Law Firm Compensation & Culture

As we approach Labor Day, law firm managing partners should re-evaluate the connection between compensation structure and firm culture. This is a good time to review financial data, identify patterns, and, if appropriate, negotiate a new compensation plan to implement for next year. Perhaps there’s not much cross-marketing going on at your firm. Perhaps partners are hoarding work and not pushing it down to associates. These behaviors are often a direct result of the incentives set up by the firm’s compensation model. The first step to updating your compensation plan should be to identify what you most want law firm partners to do.

At many firms, there is a lack of consensus about how much weight should be given to partners who have the client relationship but don’t do the legal work. Different firms answer this question in different ways. The extent to which partners are incentivized to bring in work that they don’t personally do, or which may be outside their competencies to do, plays a major role in determining a firm’s culture.

How information about compensation is shared and the level of flexibility in the compensation structure can also impact culture. Partners specifically need to address the following questions:


  • How transparent do you want your compensation structure to be? To what extent is compensation information shared among partners? To junior lawyers?


  • How discretionary will compensation be? Does the firm want to use a strict formula across the board? What will factor into that formula? And what will warrant deviations from it?


Too many managing partners rely on precedent and are slow to address their compensation systems, even when they clearly aren’t incentivizing the desired behaviors. As consultants, we have seen many law firm leaders hesitate to address compensation because they know it will be a divisive issue. There is no avoiding the reality that emotions are more likely to flare when discussing money, power, and status.  But avoiding difficult discussions now is likely to force even more difficult decisions in the future. Compensation and its connection to culture are frequently the reasons a firm is not growing as quickly as its partners would like, and now is the moment to start changing that for next year.

The Boutique Firm Business Plan for 2021

As managing partners and practice group leaders weigh the costs and benefits of returning to their offices, they should take advantage of the next six months to modernize their business plans. Three areas in particular are especially ripe for new approaches right now – real estate, practice area mix, and talent acquisition.

Lawyers are creatures of habit steeped in the importance of following precedent. But that doesn’t mean firms should reflexively return to the way they used space pre-pandemic. Surely, the last year has shown that most firms can function with a much smaller real estate footprint. Many lawyers may initially enjoy aspects of a traditional office setting, but this could be a fleeting feeling. Don’t just assume that face-to-face interactions among co-workers boost productivity. Instead, consider how you can downsize and use real estate savings to invest in technology or other innovations.

Boutique firms are well positioned to change their practice area mixes as well. For example, if your practice has been litigation-heavy and that’s left you worried about how courts will be able to handle the backlog of civil cases, this is an unusually good time to explore new practice areas.

The shift away from the physical workplace also opens firms up to more options when it comes to recruiting and retaining talent. You can avoid losing lawyers who relocated during lockdowns and want to stay where they are, however far it may be from the office. You can also bring on additional attorneys with their own books of business who previously were too remote. Moreover, the new world of legal services doesn’t require recruiters who cost a big chunk of a new hire’s first-year salary. Instead, a firm can list an opening on job sites for as little as $20/day and get in front of lawyers who can help the firm expand and diversify.

Simply put, the second half of 2021 will present numerous opportunities for boutique firms that are willing to embrace the changes that the last 16 months have brought.

Law Firm Cost Cutting Led to Greater Profitability in 2020, But That’s Not a Sustainable Business Development Strategy

Thomson Reuters’ Peer Monitor Index, issued earlier this month, draws attention to the root of the strong profit growth with which law firms ended a turbulent year. With some practice areas, including corporate and tax work (as well as bankruptcy) experiencing around 4% growth or more, reduced demand in areas like litigation was partially offset. But those practice areas that continued to thrive despite or because of the downturn did not account for the rise in profits. The determining factor was decreased expenses.

In response to the rise of the pandemic, firms were quick to reduce staff sizes, especially when a work-from-home model made it more difficult for administrative personnel to communicate and coordinate with attorneys. Going into the second half of 2020, lawyers began to be hit by layoffs as well. Thomson Reuters notes a 1.6% reduction in attorneys, mostly at the associate level, which is comparable to lawyer job loss during the great recession.

Without conference fees, travel expenses, and other costs associated with entertaining clients, it’s unsurprising that firms could easily create a short-term dip in expenses. Overhead costs related to office space, on the other hand, might decrease on a permanent basis as firms choose to adopt partial-remote models that allow for fewer lawyers in the office at any given time.

