The legal industry has changed rapidly over the past twenty years. Studies such as Greentarget’s 2018 Legal Industry Outlook suggest that firms are struggling with a flat demand for legal services. Regardless of their size or geographic presence, firms are faced with higher expenses driven by technology advances, increased client sophistication, and the corresponding challenges of increased security (of documents and communications) needs.
Rate pressure from clients and the competition to provide services that were formerly within the exclusive domain of the practicing attorney are simultaneously stunting revenue growth. The reality of an aging attorney population, low law school graduate rates, and increasing competition from alternative legal providers means that the race to acquire legal talent with books of business is getting more urgent and increasingly competitive.
Law360 recently published its annual review of the largest 400 law firms (based upon attorney headcount) and reported that the average rate of annual growth in the top 400 is only 2 percent. Most law firms recognize that recruiting experienced lawyers with business is needed to remain flat. As a result, the legal marketplace has become a seller’s market for those practicing lawyers with portable clients and business.
The 400 largest firms are by far the most active in terms of recruiting new lawyer talent. Many are competing by offering high base pay to recruit lawyers. Base pay, however, should not necessarily be the determining or even the biggest factor for laterals with a mature or growing book of business. Lateral candidates need to look very closely at fit, culture and the overall compensation opportunity being offered before deciding on where to move their business.
When Clients Don’t Fit, Neither Do Their Lawyers
Many lawyers seek alternatives to their current firms because they conclude that while their firm likes the revenue that their clients provide—the firm does not actually want or value the client or the lawyer controlling that business. At many law firms, there is an annual battle between firm management and the practicing lawyer over rate increases. Management wants to raise rates to cover increased costs and raise revenue and the individual lawyer fears being priced out of doing the work for the clients that they serve. Many lawyers serving mid-market, privately owned clients, work at a firm focused on representing large institutional clients with a national or global presence. It is generally easier for firms with institutional clients to raise rates because those clients can afford high rates. That said the larger clients have more market power to demand discounts off the face rate charged by these law firms. However, lawyers at these firms with smaller market clients do not have that power. All too often, lawyers wait until they lose clients or the client’s market share because of rate increases at their current firm before deciding they no longer fit at their firm. Once those clients leave for a quality, but lower cost, alternative, it is hard to win them back. Conversely, if a lawyer is focused on representing mid-market clients and works at a firm that does not generally represent those clients, there is a reasonably good chance that a move to a different firm catering to the same market segment served by the lawyer will both improve the lawyer’s ability to serve the needs of their existing clients and improve their ability to attract new clients in that same market space. Furthermore, some lawyers are hybrids doing work for excellent clients in the privately-held marketplace and the institutional space, but their current firm cannot (or will not) provide the support needed to grow that client base in the privately-held space.
There is no question that the way that lawyers attract, retain and grow clients differs from marketplace to marketplace. Given that reality, lawyers who are thinking about moving to a new firm need to have a good understanding of the new firm’s client base and market focus to determine if their business fits with the new firm’s vision and strategic plan. In the end, if there is not a match between the lawyer’s existing practice and that of the new the law firm, a “bigger” base salary may only be a good short-term fix. “Fit issues” generally do not go away and tend to create problems that will likely not be solved in the long run.
While Fit Should Come Before Finance, Finance Still Matters
I often ask lawyers I meet with about their firm’s compensation philosophies. Most of the time I get a variant of the same response, which is an embarrassed chuckle and the statement “Good question—wish I knew!”
Most firms claim to have an objective compensation system; but what they have are objective elements in what is really a subjective compensation model. These models are usually reliant on decisions by a compensation committee or a few key people in senior management. If the lateral candidate is not part of or “in” with that group, the lawyer often requires them to submit a “hero” memo to explain why they should be paid what they think that they are worth. All too often, this results with a disappointing compensation meeting with management.
