Hidden problem with attorney compensation models

Your employees are all mercenaries. 

According to Gallup and Steve Rasmussen, former CEO of Nationwide, your employees fall into one of two camps, patriots or mercenaries. Not because they want to be but because they have to be. 

It’s a for or against problem. 

This problem makes it difficult to solve a more urgent problem law firms are struggling with today.  Their compensation model. 

The hidden problem behind compensation models

As Rasmussen saw it, employees were comprised of these two groups. 

“Patriots totally identify with their company, and mercenaries are more likely to focus on personal outcomes.” 

Patriot employees are engaged. They have ownership, they believe in their firm and their firm believes in them. Instead of looking out for themselves, they’re focused on looking out for their firm. 

Why would they do that? 

Because they trust their firm to look out for them, their interests, their families, etc., on the other hand, mercenaries are focused on themselves. They’re job hoppers and social climbers. They’re focused on getting as much value as they can for themselves. 

They’re typically disengaged. 

If the interests of the firm happen to align with their own interests, they’ll do what’s best for the firm. But they’re not really focused on putting their firm ahead of themselves. 

They’re the opposite of patriots. 

Research from Gallup shows employee engagement in the US is at 34 percent, the highest it’s ever been. This data is promising, isn’t it? Yet it’s hiding an unpleasant dark side. 

Sixty-six percent of employees are disengaged 

Of that number, 13 percent are actively disengaged, meaning they’re working to sabotage their company and undermine progress made by their co-workers. 

Why engagement is a compensation problem

Firm leaders are seen as mercenaries. 

This doesn’t mean they are in reality, but for many employees, perception is reality. Here’s why firm leadership is viewed this way. If anything changes, if associates bend over backward to increase their billable time do they see the rewards? 

Maybe, it all depends on the firm. 

For most firms, the answer is No. If timekeepers bend over backward, they don’t see another dime — traditional compensation models pit partners and associates against each other. Teams are told to work together, but they actually end up competing with each other. 

Collaboration, teamwork, those aren’t the things that increase revenue or make firms successful. 

Actually, it is. 

When firms compete, it’s incredibly harmful. 

According to Law.com research, when clients were served by three practice groups, revenues were 5.7 times higher than those served by one. Clients who were served by five practice groups generated fees that were 17.6 times higher than those served by one.

Firms aren’t cooperating though. 

Why? 

I’ve shared the answer before. The hidden problem behind compensation boils down to your law firm’s identity. That identity is built and defined by three areas – culture, personality and values. Today we’re going to look at two. 

1. Culture
2. Personality

1. Culture

Robert E. Quinn and Kim S. Cameron at the University of Michigan at Ann Arbor discovered there are four types of organizational cultures.

1. Adhocracy cultures are temporary and driven by change. They’re often characterized as “tents rather than palaces.” These firms reconfigure themselves rapidly in the face of change. They’re adaptable, flexible and creative in the face of uncertainty, ambiguity and disruption.
2. Clan cultures are family-like. There’s a focus or special emphasis placed on mentoring, nurturing and investing in the growth of those in the clan. It’s all about doing and accomplishing together. Prioritizing employee development is crucial, viewing clients as joint partners essential — an emphasis on engagement, commitment and loyalty non-negotiable.
3. Hierarchy cultures follow a set structure. These firms are focused on perfection, efficiency, stability and doing things the right way. Clear lines of decision-making authority, standardized rules and procedures, control and accountability mechanisms. These are seen as the keys to success.
4. Market cultures are often utilitarian and primarily focused on results. The internal environment in market cultures is competitive, achievement-focused, and driven by outcomes and prestige. “In the words of General Patton, market organizations “are not interested in holding on to [their] positions. Let the [enemy] do that. [They] are advancing all the time, defeating the opposition, marching constantly toward the goal.”

These cultures each have strengths and weaknesses. 

These strengths are unbelievable. 

On the other hand, these weaknesses are unbelievably destructive. They create major problems in law firms, especially when it comes to compensation. 

Why though? 

Because of the next component. 

