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RECENT ARTICLES & PUBLICATIONSWhy are we here? Most of us have financial management responsibility for our law firms and our conference organizer, Ark Group, has enticed us with the promise of exposure to “best practices and financial management trends from today’s top law firms”. Well, by the most common metrics anyway, little Summit Law Group may be far, far off the AmLaw 100 chart, but I’m here to share with you some innovative and unusual practices and techniques that our ten year old firm has implemented to great financial success. My goal is to challenge your traditional thinking and have you take away some new ideas for implementation (or at least serious consideration) at your own firm.
Summit Law Group has been called both innovative and non-traditional. Founded almost ten years ago by a group of large-firm attorneys seeking to practice law “in a different way”, we’ve successfully flattened the organization (we have only partners/no associates, we have no corner offices/every attorney and employee works in identical office with built-in furniture, and the firm’s financial results are shared by all – lawyers and employees - simultaneously), we moved out of the central business district into minimalist space, and we established some unique billing concepts such as a “Value Adjustment Line”, on each and every invoice, so that our “customers” (rather than “clients”) may adjust a bill to what they feel is commensurate with the level of service that we have provided. I want to share with you some of what has worked, what hasn’t, and what lies ahead.
Let’s flash back to about 11 years ago. One of our founding attorneys, Ralph Palumbo, was intrigued by the thoughts and ideas of business management guru Tom Peters (remember In Search of Excellence?) and proposed that his then large firm, San Francisco’s Heller Ehrman White & McAuliffe, make some pretty significant changes in the way that they practiced law. Well, those radical ideas must not have gone over too well, because within about a year, a group of attorneys from the Seattle offices of both Heller Ehrman and also large Davis Wright Tremaine decided to strike out on their own and establish a “21st Century” law firm. The name they chose was Summit Law Group.
What was so very radical? Let’s start with the name; the Washington State Bar Association threatened sanctions because the firm name didn’t include individual identities. How about the idea of abandoning the most expensive real estate in the heart of the central business district for the city fringe? How about building small efficient client service teams – and then sharing the financial results with each participant? How about getting away from the traditional leveraged hourly billing model and instead providing the highest quality legal product; a) without associates, b) on a fixed or incentive fee arrangement, and c) with the value of that work product guaranteed? How about physically flattening the organization still further by eliminating hierarchical office space and then housing attorneys and staff in identical offices? These were radical ideas 10 years ago and, judging by the reactions of some of you, they are almost all just as radical today.
But we’ve survived. Not only survived, but we’ve thrived! And I’m here to tell you that much of what was dreamt and imagined 10 years ago really can and does work.
Has it all worked? No. Like many innovations, some aspects of the plan were successful and some were not. But the essence, the core, has no doubt exceeded even the founders’ expectations.
They didn’t think that much needed to be centralized, and the initial plan had each of the small legal teams doing their own hiring, firing, billing, purchasing, etc. That didn’t work out – although performance reviews are indeed handled within the team. The billing and other accounting functions are in fact centralized.
An Advisory Committee, much like an Outside Board of Directors was planned, theoretically comprised of both clients and local business people, but the logistics of getting such a group together proved to be an insurmountable burden.
The administrative team was expected to be very small, something in the neighborhood of only 5%, but even though we keep it slim, have no general services staff, library staff, etc., and have an overall ratio of less than one employee per attorney, I’m afraid that those not directly involved in providing legal services to customers (including me, of course) total something more like 25% of our employees and 11% of our entire organization.
And then there’s me. It was 18 months or so before they decided to hire a professional business manager with, like you, a finance background.
So let’s talk about a few of our innovative financial practices. First and foremost (and probably the most controversial) is our “Value Adjustment Line”, another is non-hourly or “Flexible Billing” fee arrangements, and a third could be labeled “Incentive Compensation” - with a key transparency component.
Value Adjustment Line Let’s face it, many of us talk and read about getting away from the hourly billing model, a fairly recent (less than 50 year old) practice and perennial scourge in some quarters, but we all have clients who actually prefer it that way. Unfortunately, these are also the customers most likely to be, shall we say, “surprised” by the size of their legal bill and thus the classic candidates for a potential client relationship problem. No one likes surprises, especially of the financial sort, and my years of experience in professional services have taught me that the exorbitant price of a widget or bling will usually be grudgingly paid, while the higher than expected bill from their attorney, accountant, or consultant may disappear on the client’s desk for weeks or more while they wrestle with attempts to reconcile, much less explain to a superior, the difference between their expectation and the actual amount billed.
The Summit value-based pricing system is designed to match our customer’s perception of value to the amount paid. Our bills probably look much like yours (although, unlike you, we have far fewer expenses because we do not charge for copies, faxes, and phone calls), but after we get to that “Total Amount Due” line, we have another line beneath it that is labeled “Value Adjustment”, followed by a third line that says “Amount Paid”. Our customers are, for the most part, sophisticated purchasers of legal services. They are thus good judges of the value of a legal product. So we encourage them to adjust our fee – up or down – to match the value that they have received. Whatever amount our customer puts on the “Amount Paid” line is the amount that they owe. No questions asked. Really!