The old tenure-based compensation model is still commonplace. Those firms cannot compete for lateral talent using a tenure-based model though. The result is a contract pay plan that lasts a few years. At the end of the contract, the firm’s hope is that the lawyer will see the benefit of remaining at the firm long term and thereafter join the system in which the other tenured lawyers are participating. While this happens on occasion, the lawyers leave to go elsewhere frequently because they do not see the value in the tenure-based model and/or they use their own market power to cut a new and better deal.
Moreover, having five lawyers (by way of example) with the same sized book of business and the same profitability on five different compensation scales, lacks continuity and objectivity, is difficult to manage, and is bad for long-term firm culture. The better plan is to find a law firm that has a consistent approach to lawyer compensation—a plan that rewards the behavior that the lateral candidate prioritizes. Firms that focus on institutional representation, generally focus on, and compensate heavily for, billable hour revenue; while firms that focus on the privately-held marketplace tend to value and reward origination.
It’s Time to Think Like the Owner of a Business
Before accepting a position with a new firm, each lawyer should know if their driver is production or origination (or both) and they should find a firm that will reward what the lawyer is seeking to achieve in their career. As someone who spends their time talking to lawyers more than clients, I can assure you that most lawyers want to develop their own book of business. It generally brings more financial rewards than being focused on production. It also provides more autonomy as to the work that the lawyer does each day. If a lawyer wants help in growing or developing a book of business, then the right fit is with a firm that creates an origination-based culture and provides sufficient resources to promote individualized and practice group growth. While many firms are pretty good about providing financial resources to help lawyers acquire clients, most do not do much to help their lawyers determine how to use those resources or find the clients.
By focusing on the dollar value of a book of business and on base pay, most law firms and many lawyers ignore key issues in identifying and solving the fit and finance questions critical to a lateral move. This often leads to continued lawyer turn-over and the related frustration for law firms, lawyers and clients. Law firms and laterals can practice better business management by doing a few things differently:
- Consider attorney and client fit during the interview process. Fit is about culture, skill sets and alignment on firm philosophy (compensation on origination and not just production). Not every lawyer is the right fit for every firm. Still, the majority of interviewers (and interviewees) ignore or avoid the subject. It is only after the lawyer has joined the firm that the parties think about and realize the problems that occur when practice fit and compensation drivers are not fully vetted and understood ahead of time.
- Create an objective, transparent compensation package. The simpler a financial philosophy is to articulate, the better that philosophy will tend to serve attorneys of all types. I have yet to meet a lawyer who does not want to have control over how much money they make each year. While it is not possible to control all the variables that contribute to a firm’s ability to pay its lawyers (all firms of any size have both fixed and variable overhead), it is entirely possible to have an objective compensation system that applies to all lawyers. My firm has had one for decades; and while all systems need to evolve, Offit Kurman’s core compensation philosophy has remained unchanged for over 20 years.
- Invest in attorney training and leadership development. In a recent industry survey by Altman Weil, only 5.6 percent of respondents said they had “high confidence” in their firm’s leadership to “keep pace with the challenges of the new legal marketplace.” An additional 33 percent reported “low confidence” in management’s ability to do so. Clearly, attorneys see a void in innovation and leadership ability. One of the best indicators of this deficiency is succession planning. If a firm is not willing to invest in its own lawyers to help them grow, it is likely that the firm has no meaningful succession plan, or the “unstated” plan is to be acquired once the keepers of the brass ring decide to retire. Good leaders are always training their replacements. There is no right or wrong compensation system for law firms. But there most certainly are systems that fit and do not fit with the desires and practices of the firms’ best lawyers. In the end, it’s about alignment. If a lateral candidate is working at a firm whose compensation system is not aligned with their practice and their goals, then that lawyer needs to delve deeply into those areas when they are looking for a new place to practice. Law firm leaders should be thinking the same way, because if fit and culture do not exist, at the end of the day, neither will the finance.
Timothy Lynch is the managing partner of Offit Kurman. He also sits on the firm’s executive committee. As such, he is responsible for all of the lawyer operations at the firm and he is heavily involved in the daily operations and strategic planning for the firm. Before moving into these roles, he chaired the commercial litigation practice group at the firm. Contact him at email@example.com.