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Category: Partners

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Dec 31, 2019

Law Firm Management – What Will Be Keeping Owners and Managing Partner Awake at Night in 2020

Question: 

I am the owner of a twelve attorney business litigation law firm in Northern, California. I started the firm fourteen years ago after practicing ten years in a large law firm. While the practice has been fulfilling both professionally and financially, the management side is often a challenge. As I sit here on December 31, 2019 thinking about management challenges that I may face next year I was wondering what you envision the challenges will be in 2020.

Response: 

The following were the common challenges that owners and managing partners advised us that they faced in 2019:

  1. Talent Management – Attorneys and Staff
    1. Hiring
    2. Training
    3. Motivating
    4. Compensating
    5. Keeping (retaining)
  2. Firm Succession and Transition
  3. Getting and Keeping Clients and Additional Sources of Business
  4. Managing Cash Flow
  5. Satisfying Hard to Please Clients
  6. Balancing Time Between Servicing Clients and Managing the Firm
  7. Getting Paid
  8. Competition from Other Law Firms and Non-Law Firm Service Providers
  9. Proving High Quality Legal Services at an Affordable Price and Avoiding Malpractice Claims
  10. Finding Time for Personal Life and Family

In 2019 the number one challenge was talent management and I believe this will continue to be the case in 2020. The other challenges that I have listed will continue to be the major concerns of owners and managing partners in 2020.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

 

Jul 03, 2019

Non-Equity Partners Receiving Percentage of Firm Profit as a Bonus

Question: 

I am one of four partners in a personal injury plaintiff firm in Denver. In addition to the three of us we have one equity partner and two associates. Our non-equity partner and our associates are paid salaries and discretionary bonuses when performance warrants bonuses. Our non-equity partner is pressing us for more money and a different approach to his compensation. A couple of our partners have suggested that in addition to salary we pay the non-equity partner a share of firm profits. What are your thoughts?

Response: 

Personally, I am against sharing firm profits with non-equity partners. I believe that non-equity partners should only share in some of the profit from their working attorney and or responsible attorney collections. Sharing firm profits should be reserved for equity partners – those that are invited into the partnership ranks, buy-in, and share in the risks as well as the profits of the firm. I would suggested that you replace the discretionary bonus or in addition to it implement an incentive bonus system based upon working attorney and or responsibility collections above a certain threshold. You may want to also consider a bonus for client origination as well. Another approach, if the non-equity partner is willing to forego his guaranteed salary or accept a lower salary, would be a percentage of his working attorney and or responsible attorney collections on a first dollar basis rather than above a threshold.  While a few of our clients have shared firm profits with non-equity partners this has been a small number with poor results. Many firms are moving away from formulaic approaches to compensation however this does not seem to be the case with personal injury firms.

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John W. Olmstead, MBA, Ph.D, CMC

Jun 05, 2019

Law Firm Partnership Tiers – Different Qualifications For Equity and Non-Equity Partners

Question: 

I am the managing partner of a six lawyer firm in Nashville, Tennessee. There are two partners in the firm, myself and another partner, and we have four associate attorneys. Two of our associates have been with firm for over ten years. We are trying to put in place a career progression policy for them and we are thinking about having a non-equity and equity tier which would serve as a prerequisite to equity partnership. What are the differences between the expectations and requirements for non-equity and equity partner?

Response: 

The main difference between an equity partner and non-equity or income partner is that the equity partners assumes a higher degree of capability in a lot of areas, not just good lawyering. Equity partners are expected to develop business, to manage large client relationships, and to have a level of commitment that allows them to do all of that and maintain a very full practice load at the same time. Non-equity or income partners are generally lawyers that are excellent lawyers in his or her field but doesn’t satisfy the other requirements required of equity partners. In addition, equity partners usually invest capital in the firm and assume the risks of the office lease, credit line, and other liabilities. Non-equity partners usually have guaranteed salaries and equity partners do not.

Here are a few of the typical hurdles that are required to move up to equity partner:

The primary difference is non-equity partners focus is on lawyering and the focus of equity partners is on lawyering and being a businessperson as well – practicing law and managing a business.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 22, 2019

Conflict Between Law Firm Partners and Non Productive Partners

Question: 

I am a partner in an fourteen attorney firm in Dallas, Texas. There are seven partners in the firm. We started the firm together twenty years ago. Over the years the firm has been very successful and each of the seven partners have had a great relationship. However, over the last five years some of the partners are no longer contributing like they were and relationships have become strained. We are equal partners and our compensation is based upon our ownership interest – so we are paid equally. I am concerned that if we don’t resolve this problem the firm may split apart in the future. You advise and thoughts will be appreciated.