As demand grows, firms will rebuild their ranks, and the bottom line is that cutting costs can only go so far toward increasing profits. For law firms and individual attorneys determined to not just weather the storm but continue expanding, the real triumphs will come from building their books of business. Reducing expenses may have resulted in favorable profits per equity partner last year, but it won’t carry firms forward. Each firm’s ability to bring in new clients, grow in additional practice areas and specializations, and maintain its position in the market will be the truer test.

The Outlook for Small, Large, and Mid-Sized Firms After 2020

The 2021 Report on the State of the Legal Market, published by Thomson Reuters and Georgetown Law’s Center on Ethics and the Legal Profession, suggests that 2020 may over time be seen as a “tipping point” for the legal services industry. The authors reference Malcolm Gladwell as they adopt the term, explaining that this phrase captures the moment when a build-up of momentum in a certain direction makes it such that “the acceleration [of a trend] can be influenced by little changes that have big effects.” Focusing primarily on large law firms, the report identifies the rise of alternative business structures, changes in hiring, and, of course, the COVID-19 pandemic as catalysts for a potential tipping point.

First, let’s touch on a few specific findings included in the report. According to a survey by Acritas, 2020 saw a decrease in demand for outside counsel concurrent with a spike in workload for in-house legal departments. This, the report explains, has to do with the specificity of issues that came up last year, which tended to require deeper knowledge of the particular businesses being served than outside firms could provide. A level of urgency may have also played a role in more legal work being handled in-house.

During this time, profits per equity partner (PPEP) at large and mid-sized firms increased significantly, especially among the very biggest firms in the country. Law firms raised their rates prior to the pandemic and engaged in drastic cost cutting and better billing discipline once it began. Thus, comparing year-to-date figures as of November 2019 and November 2020, PPEP growth more than doubled for the Am Law 100 to over 20%, leapt from less than 3% in 2019 to about 20% in 2020 for the Second Hundred, and increased from again less than 3% growth to more than 10% for mid-sized firms.

Other market changes noted in the document are likely to be short-lived. For example, merger activity slowed with only 44 mergers reported through the third quarter of 2020 after over 100 in each of the three preceding years. Additionally, 79% of small firms and 48% of large law firms received government support in 2020 through programs that almost certainly will not be available in the future.

It is unclear whether firms will continue to shed partners and senior counsel as they did last year. As you can see on page 7 of the report, the replenishment ratio fell below zero (meaning firms lost more lawyers than they hired) for partners and senior counsel, while the ratio for associates dropped from over 1.5 to nearly an even 1.0, signifying that more associates were brought on than lost but at a much lower rate than seen in prior years. This change is certainly notable but probably does not indicate a lasting trend.

So which changes are most likely to be permanent? As law firm consultants, we predict those with the most potential to last may be the shifts in workplace culture. The report cites survey findings that 76% of attorneys would now prefer to work remotely at least part-time, compared to 37% before last year. Likewise, law firms have been forced to face issues of work-life balance to a new degree since the pandemic began, and those conversations around lawyer mental health and familial responsibilities may carry over into whatever becomes the “new normal.” Issues of diversity and inclusion have also been brought to the forefront and are unlikely to return to their pre-COVID states.

Overall, the report paints a picture of a legal market with fewer but potentially bigger winners. The move in this direction will place a premium on law firm leadership and branding. More than ever, boutique firms and small law firms in 2021 will need to make strategic decisions about where they want to position themselves in the market. Small firms that choose to ignore these trends are especially likely to struggle.

The Most Important Trend Impacting Law Firms in 2020 – And It’s Not COVID

The biggest news story of 2020 has been, of course, the pandemic. But that hasn’t been the most significant trend impacting law firms. COVID-19 sped up quite a few processes already unfolding in the world of professional services and in the economy at large, including the growing gap between small businesses and major corporations. Along with this has come a widening divide among the law firms that serve them. As we warned in May, smaller firms have taken a disproportionate economic hit this year. As individuals and small businesses have struggled, the law firms representing them have fared worse than those that provide counsel to big companies with greater ability to weather the storm. Within the legal services industry, revenues for the top 50 firms have continued to grow more rapidly than their Am Law 200 peers, and many solos and small firms have suffered much worse from the economic downturn.

Below are five significant ways this trend will impact law firms and attorneys:

  1. The Am Law 100 will become increasingly isolated from the rest of the legal community.
  2. As firms continue to scale up, more mergers and acquisitions will mean higher compensation for the best-performing partners.
  3. Boutique firms will be able to peel off BigLaw partners who don’t want to be smaller fish in a bigger pond.
  4. The difference between successful and underperforming practice areas will grow, thereby placing a premium on the ability of leaders to position their firms strategically.
  5. There will be greater opportunities for lawyers in their forties and fifties to acquire or otherwise take over practices from older attorneys, making succession planning even more important than it is now.

