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- Partner Compensation reality
September 2023 it was announced that three Kirland & Ellis partners would move to Paul Weiss. According to people close to the matter, the trio would each receive $20 million in annual compensation at their new firm. This is quite exceptional as today at Am Law 25 firms, only a handful of partners have comp in excess of $20 million. The news will undoubtedly leave a number of partners elsewhere in town feeling all at once very unhappy and under-rewarded. Modified lockstep For compensating its partners, most firms today have a system that includes elements of merit based compensation as well as seniority based. Some well-known firms with pure lockstep have introduced merit based differentiators in order to retain and attract star partners. What the modified lockstep looks like varies wildly. Most firms have adopted a set of – sometimes very detailed and complicated – rules for calculating each partner’s profit share. Others involve a compensation committee or have the managing partner decide. Compensation for yardstick Why is partner compensation such a hot topic in many law firms? Partners in business law firms invariably earn more than 99% of the population, so why not just be happy with it and focus on clients and family? One reason is that partner compensation is used as a yardstick for the success of the firm. Partners always compare PEP with other firms, seeing a close competitor have higher comp will trigger a heated debate on the firm’s strategy and sometimes results in star partners leaving. Also the opposite is true: a highly competitive partner compensation is a prerequisite for lateral hiring of rainmakers, which in turn could help the firm become even more successful. This is what’s happening at Paul Weiss. Which compensation model is best? Ideally in a firm, all partners are equally successful in the market and are happy to cooperate with each other. If the bandwidth between partners is narrow, there will be no need for merit based differentiation and lockstep will help avoid partners starting to compete with each other. Each partner will always act with the interest of the firm in mind. Unfortunately there is no ideal world in which each partner is equally successful and also partners are inclined to prioritize self-interest before firm-interest. This will even happen in lockstep firms as each partner is under pressure to meet his/her target. Partners start monopolizing client relationships and are trying to get files in which also other partners are active, to be administered under their name. Now the solidarity which underpins the lockstep is compromised, cracks will start to appear. Collaboration will suffer and star partners will demand action against slackers. One could also start from the other end assuming that self-interest is the norm and make the compensation fully merit based. This could even go as far as partners charging internally for helping out in another partner’s file. Such ‘eat what you kill’ compensation systems will allow for a very large bandwidth in partner performance, but provide no incentive for collaboration. Fully merit based systems also give young new partners a difficult start as in order to make an income they will have little alternative than working in other partners files at a reduced rate and without quickly growing a client base of their own. Since both lockstep and ‘eat what you kill’ have their problems, it comes as no surprise the hybrid modified lockstep has become the most popular. In reality the modified lockstep suffers from the same issues: collaboration remains an issue and the weak partners irritate the star partners. “There is no evidence to support that compensation impacts partner performance” Carrot and stick As stated, in our practice we have seen a great many different partner compensation models. Most of them have a few things in common: they favor a small group of partners and they aim to influence partner behavior. Let’s examen both in more detail. Mostly compensations systems favor the more senior partners with an established practice. One argument could be the firm must prevent such rainmakers to leave. While there certainly is some truth in that, it also creates problems, notably when it comes to succession. Also this group is typically also involved in the leadership of the firm whether it be formal or informal. Granting themselves the largest cut can in a way be self-serving. And I have not even mentioned ‘origination credits’, which also disproportionately favors this group. Over there years we have done multiple in depth analysis and never have we found any evidence that individual partner performance and behavior can be significantly influenced by compensation. Never have we seen a weak partner show better performance after his/her compensation was cut. Receiving less money will not transform a weak partner into a strong partner. This is similar for other aspects that are part of a partner compensation formula: rewarding collaboration hardly increases real world collaboration. Partners that feel comfortable collaborating will collaborate regardless and