Response: 

There are many reasons that difficulties may arise between partners in a law firm. One of the major factors is that working together effectively is a very difficult skill to acquire. Most individuals join a firm without realizing all that is involved. Professionals, especially, frequently do not understand that being an associate, colleague, and partner require a different set of skills than just being talented in one’s field. Many partners often only have a general idea of what the firm expects of them and only limited interest in how the firm itself operates, as distinguished from what they are professionally prepared to do. Most lawyers are highly motivated to use their expertise on client work, not on spending time in organizing or running a firm or partnership, even though doing so would help the firm operate more successfully and efficiently.

The first step would be, if you have not already, to sit down as a group and discuss the problem, establish agreed to performance expectations for the partners, document in writing, and have each partner sign the document. See if this makes a difference. If no improvement is made then the under performing partners should be confronted and some form of action taken. You may have to redesign your compensation system and possibly ask problem partners to leave.

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John W. Olmstead, MBA, Ph.D, CMC

Mar 26, 2019

Hiring Lawyers that are Children of Law Firm Partners

Question: 

I am an associate attorney in a nine-attorney firm in Orlando, Florida. There are five partners and four associates in the firm. I have been with the firm four years and I am the senior associate. I am concerned about my future. Recently one of the partners announced that he was bring his son, who recently graduated from law school, into the firm as an associate. Other partners have children in law school. I am concerned about my future. I have hopes of becoming a partner in the firm in the next few years. I am afraid that with partner children in the firm this may not happen. What are your thoughts on this matter?

Response: 

Many firms have brought children and other family members into the firm and have had excellent results. Others have not. In general, I believe that law firms do a better job at this than do other business firms.  I believe that if the firm lays the proper foundation and goes about it correctly children of partners and existing associates can coexist. Here are suggestions that I suggest for law firms:

  1. Recognize that for the family members there will be a family system, law firm, and an overlapping of these systems. This can be fertile ground for conflict if clear boundaries between the family role and the firm (business) role are not clear. Establish clear boundaries. Family dynamics and business dynamics seldom mix. A firm’s objective should be to draw the clearest possible distinction between the two and make sure that everyone understands that the firm (business) is the firm and the family is the family.
  2. Children should not be brought into the firm unless they want to be involved and satisfy the firm’s  standard hiring criteria for lawyers. I believe that before partners children join the law firm it is a good idea for them to work for another firm or organization. When they do join the firm, they can bring with them that experience, a supply of new ideas, a network of contacts, and a number of other benefits acquired.
  3. The firm must make it clear to partner’s children that they must “earn their stripes” and come up through the ranks in the same fashion as other associates in the firm. No special privileges. Make it clear that they must earn the respect of other attorneys and staff in the firm.
  4. The firm should put the associates and staff at ease. Make it clear that children of partners are expected to “earn their stripes” and they will not be promoted to partner over other associates on family status alone.
  5. The firm should clearly define the role of all parties.
  6. The partners should monitor their own behavior. They should not take sides – either between their children if they join the firm or between other partner’s children and other employees in the firm.
  7. The firm should be careful with compensation and other rewards. Compensation should be based on performance and results and consistent and competitive with other law firms of similar size and type.
  8. Communicate, communicate, communicate – your intentions, roles, etc. before and after partner’s children join the firm.

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John W. Olmstead, MBA, Ph.D, CMC

Feb 27, 2019

Law Firm Succession and Transition – All Three Partners Retiring at the Same Time

Question: 

Our firm is a personal injury plaintiff litigation firm in Denver, Colorado. I am one of three partners in the firm. We have one associate that has been with us for twelve years and three recent law grad associates with less than three years experience.  The three partners started the practice together over thirty years ago and we are all in our early sixties. Our lease expires in three years and we need to think about the future of the firm. All three of us are not ready to retire but none of us want to sign another lease. When we do retire we would want to retire at the same time. Do you have any suggestions?