So, what will happen to the firms and lawyers on the wrong side of this trend? The unfortunate reality is that smaller firms, especially solos, will face more and more price competition, and ten percent to perhaps as much as a third of lawyers will struggle to make more than $75k to $100k.

COVID-19 Will Hasten the Decline of Small Law Firms

Everyone knows that “small businesses are the backbone of the U.S. economy.” This notion is so widespread that it obscures what has actually been happening over the last two decades.

The Small Business Administration regularly promotes the idea that almost all jobs are created by small businesses. But the SBA defines small businesses as those that employ fewer than 500 employees. By that measure, more than 99% of workers work for small businesses.

But once you examine employment data at a granular level, a more interesting and complicated pattern emerges. According to a report from JPMorgan Chase, since the early 2000’s, small businesses have come to account for a minority of the U.S. workforce. Only 18% are employed at organizations staffed by fewer than twenty people, and the share of GDP represented by small businesses has fallen since the late 1990’s from over 50% to below 45%.

COVID-19 is likely to speed up this trend. It has been estimated that at least one million companies with ten or fewer employees will go belly up as a result of the pandemic. The effects of federal measures like the Paycheck Protection Program, designed on its surface to bolster smaller entities during this crisis, are actually likely to exacerbate the gap between organizations with fewer than ten employees and their larger counterparts.

So what does this suggest about law firms?

In many ways, law remains an industry dominated by small employers. The State Bar of California reports that approximately one in five of its members are solo practitioners and 42% work at firms with between two and ten attorneys.

But the same trends that have caused a reduction in employment by truly small institutions throughout the U.S. economy will almost certainly impact the legal services industry as well.

As the benefits of size continue to increase, boutique law firms may find themselves at a further disadvantage. Smaller firms, and especially solo practitioners, should therefore consider growing by either merger or acquisition. And for younger professionals, inheriting a practice is an increasingly relevant strategy. Being proactive in considering these options may make the difference between thriving and failing to survive in the coming years.

This Is a Time for Humility

The decisions made by human beings are subject to numerous logical flaws and idiosyncrasies. Unfortunately, COVID-19 and our individual and collective responses to it require us to make prudent decisions despite our flawed reasoning.

There is a lot of research showing that we tend to underestimate risks associated with low-probability but catastrophic events. For example, humans can’t easily distinguish between bad outcomes that are likely to happen one in twenty times and those that take place one in two hundred, two thousand, or two million. This flaw in our thinking is linked to an even more general and systematic one – overconfidence. Whether it’s business owners estimating the chances of their business surviving five years or experts assessing the chance of a rare event, we tend to overestimate what we know.  And this can be a particularly severe problem in cultures that encourage positive thinking and ostracize those who are deemed to be “negative” people.

As a business owner or manager, some anxiety under the present circumstances is a sign of intelligence. But anxiety without some analysis is not useful. So, where should the analysis of your business start?

In our experience consulting with law firms and other professional services companies, two areas of risk tend to get overlooked during a crisis. The first relates to low probability events involving cash flow. For example, business owners tend to underestimate the chances that typically reliable clients will stop paying. We understandably focus on those clients who have a history of paying us inconsistently or who have said something to alert us to the threat of non-payment. That’s why businesses tend to get blindsided when a dependable client suddenly changes course. You should, therefore, run revenue scenarios that include non-payment by some of your best clients. That will help you decide what to do before such an event takes place and how to react once it does.

The second area of balky risk assessment involves relationship management. In a crisis, we tend to shrink our focus to those who are closest to us, and that is true of both personal and business relationships. But weaker relationships have been found to be especially helpful in creating new opportunities and finding new clients. Excessive reliance on your strongest relationships often results in you knowing the same people. And when you know and rely on a relatively narrow circle of people, you are at risk of something happening to a key relationship. That is why you should evaluate your systems and identify key relationships and alternative ways of receiving certain services. For example, if you are entirely dependent on a single person to provide your IT support, consider what will happen if that person falls ill or otherwise becomes unavailable to you.

The list of human logical flaws is long and varied. Papers like Eliezer Yudkowsky’s “Cognitive Biases Potentially Affecting Judgment of Global Risks” have done a good job of cataloging these. But even without delving into the academic literature, you can help your business and the people you care about by being aware that our ability to assess risks is impaired during a pandemic and we should be wary of overconfidence.

This is a time for humility.

