Schieneman’s “Occupy Legal Tech” movement.

Basically, Karl is “protesting” the reluctance of the legal profession to move from the 1970s in terms of the way that many of us still handle discovery in document-intensive litigation. I cannot begin to describe it as well as Karl does, so let me just cut and paste:

We will be conducting an informal protest at Legal Tech which we jokingly call “Occupy Legal Tech.” This is to draw attention to the slow paced adoption of machine-assisted review, despite substantial evidence that it’s a superior way to conduct document review work. So if you see a 6 foot 3 guy with a few funny protest buttons on his suit, and depending on how brave I am waving a small sign, it is probably me, a colleague or friend who agrees with this message. This will be completely non-violent, there will be no tents, and I have no intention of seeing the inside of a prison cell in support of this cause-just a couple of humorous buttons, an iPad and a compelling argument!!

Stop and say hello and we will gladly show you a few charts which cut across vendors and highlight that these tools compare very favorably to linear review on both recall and precision measures, and proportionality measures, which include speed of review and costs. We might even give you an “Occupy Legal Tech” button. You won’t hear this at any vendor’s booth because it is a technology-neutral message and combines results from a number of vendors. Nevertheless, there are differences between predictive coding software tools so feel free to contact me if you’d like to discuss this further. If you’d like to enhance your odds of running into me and we can set up a meeting, email me at kas@reviewless.co. Chris Dale’s hilarious tweet aside, not all of us employ phone call appoint setters. I’d be happy to share a drink, coffee, or alcohol and discuss this area further with you, or put that discussion off until after Legal Tech and connect via WebEx.

Hopefully our paths cross at Legal Tech, an e-discovery conference, or at a future WebEx. Please email me if you’d like to arrange a WebEx to learn more about how predictive coding works for a variety of vendors and software tools when compared to manual review.

Seriously, if your law firm or in-house law department is involved in electronic discovery, you need to speak with Karl. He and his company, Review Less LLC, are paradigm-shifting pioneers who deserve attention and, like the other “occupy” movements, are ignored only at great long-term risk.

Norman Clark

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Required viewing: Paddy Ashdown on “The Global Power Shift”

Posted on January 11, 2012 by nkclark

My colleagues at Walker Clark and I frequently stress the critical importance of informed strategic planning.  Part of that information should include an in-depth understanding of the major trends that are shaping our changing world. Although global in scope, such forces have powerful effects on national and local law firms, even on those who do not currently have a single “international” client.

I highly recommend that every law firm manager view and consider Paddy Ashdown‘s December 2011 talk “The Global Power Shift,” which he gave at the TEDx Conference in Brussels, and which has just been released.  Click here to view the video on the TED website.

Norman Clark

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Korean law firms at a crossroads

Posted on January 11, 2012 by nkclark

Major Korean law firms are at a historic crossroads as we begin 2012.  This year will probably bring a massive entry of foreign law firms into South Korea, which will introduce sweeping changes into the legal marketplace.

The free trade agreement between South Korea and the European Union opened the door to EU-based law firms on 1 July 2011.  On 1 January 2012, the agreement with the United States went into effect.  We at Walker Clark already know of at least five U.S.-based firms with  definite plans to open offices in Seoul this year to advise on U.S. law, as well as seven others that are considering it carefully.  We also know of at least five major international law firms based in the United Kingdom who have similar plans.

The future of the Korean legal market has arrived.

Threats and opportunities

Leading national firms like Kim & Chang, Lee & Ko, and Bae, Kim & Lee have simply run out of time to develop well-informed and realistic strategic responses to these changes.  Their inbound flow of instructions as local counsel are in jeopardy. Among all of the law firms in Korea, these traditional market leaders face the greatest risks, we believe, of a substantial erosion of their enviable current positions in the international legal market. If they wait until after the foreign firms open their doors — some of them in just a few months — these firms will suffer the significant disadvantages of having to play “catch up” against larger, much better financed competitors.

