By Tim Batdorf and Jim Hassett
This post completes our interview with Paul Saunders, Stewart McKelvey's Practice Innovation Partner.
Q: In Part 1 of our discussion, we talked about your position at the firm and some typical LPM success stories. You probably know that in the most recent (2019) Law Firms in Transition survey (p. 22), Altman Weil found that the single most effective tactic for improving firm performance was “rewarding efficiency and profitability in compensation.” So, in this next part of our discussion, I’d really like to focus on your firm’s new compensation system. Changing compensation can be extraordinarily controversial, so I’d like to start by hearing about how you laid the groundwork.
A: We actually started several years ago by creating a new committee that included members of our compensation committee, our partnership board, and other influential partners. We made sure that we got a really good cross-section of different levels of seniority in our partnership.
That group then hired a compensation consultant who analyzed our financial data and interviewed over half of our partnership. They then brought all that information back to the committee to inform our strategy.
At our partner retreat three years ago, we shared the results of the research interviews. The year after that we shared our new profitability model and financial dashboards. At the most recent retreat, we launched new guidelines to align compensation with profitability.
Of course, there were some folks who pushed back and said, “Why rock the boat and create all this disruption and inevitable resistance for a system that's working great?” The answer was simple: Just because we’ve been successful in the past doesn’t mean we’ll necessarily be successful in the future. It is better to align compensation with the behaviors we need for long-term success before we are forced to.
So, right from the start we discussed possible changes with compensation. We heard what they had to say, and factored that into the development of our new system. Since then, we’ve continued to provide them with information, so none of this is coming as a surprise to anyone.
Q: What advice would you have for other firms that want to change compensation to reward efficiency?
A: Plan for enough time to build consensus, and start with a widely-shared model for measuring profitability. Learn the basics of change management. Anticipate resistance. Engage partners in the process. Don’t make them feel like the change is being forced on them but rather that they are part of the change.
Q: How does Stewart McKelvey define profitability?
A: Profitability is a very difficult concept to wrap one’s head around in a law firm. The issues largely revolve around the idea that partners are both workers and owners. Is partner income a cost or profit? Any profitability model must answer that question somewhere in the middle if it’s going to make sense.
The precise details of our approach are proprietary, but the model effectively answers the question “What is your break-even point?” for every timekeeper.
For example, suppose I look at a particular client or matter and see that we're having problems with a fixed price deal based on significantly discounted hourly rates. One possibility is that partners with high hourly rates are putting in more hours than necessary. If junior partners, senior associates or paralegals might be just as capable of doing that work at a much lower price point, that would indicate that more effective delegation is required. But we don't want to be obsessive about using this one metric in every situation, because all the metrics have flaws. We think of our profitability model as a framework that helps drive better decisions, but it isn’t the only consideration.
If you look at the compensation submissions that partners have prepared and the feedback they provide on other partners, as well as financials, you can get a pretty good picture of how effective somebody is at client matter management and project management. It's not perfect, but it is a step in the right direction.
Q: Can partners keep track of their personal profitability in real time?
A: Yes, we’ve just launched a new automated compensation app along with a highly flexible financial dashboard system that we developed in-house that is uniquely customized to our needs. Each partner can log into at any time and within a few clicks have instant access to eye opening trends and patterns that can lead to better decisions. I had several IT developers working with me, and this will be the conduit for managing LPM activity, smart goals, and all relevant metrics.
Initially, partners build a practice plan in the app that tracks all matters a partner is involved in. This goes beyond matters where you are the billing lawyer or the responsible lawyer. It also includes matters that you’ve referred to colleagues or matters where you helped develop the business in some other way. Our compensation committee can also view your practice plan at any time with a click of a button on our home page.
In the past, compensation was based on dozens of different data points and written submissions. This made it difficult for a partner to track their contributions in practice, and difficult for the compensation committee to assess their performance at the end of the year. Now it's all packaged up into a single application.
I'll also be able to work with partners in developing their plans and then check in with them throughout the year to see how they're doing. If our goal is to improve realization, revenue, or profit for a particular client, I'll be able to track in real time how they're doing with a couple of clicks.
Q: Do you think this new app will change the way lawyers behave?
A: Yes, I do. I think too often what happened in the past was lawyers were just so busy doing the work and sending their bills out and writing off fees, that they didn’t understand the impact it had on the firm. And it's been an eye-opener to have these dashboards now that can be used to instantly diagnose a problem. It is built around very compelling visuals showing downward and upward lines.
I think a big part of becoming more profitable is not just about my team working directly with lawyers in LPM, although that definitely helps. But, it’s also about building an increasing awareness of the impact of a reduction in fees. In the past, lawyers too often thought, “What if I offer a 5% discount on a $100,000 matter? It's just $5,000 off the total, so no big deal. The client gets a little value-add and a little reduced cost.”
But that $5,000 might eliminate half the profit on a particular matter. If partners don't understand the economics behind it, they’re probably going to make less than ideal decisions. And so, I think increasing the awareness of profitability metrics through this app will make a real difference. We're talking about percentage increases in firm-wide realization as a result of these initiatives.
Q: What do you have planned to further accelerate your LPM initiatives?
A: This year we plan to follow the process recommended in one of the templates in the online fifth edition of your LPM Quick Reference Guide. We’re going to organize a panel discussion of lawyers that have already experienced the benefits of LPM first-hand. We are targeting specific Client Service Team Leaders with large clients and asking them to sign up for our LPM coaching program. Then we’ll get these people to champion the program and speak about the benefits that they've seen. And we're hoping that will drive even more usage of the app as we move into year two of this new compensation system.
Q: So, between the new app and the new compensation system, your firm has created a huge incentive for lawyers to talk to you and your team and ask for LPM assistance.
A: Yes, that's absolutely right. We will be providing more coaching and rigor around LPM best practices. This will be a critical part of effective matter management. And now lawyers will be compensated for changing their behavior, so the firm can continue to meet client demands in an increasingly competitive marketplace.
Q: Are you currently seeing an increase in lawyers coming to you and looking for LPM advice?
A: There’s no question about it. We’ve seen an increase because everyone knew these changes were coming.
Q: Are you confident that the combination of LPM training, tracking profitability in the app, and changing your firm’s compensation system will boost profitability for the firm?
A: Totally confident. Just the idea that we have successfully been able to realign our compensation system to reward certain behaviors is a hugely positive outcome for our firm.
I think we’re well positioned now to be able to drive more and more LPM activity, now that it’s factoring into compensation decisions.