2. Personality

Like people, your employees have a mix of the big five personality traits. These traits existed at the individual and firm-level. These traits are: 

• Openness: Individuals and firms high in this trait have a higher degree of intelligence and intellectual curiosity. These individuals and firms value knowledge, experience and data more than others. Firms with a large number of people who are high in Openness may prefer any of the four cultures, provided that they meet their goals or objectives. 
• Extraversion: These individuals and firms are skilled connectors. They’re able to build relationships inside and outside their industry. They’re the life of the party. Influential partners can connect with influencers, leaders and essentials who can provide these firms with a significant amount of leverage. Firms with a large number of people who are high in extraversion may prefer clan, market or adhocracy cultures. 
• Agreeableness: These individuals and firms are socially minded. There’s an emphasis on taking care of their own (employees/clients). They’re cooperative, easy to work with, polite and compassionate. Firms with a large number of people who are high in agreeableness may prefer clan cultures. 
• Conscientiousness: These individuals and firms have a high degree of amount of self-discipline. They’re reliable, trustworthy, organized and efficient. These individuals and firms thrive with proper planning. Firms with a large number of people who are high in conscientiousness may prefer hierarchy cultures. 

See why this is a compensation problem? 

No? 

The employees in your firm may not match the culture of your firm. This mismatch creates major problems if the culture and compensation model you’ve selected doesn’t fit with the employees in your firm. 

Michael Anderson, author of Partner Compensation, the vast majority of compensation models fall into seven basic categories.

1. Equal partnership
2. Lockstep
3. Modified Hale and Dorr
4. Simple Unit
5. 50/50 Subjective-Objective
6. Team Building
7. Eat What You Kill

To be successful, these compensation models (as well as it’s variations) are dependent on both your firm’s culture and the collective personality of your team and firm.

What does that mean?

It means that an “Eat what you kill” model, that’s focused on a timekeeper’s individual effort, will create major problems in a clan culture.

Here’s where it gets worse.

Partners who are at a sufficient level in the firm may refuse to work with the culture or personality of the firm. This means a partner in a clan culture may decide to behave like a mercenary, every partner for him or herself. 

The hidden problem with compensation models is people

Your employees fall into one of two camps, patriots or mercenaries. Not because they want to be but because they have to be. Your firm’s culture, personality and values determine whether your firm is filled with patriots or mercenaries. 

As I said, it’s a for or against problem. 

In my next posts, we’ll unpack the problem further and provide solutions you can use. 

Hate tracking time? 

It’s completely understandable. Attorneys have much better things to do with their time, like defending and protecting their clients. Here’s the problem. 

Tracking time is a necessary evil. 

It’s how attorneys, law firms and support teams get paid. The surprising part about all of this, if you hate time tracking, your managing partner may hate time tracking even more than you do. 

Law firms with poor time tracking habits bleed money

This sounds like an inflammatory thing to say. Is it true though? Here’s how Benjamin Lieber, Managing Partner at the Potomac Law Firm, described accepting attorney timesheets.

 “Lawyers would send me their time every month by email and would come in all different formats and all different conventions and levels of granularity. And even the units would vary somewhat. Some would use a tenth of an hour or some would use quarter hours, some would use a third of an hour, it was a mess…”  

Next, he explains what he did with the data, once he received it. 

“I would take all that, put it into spreadsheets and then put it into invoices. That worked okay for the first 10 or 12 clients…” 

The amount of busywork Lieber had to deal with was excruciating; it was an absolute nightmare. All of this, just to get invoices to clients on time.  

Looking at Lieber’s feedback, we know: 

1. His attorneys sent their time entries in at the end of the month
2. All of his attorneys were reconstructing their time entries
3. These attorneys used a variety of unhelpful formats and billing conventions
4. Lieber had to sort through these headaches at the end of each month
5. This kind of billing at up a significant amount of his attorney’s billable time, as well as his

No wonder attorneys hate timekeeping! Lieber’s situation is a recurring problem across the industry. Here’s where this gets worse. 

Poor time tracking habits decrease revenue

The longer timekeepers take to complete their timesheets, the more billable leakage their firm experiences.

Ann Guinn, on her ABA blog, compiled the research. 

• You lose 10 percent of your revenue (billable time) if you record time entries the day of, once a day.
• You lose 25 percent if you wait 24 hours to record your time.
• You lose 50 to 70 percent if you wait just one week.

The attorneys in our particular case study were waiting till the end of the month! If we’re projecting this out, this means firms could be losing 200 to 280 percent of the revenue they should have. Revenue that’s rightfully theirs simply because they didn’t track their time properly. 

Does the data back this up? 

Absolutely. 

Research from Adam Smith, Esq., shows billable leakage is a serious concern for firms that are reliant on reconstructive billing. According to Adam Smith Esq., timekeepers using reconstructive billing (at the end of the month) are failing to report all of their billable time. 

This leakage ranges from $20,000 to $40,000 per timekeeper, per year.

