A firm’s profit-sharing model is a poor determinant of collaborative behaviour.
Motivational theory predicts that firms with equal-share or lock-step model would be far more collaborative than those with more performance-based reward systems. The logic is that in equal-share firms there is a strong financial incentive for partners to grow the collective pie by sharing clients, staff and other resources.
I can think of a number of firms where this theory simply does not hold true.
Source: strikingly.com
Despite equal profit share, partners in these firms hoard work and clients, they hold onto resources and they operate primarily in silos. They continue to do this despite all the evidence that better collaboration will result in higher profits, more staff engagement and stronger client loyalty.
SO WHAT IS GOING ON?
In many firms, partner performance measures are oriented around financial metrics like personal and supervised production, fees billed, fees collected, work referred, utilisation, write-offs and WIP. They are usually reported monthly in arrears and are transparent to the rest of the partnership.
It appears to me that silo’ed behaviour is driven by a reaction to the measurement system by three different types of partners.
Insecure Overachievers
Insecure partners view their relative ranking on performance reports as a signal of their worth, both to themselves and others. The data is a form of validation or redemption. Getting higher up the individual billings league table takes on new meaning, that is, proving that they’re ‘okay’. At the extreme, one hears of stories of partners gaming the practice management system and manipulating data so as to rank higher. Perhaps in an eat-what-you-kill firm, this behaviour is more understandable, but in an equal-share firm, it just smacks of paranoia.
Inflated Egos
Those with above-average egos use individual reporting as a competitive scorecard signalling that they’re winning and the others are losing. While some internal competition is healthy, in some firms, it strays into a dog-eat-dog culture where collaboration is the last thing on people’s minds.
Tenureds
‘Tenuritis’ is my term to describe the mindset of a partner who feels that as an owner they have a self-directed job for life with next to zero accountability. For those even partially inflicted with tenuritis, the performance reports have little impact. They’re mostly ambivalent about the data and care little whether they sit at the top, middle or bottom.
With the Insecures and Inflated Egos it is the symbolic power of measurement that’s primarily driving behaviour. With the Tenureds it is the over-reliance of measurement as a leadership tool which, with these individuals, has very limited power.
SO WHAT CAN YOU DO ABOUT IT?
The key issue here is that measurement should not be used as a proxy for leadership. It’s just plain lazy (and a little cowardly) if firm leaders send out the monthly reports and then think their job is done.
Effective leadership is about [i] providing regular feedback – the good, the bad and the ugly, [ii] active listening, [iii] setting direction, [iv] developing capability, [v] offering support, [vi] opening doors, and [vii] removing constraints.
In equal-share firms, effective leadership is crucial to mitigate the measurement system risks outlined above. It is also fundamental to restoring a sense of fairness across the equity partnership and to get everyone performing to their full potential.
Without effective leadership, meritocracies run the risk of letting the “money do all the talking”. The differential in reward might address the perception of fairness but it does little for partner development, especially for those not intrinsically motivated by the Dollar. Profit-share, on its own, is a blunt pseudo-precise deferred performance management tool.
I believe a firm’s leadership capability is a far better determinant of one-firm collaborative behaviour than its profit sharing model. There are thousands of examples of deeply collaborative public and private companies that operate with merit-based rewards. There’s no reason why professional service firms should be any different.
CALL TO ACTION
If cross-firm collaboration is on your strategic agenda, don’t just jump to the reward lever and expect everything to change. Rather take some time to think about what and how you measure and the critical role your leaders play in driving one-firm behaviour.
Over the past 30 years, larger law firms in Australia have had to make only two major strategic decisions: [1] whether to become a national firm and how, and [2] whether to become an international firm and how?
change management, client relationships, culture, governance, growth, innovation, Measurement, pricing, professional service firms, strategy management
The future of law has fewer seats for grads
In Articles, Commentary on 16 September 2018 at 10:53 amFirst published in the Australian Financial Review, 14 September 2018
The pyramid has been the foundation operating model in private practice law firms for the past century. Put simply, a typical pyramid has a partner at the top, one or two senior practitioners below him or her, and then three or four juniors below them. These ratios obviously vary from practice to practice. Leverage and utilisation of the mid and lower levels of the pyramid are the primary profit engines of most firms that charge by time.
More recently there has been much talk of the pyramid losing its bottom left and right corners and becoming a rocket. In this model, there are far fewer junior lawyers and their work substituted by a combination of technology and lower-paid process workers.
The shift towards the rocket model is being driven by both the demand and supply side. Sophisticated clients are stating that they’re happy to pay premium rates for highly-trained senior practitioners to provide strategic advice, insights and judgement, but they’re not willing to pay high rates for junior lawyers to do largely process work.
On the supply side, many NewLaw and legal technology providers have seen the market opportunity to supply legal process services directly to corporate legal departments, to SMEs, to private clients and to law firms. Catalyst Ventures estimated the global LegalTech market to be worth over $US 16 billion in 2017.
There are four major strategic implications for private practice law firms in moving towards the rocket model.
#1 The role of partner
Law firm partners will no longer get by by just being great advisors and team leaders. Project management will become a critical element of the partner role. This means partners need to become adept at configuring the most appropriate mix of legal, process and technology resources to solve a client’s problem. They need to be able to design, prepare, price and sell project plans. To manage projects effectively they will need to be both digitally and economically literate. Teaching old dogs these new tricks will be a very big challenge in many firms.
#2 Size and access to capital
Economies of scale have not traditionally been a key success factor in labour-intensive law firms. New York’s Wachtel Lipton is one of the world’s most successful firms despite being a relatively small single-office partnership.
With the addition of product, process and technology to the business model, firm size and access to low-cost capital may bring specific advantages. These include the ability to wear the risks of R&D, and the ability to invest in high-potential start-ups, technology infrastructure, marketing capability and big data. There is also a defensive argument in that if your firm can’t afford the new bright shiny toys some clients might stop playing with you.
#3 Recruitment and development
Source: strikingly.com
The pyramid model creates a “tournament” where a large group of aspirants start at the bottom and are encouraged to beat their peers on the way up. The rocket model potentially changes the game with far fewer recruited at the bottom and a philosophy of retention rather than competition. It also challenges the apprenticeship system of learning and development.
Firms will need to make profound strategic choices around whether they ‘make or buy’ talent. If clients are not prepared to pay for junior development and apprenticeship, then some firms may prefer just to poach mid-level staff trained by others. However, this free-rider approach may negatively impact firm culture and ultimately drive up labour costs.
#4 Pricing and measurement
Imagine your firm offers a new compliance solution for its clients that incorporates legal advice, training and a suite of software tools. You cannot bill for the software tools using hourly rates. Charging for the training by the presenter’s time severely undervalues the IP. Tracking staff utilisation in this scenario would not only be meaningless, but dangerous.
It is clear that time-based pricing will be less prevalent in a talent + data + technology world. New pricing models will be required to set, communicate and capture value. This will include things like user license fees, subscriptions and incentivised retainers. What constitutes a “fair price” will become more complex, and need to factor in development costs and risks, IP fungibility, the scale and scope of application, and duration of benefit.
Measurement will shift away from input measures like utilisation towards more outcome measures like client results and clients’ propensity to refer.
In conclusion
The rocket model scenario poses some profound challenges but it also presents many significant opportunities. There is clearly a benefit to be ahead of the curve in thinking through these issues and shaping your future. Not only it is critically important, the journey to becoming closet astronauts can be quite fun.
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