By contrast, smaller firms with well-developed sophisticated specialties may have great opportunities to provide local expertise and service quality at a level that it might take the foreign firms several years to achieve.  These firms need to move quickly and efficiently to identify and take advantage of these opportunities, which are not likely to be repeated.

Strategic priorities for 2012 and beyond

2012 will be a year in which Korean law firms, both large and small, must focus very clearly on their best strategic priorities and develop efficient action plans to maintain and — equally important! — to improve their competitive positions. This is not a time for just a defensive strategy. Instead, Korean firms should use the leverage of their great experience, expertise, and local industry knowledge to advance their position, even against much larger opponents.  In other words, use the size and strength of the global giants against them.

Many of the leading Korean law firms already have strategic plans; and some of them are very good. However, the entry of foreign law firms into the Korean legal market changes everything.  Every law firm needs to apply a new measure of intellectual rigor to evaluating its strategic assumptions and objectives, in order to make sure that they are still relevant to the new competitive realities of 2012 and beyond.

This will require, among other things:

  • Strategic investment decisions based on facts and a realistic view of the market, not on visions or aspirations
  • A crystal clear understanding of the needs and expectations of each firm’s best clients
  • A willingness to forego current profits in order to make investments in modern management systems and quality assurance
  • The courage to take prudent risks
  • The discipline to agree a set of strategic actions and to follow them through to successful completion

One final requirement

Above all, it will require optimism. Few things in business are more powerful in motivating performance than optimism demonstrated by every leader in a law firm.  Our firm’s knowledge and experience in the Korean legal market convinces us that Korean lawyers and law firms are capable of meeting all of these challenges. We believe that, one hundred years from now, the introduction of foreign competition into the legal market will be acknowledged universally as one of the best things ever to happen to Korean law firms.

For more information about how my colleagues and I can assist Korean law firms to define and achieve their most important strategic priorities in 2012 and beyond, click here or contact me directly at +1.305.432.9860 (ext. 100).

Norman Clark

 

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Nigerian law firms in a crisis year

Posted on January 9, 2012 by nkclark

Today’s general strike in Nigeria, protesting the withdrawal of subsidies for retail fuel prices, and the recent rise in domestic terror in the north of the country foretell a difficult year ahead.

2012 is going to be a crisis year for Nigerian law firms, as well as for the country. Some law firms will not survive the economic stress that is likely to appear by the second quarter of this year. As is frequently the case, the greatest impact will probably be on small and mid-size general practice firms, especially those that continue to operate essentially as “big name” firms, centered around the reputation and practice of one prominent lawyer. Because law firm business activity usually trails economic events by two or three calendar quarters, it is reasonable to expect that many firms could see a significant disruption of their revenue streams by September, if not before.

Our experience advising law firms in emerging economies (including Nigeria) suggests at least five things that Nigerian law firms should be doing now, not only to respond to short-term events, but also to be prepared to meet longer-term trends that emerge from the current unrest in the country.

  1. Understand that short-term financial survival, as well as long-term success, will be the result of a team effort, more than the result of the reputation of one “big name” in the firm.
  2. Focus intently on providing consistently high levels of service to all clients, but especially to the ones that traditionally have produced the largest fees.
  3. Have a written business plan that not only sets out goals for the firm, but also describes how the firm will respond operationally to probable negative events in the Nigerian economy, politics, and domestic society.
  4. Resist the urge to lay off lawyers and staff in order to cut costs.
  5. Do not abandon long-term strategic investments.  Instead, identify, focus, and keep moving forward on the highest strategic priorities.

Our firm has been advising Nigerian lawyers and law firms since 2004.  This experience has demonstrated to us the underlying political, economic, and social strength of the country. To be sure, there is still a lot of work to be done to strengthen Nigeria in all three areas. 2012 is already proving to be a crisis year for Nigeria and a test of its institutions, including its national and local law firms.

