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Law practices: Get creative with your operating solutions

Compensation, partnerships and other ideas to boost profitability

INSIGHT ARTICLE  | 

For many law firms over the past several years, maintaining a profitable practice has been challenging due to decreasing litigation work (a mainstay area for firms) and a decline in bankruptcies. Adding to firm concerns, law practice clients have become more discerning, cost-conscious consumers with a need for high-quality and timely service at low fees. Certainly, competition for these clients is tough, and remaining profitable is even tougher, but not out of reach for growing firms.

In part, the solution to this challenge means examining cost-containing strategies around compensation and partnership arrangements, and looking for more creative structures to foster and retain the best talent. In addition, firms should take a hard look at standard work and infrastructure in order to make administrative efforts cost-efficient. To understand and implement these key strategies for a more profitable firm, a closer look is necessary:

People, partnerships and price

According to RSM’s 2016 Financial overview for middle market law firms, compensation—factoring both billable and non-billable professionals—is the number one expense for law practices. Optimizing this area could mean luring and retaining top non-lawyer talent to complete time-consuming executive and administrative work, freeing attorneys to focus on more billable hours to help foster higher revenues. In addition, sound compensation planning and accompanying partnership structures can reduce costly professional, non-professional and staff turnover. Note the following strategies to consider in terms of partnership and fee changes to help boost growth:

·         Non-equity partnerships can be offered to executive-level roles like chief financial officer (CFO) and chief operations officer (COO). Under this structure, these critical, non-lawyer leaders in the firm are compensated at a similar level as other partners in the practice, however they do not have voting rights or decision-making say in overall firm structure like a full partner does. This phantom partnership, if you will, provides a lucrative salary to key individuals, combined often with bonus incentives.

Tiered partnerships can provide a structure for equity, limited and non-equity partners. The system creates, for example, an opportunity for the senior manager or director in a firm to have some stake in the firm partnership, but in a limited way. This incentivizes career growth as younger professionals work their way up to leadership levels and higher-tier partnership stature. Like the non-equity partnership, a tiered partnership is a strong tool for recruiting and retention of key employees.

The predominant way many firms collect fees is through billable hours. However, some firms are considering alternative fee arrangements, flat fees or a combination of hourly and flat fees as a way to stimulate collection and overall profits. It’s something to explore for many firms as a way to drive revenue efforts, but it’s dependent on specific practices. What works for one, might not work for others.

The right place

And while considering compensation methodology as well as partnership and fee structures, firms should also consider ways to contain costs by leveraging smarter work spaces and cost-efficient methods to get the work done. Growing firms have realized the days of large, plush offices are gone. Rather, spaces are becoming more economical and paired down with common conference spaces to meet with clients. Successful law firms are moving to smaller square footage spaces to reduce rent and infrastructure costs. In addition, practices are moving standard administrative back-office work to less expensive locales, sometimes out of state. For instance, some large-city based firms have moved administrative duties to offices in smaller-market locales, taking advantage of skilled labor, but at lower wages and decreased office rent. The emphasis here is to be creative in the solutions for space and labor, and open-minded with regard to change and new ways of doing business.

Summary

Staying profitable in a volatile and competitive marketplace is a challenge for many law firms. Successful practices are optimizing compensation and partnership structures while also examining fee platforms and back-office solutions. It’s important to assess what works for your organization and implement those strategies that make sense for your partners, non-professionals, staff, clients and future growth goals.

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