Walker Clark Worldview

The final demise of the British firm Halliwells, reported last week in the on-line edition of The Lawyer, is a good case study in the financial failure of a law firm.  The Lawyer summarized the factors that led to Halliwells’ failure earlier this month.

The failure and breakup of Halliwells is instructive for law firms anywhere that substitute wishful thinking for attentive management of operating costs and deepening debt.  From what I have read about the final days of Halliwells, they seem to me to have been about as orderly as the evacuation of the Titanic, with reports that more than 30 support staff were handed no-notice dismissals, apparently without any redundancy compensation or accrued vacation pay, at the end of the work day at a meeting that not one partner had the courage to attend.  (To be fair and tell the whole story, more than 460 staff found employment in one of the firms that acquired the surviving pieces of the Halliwells practice.)

A new post this morning in The Lawyer provides a glimpse of the “afterlife” for the parts of Halliwells that were acquired by other firms, who have created “firewalls” in the form of separate LLPs to protect the acquiring firms from the liabilities of the former Halliwells partners, as well as to enable a more reasoned pace of integrating the new partners into their firms.

Norman Clark

This is the fourth of a series of posts about the compelling business case for quality assurance in law firms.

The third characteristic of successful quality assurance programs in law firms is that they focus on the greatest risks and attack the biggest quality problems.

We favor a practical approach.  The best methods do not seek to perfect each and ever task, function, and process in the firm.  Unlike methods such as ISO 9001, we do not recommend detailed documentation of each and every process.  However, we do recommend intense focus on the ones with the greatest risks. In law firms, most quality assurance issues can be isolated to one or two critical weaknesses. Our approach focuses on these “significant few” issues, rather than every possible one. In particular, we recommend that a firm start by improving the processes that are currently causing the greatest problems. Focus on problems that annoy the clients the most, such as missed deadlines, errors in documents, and untimely or inaccurate bills. In our experience, most of these problems can be mitigated substantially, and sometimes even solved entirely, with relatively simple, low-cost improvements.

Norman Clark

This is how a partner from a mid-sized law firm described the departure of several of his firm’s highest-billing partners to competitors over the previous six week, who collectively took almost one-quarter of the firm’s potential billings with them.

“We knew that they weren’t happy with last year’s distributions, but none of us were. They seemed to like practicing with us. We never expected this. It was like a time bomb that was so quiet that we didn’t even hear it ticking.”

Over the past 14 years, I have spoken with many newly-arrived lateral partners. Whether in good financial times or difficult ones, when I ask why they left the their former firms, three words almost always come into the conversation: recognition, opportunity, and fairness.

• Recognition – “My former partners did not adequately value my contributions to the firm.”
• Opportunity – “I didn’t have the incentive or the opportunity to earn what I can earn and deserve to earn from my practice.”
• Fairness – “The compensation plan at my former firm produced results that weren’t just unfair. They were bizarre.”

Each of these points involve more than money. Partners seldom jump ship because they are unhappy about a single year’s pay or profit distribution. Money is only a measuring stick that suggests fundamental flaws in the way that the firm rewards and incentivizes its partners.

Is your law firm’s compensation system a time bomb that could someday blow apart your partnership?  Here are some questions to help you listen for the faint ticking:

1. How long has it been since you conducted a thorough review of your partner compensation system? If you haven’t examined your partner compensation system within the past five to ten years, this could be a good time to do so. My colleagues and I have worked with some partnerships in which not a single active partner had any role at all in the creation of the partner compensation system years ago. Also, business priorities sometimes change. If you have a compensation system that is largely performance based, does it still reward the activities and behaviors that your firm needs today?
2. Have you increased the size of your partnership by more than 20% in the past five years? Some of your newer partners might not share the same priorities that are implicit in your compensation system. A new partner  – particularly one who is being promoted from associate status — sometimes agree with almost anything in order to be admitted; but acquiescence can quickly deteriorate into resentment.
3. Does your system produce wide disparities in compensation? What is the ratio of the total cash compensation received by your most highly-paid partner and the lowest-paid partner.  If the ratio is approaching 3-to-1 within the same class of partners, your system might need adjustment.
4. What do your partners really think about compensation? Some law firms avoid any serious discussion of partner compensation for fear of hurting their collegiality or teamwork. One of the best ways to manage this sensitivity is a confidential partner compensation survey, conducted and reported by a third party such as Walker Clark, LLC. It can confirm the level of consensus and support for your current system and define the few critical issues that might need attention.  A sensitive issue can be defused, in that, as presented by the survey results, it is no longer “George’s issue” or “Maria’s complaint,” but an issue for the entire partnership.

A comprehensive review of partner compensation at your law firm need not be expensive, complicated, or divisive. Instead, it is a prudent investment to manage a quiet but potentially explosive risk.

Do you hear a faint ticking in your partnership?

Norman Clark