That’s unfortunate, but it’s certainly not enough to fix it. 

It gets worse. 

This survey also found attorneys spend an average of 3.1 hours filling out timesheets each month. The survey used an average rate of $438 per hour which means firms lose an additional $16,294 per person, per year. So a firm with 100 attorneys loses an additional $1,629,400 per year. 

The loss for our 100 person firm is now $3,629,400 to $5,629,400 per year. 

The bad news? 

This estimate is actually quite conservative. In a previous post, I showed how law firms lose an estimated $86,294 to $106,294 per person, per year. This figure doesn’t even include the financial fallout from leakage/overbilling.

What happens if we plug in the numbers for our 100 person law firm? 

The losses climb.

The financial loss balloons to $8,629,400 – $10,692,400 per year. 

How to boost law firm revenues by 70% or more

Work to eliminate the causes that produce these financial headaches. This solution is simple on its own, but that doesn’t mean it’s easy to accomplish. 

There’s a catch. 

Your partners. An Altman Weil survey found law firm partners were the number one impediment to change in the vast majority of law firms. 

“In 69 percent of firms, partners’ resistance to change is an embedded drag on progress, and recent economic successes may obscure any clouds on the horizon – at least for the short-sighted.”

Law firm leadership is most likely unwilling to change. If you’d like their cooperation, there needs to be a sufficient amount of pain involved. 

• 69 percent of law firm partners resisted most change efforts (up from 44 percent in 2015)
• 66 percent of law firms experienced insufficient economic pain to motivate change
• 60 percent of partners were unaware of what they might do differently 

You’re going to need to win buy-in from the partners, stakeholders, and decision-makers in your firm before you attempt to make sweeping changes. How do you go about doing that? Patrick Lencioni, legendary business management consultant explains. 

The long and short of it? 

You have to mine for conflict. That’s right, you’ve got to flush out the disagreements, objections, concerns, risks, thoughts and feelings from key stakeholders in your firm. Notice what he says here. Achieving buy-in: 

• Doesn’t mean there’s consensus or agreement
• Does not mean everyone in the firm is happy with the decisions made or the outcome(s) presented
• Fosters disagreements and heated discussions, the very things needed to earn buy-in 

Earn buy-in, and your firm will work to eliminate these causes. Ignore buy-in, and they may fight you or sabotage your efforts. Okay, imagine that you’ve done it. You’ve earned the required buy-in at your firm. What’s the next step you should take?

Fix the causes. 

Here are some time tracking issues that decrease law firm revenue and the fixes you can use to eliminate the problem. 

Revenue leak #1: Time tracking via spreadsheets

We discussed this above and in a previous post. Time tracking via spreadsheets is a problem for a variety of reasons. 

Spreadsheets introduce a significant amount of unnecessary non-billable time into an attorney’s workday. It’s unpleasant so most attorneys avoid filling out their timesheets for as long as they can. As a result, the accuracy of their time entries decreases day by day. 

Then there’s formatting. 

Remember how I mentioned attorneys spend an average of 3.1 hours filling out timesheets each month? In reality, that number is much higher. Here’s a common example that demonstrates my point about spreadsheets. 

• Your firm has multiple clients 
• Each client has their own spreadsheet
• Each associate in your firm has their own copy of the time tracking spreadsheet 

Here’s where the problems begin. 

Don’t worry, the problems will jump out at you as soon as we begin asking questions. 

1. Which timekeeper (e.g., associate, paralegal, partner, etc.) has the most up-to-date timesheet? 
2. You’ve just added a time entry, did the other associates download the most recent spreadsheet? 
3. Did any of the other timekeepers on your client’s matter overwrite your time entries? 
4. Is double-billing an issue with any of the clients due to two associates working on the same, exact task? 

It’s an easy way to lose thousands or millions in revenue that’s rightfully yours. A partner added their time to an old spreadsheet overwriting your most recent work. It’s gone. The 15 hours of work you spent on your client’s matter has vanished.

But you don’t know that it’s gone. 

It also means you’re below your firm’s quota in terms of billable hours. Thanks to an inefficient time tracking system (spreadsheets) you’re working hard, yet you’re falling behind. You could have sworn you had more hours than this, but you’re too exhausted to audit the timesheets yourself.

You simply add to your existing workload.

Plug the leak: Eliminate timesheets

There are a few simple ways to fix this problem. 

