April 2007

1. When things don't go "according to plan"
2. Ever read your partnership agreement?
3. Should your firm consider contingency fees?
4. Does a J.D. need an M.B.A.?

Articles

1. When things don't go "according to plan"

   I've long contended that having a strategic plan is fundamental to "The Business of Law"® for any firm. That plan can have many elements, covering marketing, receivables, cash flow, staffing, and so on. However, a plan doesn't have to be complicated. It can be as fundamental as identifying two or three desired business outcomes within a given time period, defining the behaviors necessary to achieve those outcome, identifying whom to influence in order to get both the desired behaviors and the desired business results, and deciding how to influence them.

   Large firms are beginning to follow the lead of their clients by employing professionals to run the business side of their practice and by developing strategic plans to guide them. But, a business plan is not cast in stone, just as an estate plan is not cast in stone. These are tools. A plan is a guide for the future, not a guarantor of that future. My wife has said to me, "... a plan is what you create while life happens." As pilots know, a flight plan is your intent ... and many adjustments are made as you are in mid-air. Strategic plans are constantly updated and modified as new information is obtained and assumptions are either confirmed or blown apart during the passage of time. The ultimate goal of a plan is simple - to control your practice, rather than letting your practice control you. And when you need the change to plan to take better control, you do it.

   Consider the example of a firm much in the news lately, Mayer Brown Rowe & Maw. The firm gained notoriety (to say the least) when its internal decision to lay off 45 partners, or 10% of its total, became public. Mayer Brown then publicly advanced a very specific reason for its action: although the firm ranked in the top ten on the AmLaw 100 revenue list, its profits per partner were number 51. The firm let partners go in order to increase leverage, and thus per-partner profitability, a standard they believe is important for recruiting top legal talent. The point here is not one of morality, it's one of strategy. Each of the laid off partners was (presumably) added to the partnership because the firm had a strategic goal for his or her practice. However, when the firm's overall strategic goal was not being met, the leadership made a change.

   In last month's LawBiz® Tips, I mentioned our new series of monthly teleseminars for West LegalEdCenter, "The First Essential to Success - Creating a Business Plan." If you have an interest in taking charge of your law firm's future, I invite you to visit West's web site, www.westlegaledcenter.com, or my blog, to see how you can gain your own strategic insights from our series.

2. Ever read your partnership agreement?

   There's another angle to the Mayer Brown story, this one as it relates to the individual lawyers who were let go. The firm's internal announcement about the layoff ended with a statement to the effect of, "All the lawyers involved are great lawyers and will land on their feet." While they certainly earned good money during their time with the firm, these individual lawyers face many hard questions. Did they save enough to be independent or did their standard of living increase over the years to match their income? What severance package did they receive? Did they receive a ro rata share of the goodwill of the firm as small firm practitioners do when they sell their practice? Will their ego be able to gracefully handle the psychological impact of being told "you're not wanted here."

   Some of these questions are highly personal but others go to the heart of something many lawyers have but too few lawyers understand: their partnership agreement. If you are the partner in a firm of any size, did you read your agreement before joining the partnership? Could you answer these questions right now?

   1. How much did you actually pay to join the firm?
   2. Would you receive any payment if you leave voluntarily?
   3. Do you receive severance and your share of the firm's receivables if you leave involuntarily?
   4. Are you a personal signatory to the firm's line of credit?
   5. Do you have a real voice in firm management (one wonders - did the 45 former Mayer Brown partners have a say in the firm's decision to "downsize" them)?
   6. Is the management system one vote per lawyer, or one vote per pro rata share?

   Many lawyers leap at the chance to become partner, but don't think the decision through. If you're an associate at a large firm making a $200,000 salary, is it really worth it for you to become a junior partner with a $250,000 draw, and the legal liability that goes with it? If you're joining the partnership of a small firm, do you know if your up-front contribution is going for the improvement of the firm, or is being split among the other partners? In a firm of any size, do you know if there are only certain times of the year (for example, your anniversary date, or the last day of the fiscal year) when you can leave and get your full investment back?