Our ten years of experience with value-adjusted fees has been terrific. In fact, our customers have voluntarily paid us tens and even hundreds of thousands of dollars more than our bill in matters where the value to them of our work product has substantially exceeded the face amount of the bill. Sure there have been some reductions, but those have been minor and, I suspect, motivated more by a rare disagreement or disappointment over the result of our legal work than the effort that was put into it. In fact, in my eight plus years with Summit, the net annual result, of our Value Adjustment line, has been a write up, rather than a write down.
Flexible Billing Of course no legal bill should ever be a surprise. I’m told that, until about 50 years ago, lawyers billed on a more or less flat fee basis, much like many wills and trusts are done today and just like the percentage-based legal fees that I paid when I bought and sold my first house in Connecticut.
Today, most lawyers are more or less paid as if they were hourly laborers. The hourly billing system does not reward efficient legal service. In fact, plodding, pedantic legal service is rewarded. It may sound shocking, but when lawyers are paid by the number of hours worked, conscious or unconscious self-interest can and does affect a lawyer’s judgment as to what legal services are required.
For example, an experienced lawyer may often be able to give an answer that has, say, a 90% probability of being correct. If the lawyer spent only a few minutes giving the answer, he would be paid little for his answer – despite the fact that years of experience and a high level of expertise and judgment were required to give that good answer. Paid by the hour, therefore, the lawyer would be under-compensated for the service that had been provided. If that same lawyer assigned two associates to research the problem and write memoranda on the issues, the probability that the client would get the right answer may have increased from 90% to 95%. The lawyer would then make much more money and, in a few cases, the improved probability may well have been worth the extra fees charged. But, in most cases, the customer would have been better off to accept the 90% answer and pay less for the advice.
We feel that a billing system in which the incentives for the lawyer are contrary to the interests of the customer is inherently flawed. Summit has been trying to fundamentally change the pricing of our legal product. We work closely with our customers to define the work product that is appropriate to our customer’s need and we always try to come up with a pricing arrangement that provides incentives to us if we can find a fast, innovative, and lower cost means to achieve the desired result.
Let me give you some examples. In our complex civil litigation practice we have developed an effective estimating tool, which we gladly share with our customers, that enables us to essentially price a case as a fixed fee. Occasional adjustments must be made, of course, as the case moves toward trial, depending on motions, etc., but our largely corporate general counsel customers are fully informed and participate along the way.
Another trend that I’m seeing is the litigation case where our fees are discounted slightly (and even a monthly cap may be established) with full payment of any deferred amounts and then a bonus on top being paid to us when the matter resolves successfully (via settlement or trial). In other words, we have “skin in the game” by sharing risk with our customer. You can see how that, along with our Value Adjustment line, instills confidence in the choice of legal services provider.
In addition to our largely corporate customers, the Summit Labor & Employment defense practice counsels many northwest municipal agencies. Another great example of flexible pricing is the monthly flat-fee that some of those customers gladly pay us for access to timely employment law advice, without the budget-busting and unpredictable peaks and valleys that would occur if we only billed when the need arose. Again, we share the risk with the customer, having to establish, in advance, what the anticipated annual volume of legal services might be.
A final example of flexible billing is probably the most common and familiar to you, and that would involve a set or flat fee for legal services rendered by our Corporate Securities & Tax practice group. With the hot bed of innovative start-ups in the Seattle area, not unlike Silicon Valley, Route 128 in Boston, the Austin area, etc., the ability to quote a somewhat “standard” fee for early stage financing, equity placements, etc. draws on our depth of experience with these services in a way that gives our customers both confidence in us and predictable costs.
Flexible billing, not always tied to the clock, is a trend that we both embrace and promote.
Incentive Compensation The third area of Summit Law Group innovation that I want to talk about today is incentive compensation with a side order of transparent or open book financials.
The most common example of incentive compensation in legal services is, of course, the contingent fee. Essentially pay for performance, these are the windfalls that grab all the headlines, whether the subject is tobacco, asbestos, tire failure, or stock option back-dating. I don’t have to tell this audience that the risk can be great, in these cases, but the reward for success many times greater. Many of our firms participate, to varying degrees, in this standard form of incentive compensation.
But let’s consider some other, more unusual examples. I spoke earlier about sharing risk with clients, of having “skin in the game”, and one of Summit’s earliest goals was to also build net worth by actually investing in clients – not just by taking stock in lieu of fees, but by outright stock purchases. We formed an investment company to, along with some of our members who were also “qualified investors”, purchase a stake in some of our customers. The goal was simple; to show our customer just how much faith we had in them and, if all went well, to get a little richer in the process. We’re not unique, in this regard, as other law firms (especially in the high tech arena) have done this as well.
So let’s get down to a more personal level – much more personal (or perhaps I should say “personnel” level). Summit people share, across the board in a very tangible way, in the success of the firm. Not just at the end of the year, but far more frequently.