Response: 

I believe your first step would be to agree on your timeline for the group’s phase-down and eventual exit from the practice. It sounds like three years, while it may not be the date that you want to exit from the practice it may be the date that you sell your partnership interests or begin the transition of your interests. Many firms that have other attorneys working in the firm prefer an internal succession strategy as opposed to an external strategy – selling or merging the practice. An internal strategy will depend upon:

I believe your second step is to reach a conclusion as to the above three questions. You may have to have some candid discussions with you associate to determine his or her interest level and his or her readiness to take over the practice. If you determine that your senior associate is your succession strategy you need to decide whether you are willing to start selling the associate shares sooner than later and admit the senior associate as a minority interest partner. As part of this partnership admission you would also execute an agreement for the purchase of additional shares over the next few years and upon your actual retirements. This way you get your associate committed and begin executing a transition plan focusing on additional legal and business skill development as well transitioning client and referral source relationships and firm management responsibilities.

If you determine that your senior associate is not your succession plan you will have to consider other options such as bringing in a seasoned lateral attorney that has the needed skills and desire to take over ownership of the firm, selling the firm to another firm, or merging the practice.

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John W. Olmstead, MBA, Ph.D, CMC

Aug 15, 2018

Six Worries That Keep Law Firm Managing Partners Awake at Night

Question: 

I am a new managing partner in a thirty-five attorney firm in Tucson, Arizona. I replaced the previous managing partner who retired. He was the firm founder and had been in the position since the firm’s inception. I have had this position for six months and I am finding the job overwhelming – trying to serve my clients and managing the firm at the same time is very difficult. What are the major challenges that managing partners are having.

Response: 

I understand and appreciate your situation. Managing partners advise me that the following challenges are what keeps them awake at night:

  1. Managing cash flow. Investments in technology, higher salaries for attorneys and staff, and longer collection cycles are all having a negative impact upon cash flow. Contingency fee firms have additional cash flow challenges. Managing partners must insure that client bills are going out promptly, client payments are deposited promptly, and vendor bills are paid “just in time.” Cash shortfalls will have to be financed with additional partner capital contributions or bank loans.
  2. Satisfying hard to please clients. Institutional clients are demanding more from their law firms in terms of service offerings, geographical coverage, responsiveness, and fee arrangements. Law firms are finding that the market for legal services is a buyers market and that they must continually innovate in order to continue satisfying client demands. Many are conducting client satisfaction interviews with these clients in order to measure client satisfaction and identify needed improvement areas and new opportunities.
  3. Competition from other law firms and non-law firm service providers. The oversupply of lawyers, advertising, and the internet has increased competition between law firms. In addition to the competition between law firms, law firms also also facing competition from other service providers as well. Managing partners are finding they have to allocate more resources to advertising and marketing. Websites, internet search engine optimization, and pay-per-click internet advertising is becoming the norm for many firms.
  4. Getting new clients and keeping existing clients. Today clients are less loyal and more likely to switch law firms than in years past. Managing partners are having to work harder to retain existing clients and acquire new clients. Acquisition of new institutional clients often requires responding to request for proposals, bidding for engagements and projects, preparation of quality proposals, and making presentations to prospective clients.
  5. Succession and retirement of senior partners. Many law firms are experiencing a “bunching” of numerous senior partners approaching retirement at the same time. Succession and transition planning is critical to the continued success of these firms. Getting partners to openly discuss their retirement plans is a major challenge that managing partners are facing.
  6. Getting and retaining top talent. Acquiring and retaining top lawyer and staff talent is becoming more difficult and more costly for law firms. Even though there is an oversupply of lawyers on the market there is still a shortage of experienced lawyer talent in many practice areas. Lawyer search timelines and recruiting cost are on the rise.

 

 

 

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John W. Olmstead, MBA, Ph.D, CMC

Jul 24, 2018

Law Firm Succession Planning – Getting Partners to Discuss their Future Plans

Question: 

I am the firm administrator for a twenty-five attorney firm in Baltimore, Maryland. We have fourteen partners and nine are in their sixties. We have no succession or transition plans in place for senior partners. Every time I bring up the topic there is a resistance to even discuss the topic. I would appreciate any help that you can provide.

Response: 

A decade ago, only the more proactive, well-managed law firms had in place programs and provisions for senior partner succession and transition. A majority of firms simply had not addressed or even given serious thought to the eventual retirement and exit of their senior partners. However, in the last five years, I have seen a lot of interest in succession, transition, and exit planning. The avalanche of baby boomers reaching retirement age has fueled this interest. Firms from the largest to the smallest are getting proactive and actively addressing succession and transition of senior partners. Some are putting in place formal programs, while others are at least addressing succession and transition informally using ad hoc approaches.