1. Switch to contemporaneous (as-it-happens) time tracking: Choose a tool that provides automatic time tracking. This encourages good habits and consistent behavior from your timekeepers. The easier it is for timekeepers in your firm to track their time, the more likely they are to do it. Make sure timekeepers know how to use the tool and verify that it’s used throughout the day. 
2. Designate a minder to audit timekeeping daily: If you’re like most firms, you already have a minder, a managing partner, director or executive that’s responsible for managing the firm. The person responsible for these audits should have adequate power and authority to deal with non-compliance. 
3. Create an incentive system: This system should have two components: the carrot and the stick. Your timesheets are inventory; it’s important that your auditor or manager treats them that way. This mindset should be driven from the top down. It’s incredibly important, even if you rely on alternative fee arrangements. 
4. Follow your incentive system explicitly: Resistance should be expected. You should expect resistance from both the top and bottom. You may not be well-liked in your firm at first. Stay the course. Remove chronic non-performers, reward top performers. Show everyone in your firm that you’re consistent and true to your word. 

You’ll want to lay out a system of responses for compliant and non-compliant timekeepers in your firm. How will you handle non-compliance on the first, second or third offense? How will you reward consistent top performers? Are there any other requirements tied to your incentive system (e.g., non-compliant don’t receive bonuses, aren’t considered for key projects, promotions or partnership?)?

Revenue leak #2: Reconstructive billing 

What’s the easiest way to eliminate reconstructive billing? 

Change your team’s behavior. 

It sounds simple but it’s definitely not easy. Your associates may resist. Your partners will probably resist your change efforts. How do you get your team to voluntarily eliminate reconstructive billing? 

With a behavior model. 

BJ Fogg, a researcher at the Stanford Persuasive Technology Lab, created the Fogg Behavioral Model (FBM).  The FBM answers a simple question.

“What causes behavior change?”

The FBM shows there are three elements to behavior change.

1. Motivation. A compelling reason for people to change their behavior. This includes pain (getting fired) and pleasure (a large quarterly bonus). They can be subjective, objective or both. 
2. Ability. The capability to change behavior in the desired fashion. This encompasses two subcategories, the ability and willingness to change. The easier it is to do, the more likely your timekeepers will do it. The harder it is, the less likely they are to do what you ask. 
3. Triggers. A prompt or call-to-action that tells people to “do it now!” Triggers come in three flavors: 
   1. Spark – a trigger + motivator (i.e., pain or pleasure + deadlines) that’s perfect for those with low motivation, high ability. 
   2. Facilitator – a trigger designed for those with high motivation but low ability. A good example of a facilitator is training that improves team ability. 
   3. Signals – these are simply reminders. They’re perfect for those with both high motivation and high ability. These signals are simple, concise and clear. 

These are the elements that work whether we want them to or not. This is how you change behavior and results in the long term. Here’s a detailed breakdown of the FBM. 

This is how you eliminate reconstructive time tracking. 

Why bother though? 

It’s worth the effort to deal with reconstructive billing because it erodes client trust significantly. It creates an environment that encourages underbilling or overbilling.

Remember, a 24 delay in recording time = a 25 percent loss in revenue. 

This may not seem like a big deal to timekeepers in your firm. It most definitely is. It’s the auditor’s job to give this issue the attention it deserves. But that all depends on the system you use. 

The right system increases revenue. 

A good time tracking system…

• Automatically records time as-it-happens, increasing revenue by 50 to 70 percent.
• Automatically convert appointments into time entries.
• Automatically records billable and non-billable time, identifying profitable/unprofitable practice areas. 
• Tracks time automatically, independent of location via desktop, laptop and mobile devices.
• Provides daily, weekly and monthly time summaries to monitor and analyze timekeeper performance.

What does this mean? 

The timekeepers in your firm are less likely to forget about their time entries. They’re motivated, incentivized and reminded consistently. 

It’s everything they need. 

Law firms with good time tracking habits make 70% more

Many attorneys see time tracking as a necessary evil. 

These attorneys don’t see their timesheets for what they are, inventory. Your timesheets are the lifeblood of your firm, even if you rely on alternative fee arrangements. They give you the precious intel you need to improve the financial performance of your firm. 

But it all depends on your tools. 

The best legal time tracking tools make recording time automatic, enabling timekeepers to record their time as-it-happens. The right tool works with your incentive system, motivating your team to go above and beyond. It provides managers and partners with the data they need to optimize firm performance over time.

It’s one of the best things attorneys can do with their time. With the right tools, systems and approach you’ll find time tracking is an indispensable benefit to your firm.