those that prefer to work on their own will continue to do so even it this means they will miss out on a small percentage of their compensation. As a rule of thumb: partner compensation is not the right tool to change the status quo. Only culture can do that. The bigger picture Partner compensation is one of those topics that we come across a lot when working with our clients. Many law firms spend disproportionate amounts of time discussing how to divide the profit among the partners. The problem I see is that having lengthy conversations on how to distribute profit does not make the firm as such more profitable. These discussions are just inward looking and a time and emotions consuming energy drain. We have found there are typically two triggers for discussing partner comp. The first is heavy lifters complaining about partners that seem to enjoy a free ride and don’t put in the effort. The other trigger is the wish to change partner behavior, typically this means stimulating collaboration. As mentioned before, there is no evidence that partner compensation changes partner performance. Taking away money from a weak partner will just legitimize their weakness. Giving more money to a top performer will only keep him/her happy for so long. We have looked in depth at lateral movements of partners across a number of markets. In some markets lateral movements are common in other markets they remain rare and are frowned upon. One thing partners that move firm have in common: the primary motif for moving is rarely money. Typically, they have lost confidence in their firm’s strategy or have developed cultural or interpersonal issues. A partner that likes the firm culture, gets along with other partners and feels supported, is unlikely to leave for more money. Using PEP as a yardstick for performance also has its flaws. Generally we at TGO Consulting prefer to look at profit margin, revenue per lawyer and a number of other indicators more relevant to a firm’s performance. Bottomline Law firms are well advised to have a permanent focus on performance and profitability on a firm level and not so much on an individual partner level. Partners should spend less time discussing internal matters and more time identifying and sharing business opportunities. Firms should invest in creating or maintain a result driven, inclusive, collaborative culture. Partner compensation should not disproportionally favor a small group and should be supportive for young partners who are still developing their practice. Any system that meets these criteria will do. Writing this article I noticed there is so much to cover when it comes to partner compensation, that it is impossible to squeeze it all in 1000 words. Potentially this is a good topic for my next book, what do you think?
- Preferring Profits over People
Above image generated by using Dall-E artificial intelligence Although vast amounts of students graduate each year from law schools and universities, the talent pool for top law firms remains limited. Most graduates have no interest in working in Big Law, and of those who do, a number does not meet the quality criteria. As a rule of thumb less than 10% of all law graduates falls within the Big Law target group for recruitment. It seems that with Gen-Z this number is declining. This means that in most jurisdictions, there is more demand than there are talented graduates entering the market. Hence the ‘war for talent’. Law firms go through great lengths trying to identify top talent early on and spending substantial budgets (including offering salaries up to $190.000) luring them to their firm. Look at the ‘Careers’ sections of the websites and one could be inclined to believe that joining a top-law firm equals working in paradise. There is just so much emphasis on individual career paths, mentoring, diversity, personal development and super interesting work, that it is easy to forget that in reality it is just hard work, like it was pointed out in a presentation that transpired from Paul Hastings: It is hard work Although the prevailing sentiment after publication of this slide was outrage and denial, I don’t see much wrong with it. Anyone pursuing a career at the top end of the legal market can only succeed by putting in a lot of effort. If you cannot stand the heat, get out of the kitchen. Having said that, this does not mean unfair and unhealthy working conditions. In February 2021 trainees at Goldman Sachs humbly requested management to be allowed to work slightly less than the about 100 working hours a week against an average of 5 hours of sleep: Fortunately, working conditions in law firms are nowhere near those at Goldman Sachs. However increasingly young lawyers are quitting the industry because of Uncaring Leaders, Unsustainable Performance Expectations and Lack of Career Development (McKinsey: Great Attrition, Great Attraction survey 2021) Generation Z Young lawyers entering the legal profession today are mostly born after 1997, the year that marks the beginning of Generation-Z. The first started during the Pandemic when there was hardly anyone in the office and at the same time workload was very high. Law firms, like other