However, my colleagues and I are confident that Nigerians can overcome these troubles and that, with focus, intellectual discipline, and creativity, progressive Nigerian law firms can not only survive the turmoil of 2012, but will emerge stronger than ever before.

Norman Clark

 

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Happy days are here again…or maybe not quite yet?

Posted on January 6, 2012 by nkclark

The report today of a drop to 8.5% in the U.S. unemployment rate is good news, but what does it mean for American law firms?

Are happy days here again?

Three important points come to mind:

  1. It will be more important than ever that U.S. law firms base their 2012 business plans, as well as longer-range strategic objectives, on facts, not informed guesses or “visions.”  Before you assume an increase in fee revenue in one of your firm’s practice areas or from a client sector, be sure to ask, “How do we know?”
  2. Watch Europe.  The ongoing financial issues there are not resolved. In today’s highly-connected world, failure of European Union leaders to find a sustainable solution to their problems will almost certainly slow any recovery in the U.S. economy.
  3. Hope that this is part of a more robust recovery, but be prepared for the possibility that it is not.

With respect to that third point, remember that most economists still view any U.S. recovery so far as fragile.  Think about these points and how they might affect your firm and your clients:

  • Job-creation does not appear to be uniform across the economy or the country.  To what extent are the new jobs being created in the industry sectors of your clients?
  • There are significant sections of the work force that are being left behind.  Today’s report also points out that unemployment rates of 23.1% for teenagers, 15.8% for blacks, and 11.0% for Hispanics — and that these rates show little change.
  • The U.S. economy still has a basic structural problems with:  unusual numbers of long-term unemployed people, especially from the middle class; a growing gap between rich and poor; the decline of the position of many middle class families into poverty; and upward mobility that has fallen behind that of other developed countries. Because the U.S. political system is unlikely to address any of these problems in a serious way in the foreseeable future, they will create a long-term drag on the U.S. economy, which must be taken into account into any well-informed long-range strategic planning for U.S. law firms.

I do not mean to sound unduly pessimistic. 2012 can be a good year for U.S. law firms; but this also is a time for prudence and realism.

Even if happy days are not here again, there are some signs that they might arrive soon.

Norman Clark

P.S. Our firm can help.  Click here to learn about our Strategic Priorities Review.

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Stopping the revolving doors

Posted on January 4, 2012 by nkclark

When I was a very young boy growing up in Pittsburgh, Pennsylvania, my father would tell me that the revolving doors at Kaufmann’s department store were what powered the escalators.  It made sense at the time.  As my father pointed out, the escalators didn’t operate when the doors were closed.

Kaufmann’s (now Macy’s) department store, Pittsburgh, Pennsylvania

Law firms are a lot like old-fashioned department stores like Kaufmann’s.  When the revolving doors are turning, with partners going in or coming out, that is a sign that things are happening inside.  Unlike department stores, however, when partners are coming out, arms loaded with client files instead of shopping bags, that is a bad sign for the management.

Reading the U.K.-based legal press (which should be required reading for lawyers everywhere), I notice that the Month of the Revolving Door is once again upon us, not just in Britain but almost everywhere. January is the month when law firms experience the highest volume of partner departures to other firms. 2012 so far has been no exception.

In mature legal markets, especially, partner retention has become as critical a strategic issue as associate retentions, especially in these days of decampments en masse, by entire practice groups or offices.

A partner’s decision to go to another firm is almost always a rational business decision. There can be a variety of precipitating events. Lack of what a partner believes to be appropriate and equitable financial recognition can brew into resentment throughout the year. In many cases, the “spark” for the decision can be disappointing year-end profit distributions. In almost every case, however, the partner has concluded the he or she has a better future elsewhere.

Weak or infrequent internal communication between the firm’s management and its partnership is a frequent characteristic of “revolving door” law firms. When partners start muttering about being “kept in the dark” or being treated like employees, rather than owners, they usually are already looking for the door.

Culture and collegiality are important, but law firm leaders need to present a compelling business case throughout the year for their partners to remain on board.

