A force like Bill Henderson can’t be contained by just one column. In my most recent piece, I discussed Henderson’s views on how top firms will learn to “productize.” This week, we tackle another topic we discussed in my recent interview with him: the evolution of law firm structure itself.
Teamwork Makes The Dream Work
I’ve long discussed the virtues of law firms embracing tools to measure profitability. As the American Lawyer recently pointed out, virtually every top-performing law firm has jettisoned antiquated models of paying partners based on their gross book of business: “A common driver of success in firms that outperform the market is that they increasingly use their compensation systems to reward partners whose books are accretive to profitability.”
But law firm profitability tools aren’t perfect. Henderson points out there are practical challenges associated with trying to manage book-of-business profitability. “[T]hat means you have to manage people individually. You have 300 lawyers, you have to manage 300 people, and you have to use carrots and sticks to get each one to produce.”
And with lawyers across the industry being notoriously argumentative and often having little understanding of basic business concepts, that management challenge can be significant.
Henderson’s solution to the problem is simple: start measuring profitability at a team-based level. “You put attorneys into groups of eight or 10, like little industry clusters, or little client type clusters and say, ‘You guys figure out here, your profit pool is going to be a function of how this unit works together here. So you guys better figure it out here because you’re stuck with that profit pool.’ And actually, it alleviates you from having to manage those people because that group will become self-managing.”
To those that would protest that Prof. Henderson’s idea is a nice academic theory on paper, but impossible in practice, Henderson had this to say: “That was Goldman Sachs in 1960. They moved all their comp to team-based production. The partners said ‘I’m good at generating business, you’re good at servicing internal demand, why don’t we just merge our credits together here? And that totally revolutionized the firm, because it got everybody to focus on growing the pie as opposed to growing their piece.” He added that Goldman Sachs has more in common with law firms than we might initially think: “Goldman Sachs is in the same type of business that we are, professional services. They got people to solve their own problems and get creative, and also alleviated the burden of management. They were managing 30 teams instead of 300 people.”
A Recipe For Experimentation
Does the Goldman Sachs model make sense for law firms? Analyzing performance at a team-based level could certainly ease the burden on management and compensation committees –– freeing them to focus on deeper strategic matters while more tactical decision-making was pushed down to empowered practice group managers. But more than that, this kind of team-level profitability thinking could break a firm free from the billable hour mold in new, exciting, and more profitable ways.
When you tell every attorney in a firm they’re going to be measured on the individual dollars they bring in, you’ve incentivized them to bill hours and make dollars, yes, but you’ve also incentivized them away from efficiency, or from helping others improve their numbers. There’s no “carrot,” or time available, to think about much beyond billing. Everyone has to sink or swim on their own.
If team profitability is the metric, however, then perhaps not every attorney in the pod needs to be constantly billing. Attorneys could be freed up to specialize, play to their strengths, and focus on individual components of a practice group, whether those tasks are billable or not. Teams can diversify, specialize, and reform in new and unexpected ways. A billable-hour practice might suddenly make more sense as a client-pleasing flat fee model. Lawyer-led, long-term projects like Closing Room can be prioritized and developed. Moving to team-based performance analysis could enable the productization efforts that Henderson believes will be necessary to remain relevant as a firm in the coming years. Presumably, of course, all of these efforts will lead to more profit for everyone.
The Problem: That Pesky Market
But there’s a problem. Virtually every Am Law 200 firm pays partners on individual performance. If a bold — or naïve — firm tries this model, won’t competitors simply snatch skeptical rainmakers? You can easily imagine a recruiter’s pitch: “A team-based approach is way too risky for a superstar like you. Don’t waste your time –– or jeopardize your livelihood. Keep doing what you’re doing and let us pay you for it.”
Because of market forces, getting buy-in from rainmakers on a team-based profitability approach could be difficult or impossible. The current per-person profitability model is likely working well for them, and this sort of change could be perceived as threatening their share of the pie. Rainmakers will have to be convinced that team-based metrics will allow that pie to grow. Some who don’t like the idea may end up leaving.
If firm leadership could figure out a way to get buy-in, however, a team-based profitability approach could be a great retention tool. As a firm builds up a practice group’s infrastructure to support its experimental new systems, it’s quietly ensuring that the clients who love those new systems stay with the firm itself. It’s also a lot easier for a single rainmaker and a couple of associates to lateral than it is to move a 15-person team relying on firm-developed software and hardware solutions. Savvy firm managers will find ways to make the practice groups cooperate and develop interdependence on one another, both to offer new and better client services and to further enmesh their teams with one another. By investing in team-based thinking, firm managers can increase profitability, reduce the risk of attrition, and help develop that elusive sense of camaraderie and firm culture all in one motion.
Playing Catch Up
It’s telling that we can consider a Woodstock-era management practice as a revolutionary step in the legal industry, but that’s the culture we’ve built for ourselves over the decades. As Goldman Sachs was trying out team-based compensation in the 1960s, virtually every large law firm was adopting lockstep compensation systems. Firms embraced this model to promote a team-based culture, but the unappreciated downside was that automatic raises until you retire doesn’t incentivize a business-minded approach. It does the opposite, and we’re still living with the consequences of that today.
The pendulum has now swung the other way, and smart firms have been heavily, and smartly, focusing on attorney profitability as their driving metric. Although that shift has been an overall improvement, there is certainly room to further develop law firm compensation culture.
Henderson’s approach may be a smart way forward, and I suspect there’s a way for firms to have their cake and eat it too. There are already good metric systems in place at leading firms to measure individual profitability, and nothing says those metrics need to go away. By adding team-based metrics to the equation, firms can get a better picture of both an individual’s accomplishments and their contribution to the overall team. If we can enable experimentation and team-based thinking while keeping the individual accountability our current systems are already good at, could we unlock new, better, and exciting ways of doing business?
The law is populated by strong, smart, passionate people steeped in a tradition of individual brilliance. We’re told stories of great attorneys, great judges, and great professors, but rarely of great teams. The rest of the business world has moved on to a more complicated, productive narrative where group performance outweighs individual heroics.
It’s time we caught up.
James Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore Craig. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He holds his JD from Harvard Law School and dual business management certificates from MIT. He’s currently attending the Cambridge University Judge Business School (U.K.), where he’s working toward a master’s degree in entrepreneurship. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created and run a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.
Staci Zaretsky is a senior editor at Above the Law, where she’s worked since 2011. She’d love to hear from you, so please feel free to email her with any tips, questions, comments, or critiques. You can follow her on Twitter or connect with her on LinkedIn.
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