I’ve already told you that we have no Associates, but we also have none of this other class of attorneys that many of you have; non-equity partners. Talk about having “skin in the game”! A 3rd or 4th year Associate that joins Summit (effectively our minimum entry level) gives up one of those hyper inflated salaries that you pay them to join us and then, theoretically, risk it all. They trade the comfort/security of reliable pay checks and taxes withheld for a draw against projected firm profits, those nasty estimated income tax payments, and a future K-1. This can be unsettling for many a new member!
But, so far anyway, the risk has paid off. New members and old have earned more each year than they expected (at least while I’ve been at Summit) – and I intend to do everything that I can to keep it that way! In fact, there have been years when some of our youngest lawyers have received a bonus distribution that was greater than their annual projected compensation.
You see, the Summit compensation system creates the right incentives. Unlike your new Associates, for example, our lawyers are compensated, not by years of service, but by their contribution to generating revenue. To ensure that compensation is closely tied to contribution, each lawyer at Summit receives financial information on their own and every other lawyer’s performance. Each lawyer is asked to submit proposed compensation for all lawyers in the firm. No one pleads their individual case to a compensation committee, and thus the potentially mysterious decision making is far more transparent.
Speaking of transparency, Summit financial performance information is shared with virtually everyone in the organization; doc clerk to lawyer! We believe that our management staff and legal professionals add more value because they have the same stake in Summit as do our lawyers. All lawyers and staff receive daily, as well as monthly, financial information. All lawyers and staff participate in firm meetings, including annual events such as the firm retreat (all staff and their partners are invited every year, with children also invited every other year) and periodic strategy meetings.
We prove that we are serious about our staff’s contribution by our compensation system. All staff participate in Summit’s financial success. We pay very competitive base salaries and have a best-in-market benefit package, but we also pay quarterly bonuses based on the firm’s financial success. If we achieve or exceed budget, all staff receive a bonus for that quarter. And staff bonuses aren’t exactly token. In a highly successful year, bonuses for some of our staff measure in the tens of thousands of dollars.
And remember what I said about sharing firm financial performance information? Staff and attorneys receive a financial report package (balance sheet, monthly and year-to-date income statements – down to net operating income – and a summary sheet covering hours production, billings, and an aging of accounts receivable) simultaneously! So a good quarter is never a secret. Just as the employees of public corporations can access quarterly financial performance metrics in various newspapers and sites on-line, Summit staff gets the latest numbers data as soon as possible after we close each month.
The result is world-class staff performance. Our employees have as much stake in achieving our customer’s objectives as do our lawyers. I know that every law firm has a few exceptional employees. At Summit, however, extraordinary performance by our legal and administrative professionals is the norm.
The critical thing to understand is that we don’t have complicated sets of policies or procedures to instruct staff on their responsibilities. Instead, we have an organizational structure, management, and compensation system that incents the highest level of staff performance. Our employees perform because they know that they are important, respected members of the Summit team and because they are financially rewarded – especially when the firm does well.
What Lies Ahead So, where do we go from here? We’ve obviously proven that the dream, the model, of the innovative, non-traditional, 21st century, modern law firm is achievable and sustainable. But, in this age of mergers, acquisitions, lack of lawyer loyalty a/k/a firm-hoping/practice shopping, is there still room for a firm like ours?
My optimistic answer is “yes”, but I’ll be candid – this model doesn’t work for everyone. Key to our success is what I’ll call an entrepreneurial bent or desire on the part of every attorney in the organization. We’re more than happy to take your 3rd year Associates, on whom you’ve no doubt lavished (or I suppose that you’d rather say invested) something in the neighborhood of 300-500,000 dollars or more in salaries, training, and benefits (not to mention recruiting costs and those fabulous 2L summer internships) when they want to actually work directly with clients and start building their own practice, but many are apparently satisfied to grind away for others and day-dream about the glory of mega-firm equity partnership. So we have the general question of supply.
We’ve also discovered that the large firm to small firm transition can, at times, be insurmountable. Yes, we (almost) all come from a large firm background. And yes, most all of us thrive in the more intimate, cost effective, smaller firm environment. But we’ve also discovered that you can take the attorney or employee out of the large firm, but you can’t always take the large firm out of the attorney or employee. Whether it’s the search for all-night word processing, the expectation that someone else should send that fax or empty the dishwasher, etc., we constantly have to remind ourselves that we are what we are by intention and design. You see, we have a set of core values or founding principles and they bear repeating, from time to time, so that we don’t lose sight of our fundamental goals and objectives.
Avant-garde we may still be, but we’d love to see more of the legal profession adopt our customer-centric and highly successful approach to the practice of law.
So, tell me. Have I given you some things to chew on? Which of these ideas do you think might work for your firm? Does the Value Adjustment Line scare you off? Do you think that it is too soon to abandon “ye olde” hourly billing model? What about incentive compensation, financial rewards for everyone? Aside from the obvious personal appeal, is it a concept that you can sell to your firm leadership when you get back from this seminar?
Please attend the session this afternoon on “Treating Your Law Firm Like a Business” and, with whatever time we have remaining, let me answer some of your questions.
Thanks! |