COVID-19 Presents Lobbying Opportunities for Law Firms

The rapid expansion of law likely to follow the COVID-19 crisis presents a unique opportunity for smaller firms and solo practitioners to get involved in lobbying efforts. While larger and more established firms have a head start when it comes to decades-old regulations, the establishment of new legislative schemes provides a chance for even footing.

Historically, crises have led to the development of new laws in response to unforeseen issues and vulnerabilities. Litigators, in particular, are in strong positions to expand their advocacy in such times because they’re able to represent clients in these burgeoning areas of law before local, state, and federal bodies. Other attorneys may find that their expertise feeds into one or more of the topics up for debate, and they could use that knowledge in lobbying efforts.

With the sudden surge in unemployment, those who specialize in employment law will be able to jump onto the ground floor of new policy and precedent-setting litigation.

As many renters feel the effects of an economic downturn, real estate lawyers might find ways to weigh in on landlord-tenant matters. The implications of this pandemic will touch a huge number of industries, creating similar lobbying and advocacy opportunities across many practice areas.

As laws are formed following this crisis, lawyers should be looking at how they can utilize their existing specialties and expand their expertise to include these new markets. No one will be an authority initially when it comes to just-developed regulations, so one lawyer has as great a chance as any other to adopt an additional, related specialty. Operating at the forefront of legal change allows a practitioner to establish herself as a trusted source on a given subject when there may not be many. There’s an enormous benefit to being among the first in line.

Don’t Neglect Your VIP List

In the hustle of your daily work, it’s far too easy to let important networking activities fall by the wayside. It’s even easier to ignore key networking responsibilities when you are isolated at home and justifiably preoccupied with health concerns, family care, and the general state of affairs. But now more than ever, it is crucial to strengthen your relationships with your VIPs.

You only have so much bandwidth to keep up your professional connections, so we recommend aiming for a list of twenty-five to thirty-five names. You may have some idea in your head of where your work comes from, but this list should be based on the data. Look into any new business brought in over the past few years and identify from the numbers who your best referral sources really are.

This doesn’t mean you should give up on those other individuals who may have come to mind, but your VIP list should be pruned every few months to ensure you’re spending your time wisely. A connection that hasn’t been as fruitful lately could still be a great resource if that person has proven willing to help in the past. Your selections will be a combination of your current top referrals and those you can see supporting the future growth of your book of business.

If you’re reading this and thinking you’ll never find the time, recognize that this work is some of the most easily delegated. Someone on your staff can do the legwork of investigating past referrals and tallying these sources. An assistant could also handle the next step of scheduling calls and meetings to follow up with these VIPs. Once you have a system in place for choosing and connecting with your contacts, keeping your networking efforts focused and efficient will become just another part of your routine.

The goal of networking is to acquire new business, so go forward with that aim in mind. Don’t overwhelm yourself considering hundreds of connections when the evidence will point you toward a much smaller core of referral sources. These relationships are invaluable assets to your practice. These are your VIPs, and they should be treated as such.

Succession Planning in the Age of Coronavirus

The increased importance of succession planning that preceded the onset of coronavirus may only ramp up as a result of the pandemic. The difficulties of running a law firm or other professional services company remotely may be the straw that breaks the camel’s back for some practitioners nearing retirement. And as many practice areas experience declines in demand, firm management may need to consider transitioning or acquiring new ones to pick up the slack.

With stiffening competition, we’ve already seen an onslaught of Big Law mergers over the past several years. At the same time, the attorney population has continued to age, resulting in a disproportionate number of practicing lawyers over the age of fifty. Recent losses in the stock market will undoubtedly motivate some more senior attorneys to push back their retirement date. But, as we’ve witnessed in just these first few weeks, the uncertainty of COVID-19 is leading others to expedite their decision to retire now.

It’s more important than ever to consider succession planning options in your business development strategy. In the coming months, there’s a very real likelihood for many firms that current clients will generate less revenue than they did a month or two ago. While some assistance is available to supplement these gaps and maintain payroll, the reality is that you will need to continue generating new business as the current situation unfolds. While adding new clients should be part of your plan, succession planning, mergers, and acquisitions present especially powerful opportunities to grow during this crisis.

Free Webinar on April 14th: How to Grow During a Crisis Through Succession Planning and M&A

We will be addressing this topic in depth during our next webinar on Tuesday, April 14th at 2 p.m. PST (4 CST/5 EST).

To join us for this no-cost Zoom webinar, please register using the link below:

We look forward to sharing ideas and best practices for this crucial aspect of business development in a crisis.