industries, seem to be confused and spooked by this new generation which is believed to have different priorities-in-life and no ‘old-school work ethos’. While it remains questionable if this is a fair characterization, many law firms struggle with how to ‘manage’ these young professionals. It is hard to count the huge number of reports, articles, conferences and workshops that have been devoted to Gen Z in the legal industry alone. This can probably be traced back to the perceived gap in the mindset and values of the partners – Baby Boomers and Generation X – and those of the new recruits. The former claim they had to work hard for their achievements, the latter were allegedly born with a silver spoon in their mount. Although this characterization is largely a caricature, Gen Z is different in at least one crucial aspect: young people resent being ‘just a cog in the billing machine’. For them the purpose of life is not helping the partners make millions. They are in it for themselves, not for the partners. Law firms are increasingly aware of this, hence the wordings on the career sections of their websites: “we value you as a person”, “we will invest in your personal growth and development” Preferring Profit over People During the Pandemic, profits soared across the legal industry. Demand was plentiful and costs were low. For most law firms 2020 and 2021 have been the best years on record. Last year, 2022, could not have been more different. The world entered in a global economic crisis. Inflation became high and money tight. At the same time costs substantially increased. All this impacted partner profits and that is where problems arise. Unlike other entrepreneurs and businesses, partners in law firms have for decades only experienced a steady growth in profit. To the extent that even slowing growth would lead to ‘panic’. A decrease in profit, in the minds of many partners, would be totally unacceptable. Now this is the reality for the first time. Welcome to the world I’d say. For a growing number of law firms, the prospect of slightly lower partner profits, compared to the year before - but still above 2019 - became unbearable. To ‘rescue’ the profits, law firms have started to layoff junior associates. The trend is to quietly make cuts through the review process. This year’s "aggressive" performance reviews* are resulting in an increasingly blurry line between layoffs and review-time cuts. On social media associates are buzzing with chatter about layoffs and cuts at many firms. No need explaining that for Gen Z social media carries more weight than law firms’ website ‘career’ pages. The Profit is in the People I have said it before and I will say it again: for a law firm people are the most important asset. The business of law is people’s business before anything else. No law firm can gain an advantage over the competition based on legal knowledge. It is the non-legal skills and attributes that make the difference. The law firm that is the best in attracting, retaining and developing talent is the one that is going to win. The knee jerk reaction to cull talent to save the profit might turn out to be a costly mistake. These firms might save some pennies on the short term, but they will suffer reputational damage for the years to come. There is a ‘war for talent’ and Gen Z does not want to be just a cog in the partners’ money machine. There is no better way to highlight that is ultimately what they are as by firing them at the first signs of headwind. Layoffs are short sighted and selfish. The same thing happened after the 2008 Banking Crisis and it became something those firms bitterly regretted. When the economy picked-up they found themselves understaffed and unable to attract new talent in a buoyant market. The difference is that at that time it were the Millennials, who tend to be more forgiving than Generation Z… Invest in talent development For commercial companies it is normal that revenue and profitability show variations over the years. Even Goldman Sachs has good years and bad years. Law firms partners must understand and accept that the legal industry cannot remain an exception and that sometimes a decline in profit is just a consequence of the economic reality. Like other entrepreneurs and businesses, law firm partners are well advised to focus on cumulative profit over the years. In today’s economy it is probably smarter to invest in talent, even though it impacts this year’s profit. Those law firms that retain their talent and invest in developing legal and non-legal skills will be tomorrow’s winners. Taken over a number of years these firms will have a better average profitability. TGO Consulting has developed a methodology that helps law firms with setting up a sustainable talent development program for all lawyers, juniors and partners alike. *Note: Structural periodical performance reviews are essential and should be standard practice at any law firm. The purpose of such reviews is to provide the associates with open, honest and constructive feedback, aimed to learn and improve. Feedback should never come as a surprise or ‘out of the blue’. Associates should get sufficient time and coaching.