Norman Clark

 

 

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“New year’s resolutions” for European law firms in 2012

Posted on January 2, 2012 by nkclark

I noticed that the first three news links on Page One of the Walker Clark website this morning were all about the economic prospects for Europe in 2012, particularly the euro economies. Here are four things that we are asking our clients in Europe to think about as they evaluate and plan for uncertain economic environments in 2012.

  • Pay close attention to accounts receivable. Even if current fee revenue is acceptable, declining accounts receivable can often be one of the earliest signs of an impending cash flow problem. It is a signal that the “pipeline” might be drying up.
  • Know your best clients.  During a recession, reducing outside legal fees can become  a priority for in-house counsel. Be sure that you can demonstrate that you understand each client’s business and can demonstrate, in measurable terms, the total business value of your services to your corporate clients. Don’t guess at this. If you have not done a client survey within the past three years, or conducted in-depth interviews of your best clients, this should be a priority for the new year.
  • Be optimistic, but think about the worst-case scenarios. This is especially important for smaller firms that depend predominantly on foreign clients, and which are usually the most vulnerable in times of regional economic uncertainty such as we are observing in Europe. Consider, for example, how your firm will respond if a client demands a 30% fee reduction. Or how will you respond if your local real estate or construction sector crashes? Be sure that you have a plan to detect and respond to each of the most probable and most severe contingencies.
  • Resist the temptation to fire “excess” lawyers. This should be the last resort, not the first response, to declining fee revenues. Small and midsize firms, especially, that cut too deeply during a recession often lack the talent and work capacity to recover when business becomes better. This is a significant factor in the phenomenon of small and midsize law firms that keep major clients during the recession, but lose them during the recovery.

 Norman Clark

 

 

 

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Two key planning concepts for an uncertain new year

Posted on December 29, 2011 by nkclark

One of the most difficult challenges to well-informed business planning for 2012 is that the economic forecast remains hazy in most countries. Those of you who follow our news feed on Page One of our website have been treated to predictions that range from cautiously optimistic to almost apocalyptic.

In this uncertain business planning environment, there are two concepts that are emerging as frequent themes for law firm business plans in 2012.

Improve fee-earner productivity.

It might be difficult for some firms to predict with confidence the fee performance of their major lines of service and client business sectors. However, a vigorous investment in improving the fee productivity of fee earners will enable the firm to respond to whatever expected or unexpected developments materialize in the new year.

This is not simply working harder or billing more hours. Instead, the focus is on improving the productivity of existing fee-earner resources by better quality assurance in the production and delivery of client services.

For example, your law firm should shift from an error detection and correction mentality to one that reduces or even eliminates the causes of substandard work. This can improve productivity, measured in hours of billable work, by as much as 40% — and with almost no additional investment.

Another key part of “working smarter” in 2012 will be a renewed interest in knowledge management.  Too many law firms still have “knowledge management systems” that consist only of partners’ memories and disorganized paper and electronic files. Continued inattention to knowledge management could be especially costly to these firms by unnecessarily increasing the work required to produce a service for clients, many of whom will be continuing to expect lower fees.  In such an environment, the return on even a modest investment in improved knowledge management could, by itself, improve profitability substantially, even in the face of a significant decrease in fees.

Plan for multiple scenarios.

There is never a place for wishful thinking in business plans, and especially not in 2012. In addition to adopting a set of specific, measurable, and realistic business objectives, wise business planners will also draft contingency plans for alternate scenarios, both good and bad. These contingency plans need not be extensive or detailed, but they should identify, at a minimum, a set of “alert values” in the firm’s financial performance measurements. These will allow the firm to spot a developing problem before it becomes a crisis. The alert values should also trigger the consideration of a set of management responses that should also be in the contingency plan.

Even if the economic picture for your firm still is unclear, these are two positive steps that you can take to improve the probability of a successful business plan for 2012 — and for any year.

Norman Clark


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