A recent Altman Weil Transition Survey gives us a glimpse of what other law firms are doing. Here are a few highlights from their survey concerning responding law firms.

Many other law firms are finding it a major challenge to get senior attorneys to talk and share their plans concerning retirement. In many cases the families of senior attorneys are having the same challenges. Coming to terms with aging is a difficult topic. In the case of law firms, often senior attorneys simply don’t know their future plans themselves, need the income, fear that others shareholders/partners will steal their clients, or the firm simply does not have a mechanism in place that mandates transition planning. Some firms are implementing mandatory retirement and others are putting in place financial incentives to motivate early transition of clients. Client loss is the most significant concern.

Keep at it and don’t give up but it may take a series of baby steps. Educate your partners on the risks of “doing nothing”. Provide them with articles and other resources and keep the topic on the agenda.

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John W. Olmstead, MBA, Ph.D, CMC

Aug 22, 2017

Measuring Law Partners’ Performance

Question: 

I am a partner in a twelve attorney firm in Houston. The firm has five partners and seven associates. We are a first generation firm and we, the partners, have never practiced in other law firms. Currently, the partners have equal ownership interests and are compensated equally. We are experiencing issues with the present method of partner compensation and we are giving some thought to considering other approaches. One of the issues that we are trying to get our heads around is how to measure each partners’ performance – value – and overall contribution to the firm. Do you have any suggestions?

Response: 

The first step in a partner’s compensation plan is to develop a system for measuring each partner’s performance. Measuring performance involves selecting the appropriate: (1) performance measurement factors, (2) performance measurement programs, and (3) performance measurement reports.

Performance Measurement Factors 

Each firm must decide on its own particular basis for rewarding quality performance by its partners. Factors must be selected against which each partner’s performance can be measured. Then the firm must decide how much weight to assign to each performance factor. The performance factors commonly used to measure partner performance include: (1) professional competency, (2) business development, (3) productivity, and (4) profitability.

Professional Competence 

A partner’s professional competence is usually the most important factor in measuring partner performance and is the most difficult to measure because it cannot be easily quantified and it has to be determined subjectively. In addition to technical proficiency professional competence also includes leadership ability, associate mentoring and development, management contribution, and other contributions made to the firm.

Business Development 

In many firms a partner’s ability to generate new business is an important performance factor in measuring partner performance. Client origination can be measured in terms of fees generated from new clients and fees generated from new business for existing clients.

Productivity 

A partner’s productivity can be measured by determining a partner’s: (1) chargeable hours related to client matters and (2) nonchargeable hours related to those firm matters which the firm has recognized an important partner responsibilities. Another approach is measuring billed or collected fees. Another measure of a partner’s productivity is his or her pyramid of responsibility – the number of associates chargeable hours or collected fees for which the partner is responsible.

Profitability

A partner’s profitability can be measured using three factors: (1) fees billed to clients, (2) realization of fees billed and (3) speed of collection of fees billed. Other measures include collected, effective rate per hour, etc.

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John W. Olmstead, MBA, Ph.D, CMC

 

Jan 17, 2017

Law Firm Structure – Sole Owner vs Having Partners

Question:

I am the owner of an eight attorney insurance defense firm in San Antonio, Texas. I have been practicing fifteen years. I am forty-five years old. Many of my peers in firms my size are in partnerships. Is my situation unusual? Should I consider having partners?

Response:

Years ago I would have said that a firm such as yours would be a partnership or other organizational form with multiple equity owners. This has changed. I am working with more firms your size and larger with sole owners and no other equity owners. One such firm has twenty-five lawyers and seventy-five support staff.

I am assuming that this has worked well for you. You have the benefit of financial leverage and not having to share the pie with other equity owners. You call the shots and don’t have to share decision making with others. You probably are earning a nice income.

At your present age there is nothing wrong with continuing this for awhile. However, eventually you will have to consider your succession strategy, how you will exit the practice, and to whom you will pass the baton. The other issue is a career advancement strategy for your existing associates. Some may expect to eventually have an ownership stake in the firm. Your associates need to progress in their careers – not just as technicians – but also as business men and women and managers.

Don’t wait to long to begin this process. However, resist the temptation to make everyone an equity owner. In a insurance defense firm with eight attorneys I would try to maintain a ratio of four associates to each equity owner – thus no more than two – maybe three equity owners.

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John W. Olmstead, MBA, Ph.D, CMC

 

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