Articles
High price to pay if law firms fail to manage leverage
Law firms must rethink their strategies around how to recruit, pay and achieve productivity from lawyers, or face the wrath of price-sensitive clients, writes Neil Oakes.
Ten years ago, profitability was relatively straightforward – leverage, price and productivity, right? The more, the better. Ten years ago, one of the strongest correlations to ‘high profit performance’ was ‘employed lawyers with less than five years’ experience per equity partner’. How things have changed.
It is becoming increasingly difficult to delegate work and clients to junior lawyers because an increasing number of clients are refusing to pay for lawyers they perceive to be learning on the job. Regardless of pricing methodology, clients want to pay less and they want their work done by capable, senior people.
Tight margins
As these challenges manifest themselves, salary margins (cost relative to fees billed) are tightening and productivity levels are declining. The market for legal services in Australasia is declining for a number of reasons that have been well documented and discussed. I suspect that we will see some significant changes in the way we employ, pay and manage employed lawyers. If you want a prediction; in 10 years the notion of secure, full-time employment in a successful law firm, for a certain annual salary, will be a fond memory.
Despite an acknowledged lawyer supply-demand imbalance, we currently pay many multiples of the average Australian wage for lawyers, with relatively soft expectations. We then invest in various ‘engagement’ strategies in the hope that employed lawyers will be productive. I do not see this arrangement lasting for long.
I am encountering more firms that have evolved to a contracting model, whereby they are paying hourly rates for hourly rates or cents for dollars billed. In these firms, flexibility and ‘engagement’ are entirely under the control of the employee. I think this model will become mainstream. No doubt the better firms will account for work origination relative to delegated work done and determine an appropriate measure for non-financial contributions. However, it is more likely that the latter will be an expectation that is part of lawyers’ minimum acceptable behaviour and contribution.
Budget blues
Firms have tried to manage the inherent risk in employing expensive senior lawyers through base salaries and bonuses (at risk pay), but this seems to meet with mixed success. Try this on for size: “Here’s your budget; it’s 3.5 times your salary. If you exceed it, we’ll pay you one third of the excess billings.” Sound familiar? I see this quite a lot. Partners tell me it works well; employed lawyers usually have a different view. They see it as unattainable and far from motivational.
Bonuses are increasingly being used as a risk-management strategy, not a tool for motivation. Rather than commit to a higher salary, firms are minimising the risk of lesser performance by paying a lesser salary with the prospect of a ‘top-up’, subject to performance. This is a credible strategy, but it is a risk-management strategy. Most lawyers see their worth as being their base, plus the bonus. It is difficult to motivate someone to work above and beyond by paying them their perceived worth. It is a basic entitlement that can only serve to remove dissatisfaction should there be any.
Bonus bonanza
In other industries where bonuses drive performance and behaviour (think real estate or investment banking) a common set of phenomena seem to exist. First, bonuses are more immediate and more frequent. Second, bonuses are a much bigger proportion of total pay. And third, bonuses seem to me to be ludicrously large. We do not have the margins to play this game, unless partners are prepared to significantly reduce their income expectations.
Most importantly, though, the salary-bonus construct leaves the responsibility (and risk) of motivation and engagement with the firm. It also leaves much of the cost of flexible arrangements with the firms. It is this fundamental construct that I see changing. Given the relatively predictable nature of the demand for legal services in the next five to 10 years, and the continuing oversupply of lawyers, I see it as inevitable.
Employed lawyers will be responsible for large salary risk, flexibility and engagement. Firms will no longer invest in layers of HR professionals to produce these outcomes (with mixed success).
Neil Oakes is the director of FMRC, which has provided research, training and management advice to law firms throughout Australasia for the past 30 years.