   The partner who can't answer such questions is in the position of the cobbler's children who lack shoes. Before you read through another client's contract, read through your own - with your own firm.

3. Should your firm consider contingency fees?

   Contingency fees - they're not just for personal injury lawyers anymore. As law firms and clients continue to look for alternatives to the billable hour, the once-maligned contingency fee is becoming an accepted alternative to give firms a bigger payoff and to give clients the assurance that their lawyer has some "skin in the game." However, as The Wall Street Journal recently noted, corporate firms that enter into contingency arrangements face increased problems from their use - particularly if the firm wins the matter.

   Some of these problems crop up while the contingency matter is open. Normally, compensation is based on hours worked and dollars collected. How can you compensate lawyers who bring no money into the firm, and, in fact, are responsible for many dollars "flowing out of the firm" in the form of their compensation and expenses advanced to sustain the lawsuit. How can you determine bonuses? When millions of dollars are involved, the tension can become palpable.

   Then, when the firm is successful, and many dollars flow into the law firm, who gets what? How much should the lawyers working on the matter receive? What kind of bonus should they receive, if any? Isn't the matter the "property" of the firm? Didn't the firm advance the costs, not the lawyers? What is fair? What will keep all the lawyers happy and in place? What will reduce the urge to leave and go to another law firm or start their own? And what should departed lawyers, who worked on the contingency matters, receive? A belated bonus? A payoff on their departure? How would you value the matter, before knowing even if the firm won the case?

   Plenty of questions, and really only one good answer. So long as any firm follows the "eat what you kill (EWYK)" compensation model, in which all attorneys are rewarded on how much business they personally bring in, contingency fees will cause problems. Any firm that encourages lawyers to maximize their individual compensation may have fast near-term growth. But approaching compensation as an institution makes for greater firm harmony and longevity. If a firm wants to promote the kind of cooperative effort that ensures its survival, it must change to a more cooperative corporate compensation model that depends on the success of the organization. That way the burdens and rewards of contingency billing are shared equally - and the firm benefits, along with its clients.

4. Does a J.D. need an M.B.A.?

   I was recently asked by an interviewer if, as a lawyer who holds an M.B.A., I would recommend that other lawyers follow the same path. My answer was, "Not really," which surprised him. However, except in unusual circumstances (as when a corporation would want a general counsel or deputy general counsel with a strong business background to participate in operations management), an advanced business degree really confers no unusual benefits or advantages to most lawyers. This is particularly true today, when such degrees cost much more in tuition and fees, and when the value received is increasingly diluted because business schools no longer require several years of practical experience and sole full-time focus on the advanced business course of study - as they did when I attended UCLA's business school. In fact, my M.B.A. degree has been more useful to me in my coaching career than it was when I was a lawyer or corporate manager - not because of any greater insight it gave me, but because the lawyers I coach see the degree as validation of my credentials from the "school of hard knocks."

   All this is not to denigrate the value of business training. All lawyers today need to be more sensitive to the financial needs and operations of their firm and their clients. Yet most lawyers still enter law school with an undergraduate degree in the liberal arts, and law school curricula have little business focus. As a result, some progressive law firms are creating business education programs for their lawyers. One of the most notable is that of Chicago-based Seyfarth Shaw, which sends selected partners to a three-day custom Executive Education program at Northwestern University's Kellogg School of Management. Philadelphia-based Reed Smith and The Wharton School of the University of Pennsylvania have an even more extensive curriculum-based partnership program. Business schools around the country can also customize similar corporate executive programs for law firm use.

   It seems to me that this kind of training, or even an individual attorney picking up a basic business class or two at the local community college, is a more practical way to bring business skills to legal practice without the time and expense of getting a full-fledged M.B.A.