- ChatGPT in the legal industry
There is a new hype: ChatGPT version 3.5. First launched 30 November 2022 this publicly available natural language processing tool immediately caught the attention of the media and the public. It allows to have high quality human like conversations with a chatbot, which I must admit is pretty cool. Up till then, conversations with chatbots were invariably cumbersome, frustrating and stupid. Natural Language Processing consists of two main elements: the language + the content. ChatGPT is impressively good when it comes to the language. The algorithm has been trained to predict which words are most likely to be used and in what order. The language and grammar of the tool could indeed be mistaken for real. This as such is a major technological achievement. The second element is the content. This is where things get a bit obscure. Even though ChatGPT responds like a human, unlike a real person it does not have any knowledge or understanding. ChatGPT sources its information on the internet, and that spells trouble. ChatGPT runs a high likelihood of producing bullshit in a very convincing and coherent manner. ChatGPT will always sound plausible, but could be totally wrong. So, while the Natural Language Processing part is groundbreaking, the content part is far from perfect. Training AI is not straightforward Algorithms need to be trained with vast amounts of data. The quality of these datasets will have a huge impact on the end product. It is tempting to use the internet as a source, but that invariably is a bad idea. In December 2022 Melissa Heikkilä (she/her) published an article in MIT Technology Review. She tried viral AI avatar app Lensa to make an avatar of herself. For her male colleagues at MIT the app generated realistic and flattering avatars —think astronauts, warriors, and electronic music album covers. However for Melissa, being a woman, Lensa created tons of nudes. Out of 100 avatars she generated, 16 were topless, and another 14 had her in extremely skimpy clothes and overtly sexualized poses. Only after she told the algorithm she was a male, Lensa produced flattering avatars like it had done for her colleagues. This is a great example of how the data used to train the algorithms affect the results later on. Lensa relies on a free-to-use machine learning model called Stable Diffusion, which was trained on billions of image-and-text combinations scraped from the internet. One just need to look at Instagram to recognize that women often place ‘sexy’ images of themselves. The internet is not a good source to train AI on. This is as true for Lensa as it is for ChatGPT (or any other tool). ChatGPT in the legal industry Lawyers use and process language a lot. Perhaps with the exception of writers, journalists and academics, no profession has language at the core like the legal profession. With that in mind the question arises if ChatGPT will disrupt the legal industry? Personally I think it will not. Let me explain: 1. Where will the content come from? Obviously lawyers at a law firm will not use Google as a source, so in order to use ChatGTP or a derivative, law firms need to feed it with their own datasets. These datasets need to be clean, meaning that every bit of data needs to be vetted before. Data must also be updated on a permanent basis. For many law firms this will be a hurdle they cannot take. 2. Will there be a return on the investment? Purchasing the AI tool and preparing the dataset will require a substantial investment. Further licensing fees and maintenance will add to the cost. Such an investment will only make sense if it will help the law firm to make more money. The question is will it? In this context I would like to point you towards an analysis by Lexoo which was recently shared by its CEO Daniel van Binsbergen. Lexoo analyzed how AI and Machine Learning could speed up contact review. It started with the assumption that such tools could save 50% of a lawyer’s time. It turned out to be 5% in reality! So AI/Machine learning would have very little real-world impact. Side note: this is why inhouse teams that have adopted machine learning have not magically freed up 50% of their time… Even in the unlikely event that the employment of ChatGPT would lead to substantial time savings for lawyers, this still wouldn’t mean there is a business model. If lawyers spend less billable time, this needs to be compensated for by higher rates or more work volume, otherwise it will be a lossmaking operation. The third option would be to employ fewer lawyers, but that would assume the ‘idle time’ could be pinpointed to one or more individuals, which will not be the case. 3. The Technology Paradox Once technology is introduced to simplify our lives, we humans get less experience. Today we have to drive our own cars. In the future there might be fully autonomous cars that do the driving for us. This will make us less experienced as drivers, so when something goes wrong, it will go dramatically wrong because the human lacks the experience to intervene. The legal profession runs the same risk. The present generation of lawyers already has the experience and will probably save little or no time using a ChatGPT based tool. The future generation of lawyers using such a tool will have less experience and will likely struggle to assess the results and identify issues, omissions or mistakes produced by the tool. Parting Shot While lawyers and the legal industry are well advised to remain open to change and new (technological) developments – maybe even more so than today – technology by itself is highly unlikely to fundamentally disrupt the legal industry. Its impact will always be marginal. The legal profession is first and foremost a human profession. Law firms are well advised to prioritize training and development opportunities for lawyers and partners over investment in technology. We do not need faster lawyers, we need ‘better humans’.
- Data & Dialogue | TGO Consulting
"Transforming relationships between law firms and their clients" About the book During the past 50 years or so the relationship between clients and their lawyers has fundamentally been the same. For sure the 2008 Financial Crisis rocked the boat a bit, but things soon went back to normal. In general, despite occasional critical words, clients are happy with their lawyers. Relationships tend to be loyal. Despite ‘daily’ communications, there is however surprisingly little dialogue. Law Firms have limited understanding of the inner workings of their clients and vice versa. This book will explain in detail what the drivers are on ‘the other side’. In doing so the book will explore how the use of data analytics will soon transform the legal industry and how the relationship between law firms and their clients must be reinvented to enable law firms to still be profitable while clients receive better value. A must read for anyone working in the legal sector! Free updates and information sharing The topic of this book is the ever-evolving relationship between clients and their law firms. Due to the growing popularity of Legal Operations, technological developments and the rise of Alternative Legal Service providers and other market disruptors, it is impossible to publish a book that is completely up-to-date. We have therefore created a website www.bosman-cordo.com through which the information in the book will be complemented and updated. We will share information, statistics, and graphs with you as our reader for free. So, visit the website regularly and use the opportunity to share your thoughts and let us know what you would like us to publish next.
- Revenue Management | TGO Consulting
Revenue management for law firms The vast majority of lawyers does not manage to consistently write 8 billable hours a day. Utilization, billable time as a percentage of the target, is typically at 90% or below. In almost every law firm we know there is time that is currently not used to work on client matters. What if we could help you monetize these idle hours? That would instantly create a significant boost in your profit. We help lawyers focusing on revenue management rather than on the hourly rate. Start applying market dynamics in the way Uber does. Or the airline industry, they are also willing to sell you the last remaining business class seat at a discounted price. Also for them selling that seat will bring pure profit as there will be no additional costs. Airline passengers have got used to this and have learned to accept that the person sitting next to them might have a better deal. [read our blog post ] Today we are working with our clients to introduce smarter and more sophisticated pricing models. These models introduce flexible pricing in order to better manage revenue and enhance profitability. Also for the law firm’s clients this provides new opportunities as they will have a better deal at times of low demand. Talking to the in-house lawyers we know they are ready to embrace this model. No reason for your firm to hesitate. Find how we can help your firm implement revenue management.
- Lateral hires & Mergers | TGO Consulting
Lateral hires & law firm mergers Law firm can either grow organically or through lateral hires or merger. We at TGO Consulting help our clients in defining the best strategy making the right decisions. We know the opportunities and pitfalls associated with lateral hires [read our blog post ] and we know the gains an losses that comes with mergers. We help our clients with post hire/merger integration, immediately creating extra value for the firm. We provide a service doing due-diligence on the book of business of the new partner(s). This service is extremely discrete and has proven to reduce the risk of a disappointing revenue later on. TGO Consulting will help you assess more accurately what clients and how much business the new team/partner will bring. The legal market has become a global market. Clients have ventured all over the world and often they want their trusted law firm to follow. For decades law firms have been following their clients when they started doing business abroad. Some of these international offices have been profitable, but unfortunately the majority has not. Partners and lawyers on expat allowances turn out to be costly, while the opportunities to generate local business are limited. TGO Consulting assists law firms in remaining entrepreneurial, while avoiding the financial pitfalls at the same time. There is a clear tendency towards consolidation in today's legal market. Substantial investments will be needed to keep up with technological evolution. These investments and the investment needed to attract talented lateral hires are in many cases beyond the scope of an individual law firm. In these situations a merger could make sense. TGO Consulting guides law firms through the perilous process of finding the right match, doing the due diligence, the process of decision making and the subsequent integration after the merger. ask more info