Crunching the numbers: Associate profitability

Crunching the numbers: Associate profitability
Norm Letalik remembers the reaction he got the day in 2002 when he told a room of fellow lawyers and management experts at a monthly professional development meeting that he was helping his newly merged firm put the final touches on what soon became what he believes was the first national training program for associates in Canada. “There was a lot of chuckling,” recalls Letalik, a partner in the Toronto office of Borden Ladner Gervais LLP. “People basically said, ‘Good luck with that.’”
Who’s laughing now? A decade after BLG was created through a fusion of five independent law firms across Canada, today it ranks as Canada’s largest full-service firm and the only one, believes Letalik, that has registered increased annual revenues every year since 2000. “It’s hard to gauge our development program’s contribution to that success in terms of increased revenues or even retention rates of young lawyers who can leave a firm for 1,001 different reasons,” he says. “But what I can say with absolute certainty is that the program is one of the elements in the mix that is helping us.”

BLG isn’t alone in its efforts to maximize the revenue earning potential of associates — not by a long shot. As the legal profession continues to deal with fundamental changes in the way it serves an increasingly wary and demanding clientele, large law firms across Canada, and in the United States and Britain, are taking long looks at different methods of improving the professional competencies and productivity of their wage earners in an effort to boost both firm revenues and partner profits. “Associate profitability could be the most important management issue for many, if not most, law firms over the next three to five years,” says Norm Clark, an American lawyer and a founder of Walker Clark LLC, a Florida-based consulting practice that specializes in legal practice strategy and lawyer performance and profitability.

A former trial lawyer, trial judge, and law professor who has managed legal services on a global scale — notably as a U.S. Navy lawyer managing 800 lawyers in 50 locations on three continents — Clark is both a pioneer and a leader in applying manufacturing and business-based management concepts and methods to the practice of law. It was a once-obscure field that has become mainstream since 2008 when the recession forced fee-challenged firms to cut costs, lay off associates, and rethink and redesign their ways of doing business. According to Clark, upgrading the skill sets of young lawyers is the best return on investment, but also the most overlooked, that a law firm can make. “One of the central features of law firms that have managed to increase profits against declining fee revenues has been a serious inquiry into the profitability of the ways in which associates prepare and deliver legal work for clients,” he wrote in a recent blog post on martindale.com. “These firms understand that the better response to hard times is usually to improve the productivity of fee earners, rather than to get short-term savings by slashing payroll.”

“More skill and more productivity is the goal for associates,” says Robert Gilfoyle, a Vancouver leadership consultant who works with law firms here and abroad. “The responsibility is on the partners to provide them with the teaching and tools they need to reach that goal. Partners should make it their mission to do that. In addition to being generous to associates with their time, they need to work on learning or honing the skills that will make them better leaders.”

It is already happening at some Canadian firms. Susan Clarke, a partner in Gowling Lafleur Henderson LLP’s Toronto office and the firm’s director of professional development, says there has been both a growing awareness and a push over the past decade, from associates and partners alike, for more legal and knowledge learning opportunities. “We’re now at the point where we’re putting emphasis on mentoring and teaching of substantive legal topics and skills,” says Clarke, a one-time Supreme Court of Canada clerk and former full-time lecturer in legal research and writing at Osgoode Hall Law School. This year, for example, she says Gowlings has instituted a new program that features a mix of one-on-one learning initiatives. “Some are small things, like giving coffee cards to partners as an incentive to spend time with the associates they are mentoring [and] help them learn things about the firm’s governance structure or how to handle clients,” says Clarke, who relies on her own experience and the ideas she picks up from fellow lawyers — such as BLG’s Letalik — at monthly meetings of the Toronto chapter of the Professional Development Consortium. “But there are bigger things like the six hours of training in group settings with senior associates [and three hours of online training] to teach business development skills and then giving them opportunities to practise those skills in the field. Often associates work in teams and they don’t get a chance to work with clients. Client service is the bottom line and improving their abilities to provide that helps to raise revenues.”

Consultant Clark says principals in every firm should be asking themselves three key questions: How productive are our associates? How do we judge productivity? Do we have an effective quality assurance in place? “Productivity involves more than just working hard. It also involves producing quality legal work that produces a fee. One of the biggest risks in alternative fee agreements, for example, is that associate productivity will not support the lower fee that the firm had to accept in order to get the work.”

In terms of quality assurance, he believes a huge amount of the work being done by associates — particularly younger ones who are still learning on the job — can’t be billed to clients because of inefficiency and errors. “Firms waste hundreds of hours of associate and partner time fixing mistakes that could have been avoided,” he says. “Doing rework and catching mistakes after they are made can account for anywhere from 40 to 60 per cent of the lost profit potential in associate work. That is especially true in cases where the client is a sophisticated user of legal services. They are simply not willing to pay for errors.”

The solution, says Clark, is for partners to shift away from spellchecking and reworking and focus on helping associates avoid making errors. They should also look beyond associate inexperience and consider other facets of the firm that may be the root cause of errors — notably poor performance knowledge management and other inadequate or slipshod practice habits that are ingrained and systemic in many law firms. “Many firms are handicapped by an inability to communicate [or] to share and retrieve useful information. They are condemned to constantly reinventing the wheel,” says Clark. “I know of an associate in a mid-sized firm of 150 to 200 lawyers who was asked to put together the papers for a commercial acquisition in another country. He was given a very detailed parcel by a partner and worked on it for two days. When he was done, he found out that the guy in the next office had done almost the exact same deal a week earlier. Had he known the templates and everything were all there, the job would have only taken him a half day.”

Such situations, he adds, often occur as a result of the ad hoc and informal approach that many law firms take in regards to apprenticeship training. Without structure, Clark says many well-meaning but busy partners are reluctant to devote time to training and/or don’t know how, when, and where to properly brief and explain to associates about the work that needs to be done, the resources that are available to them, the people they need to talk to, and the places they can go to get the information they need to complete their task. “Many partners assume that associates can and will figure things out on their own, but that old sink-or-swim attitude is both old-fashioned and wrong-headed,” says Clark. “Or maybe they figure they are so busy they simply can’t afford to devote the necessary time to associate training. But the reality couldn’t be further from the truth.”

According to Clark, partners who take the time to properly train and mentor their associates are rewarded with an increase in both the quantity and the quality of the work that is being done. In addition to raising associate productivity and profitability — changes that can be both measured and monitored through billable hours — the partner can confidently increase associate workload, making time in his or her own busy schedule to pursue other potentially profitable activities such as meeting potential clients, attending industry or public events, or getting value-added learning of their own about the latest developments in a client’s industry or business. “Law firms are not the best business structures because of the multiple roles partners have to play — representing the brand, supervising, working, and bringing in fees, etc. — and these competing commitments can make things challenging,” says Clark. “But if a partner can delegate 10 per cent of his or her time to an associate, the return on investment can be enormous: something like 8:1.”

He says by failing to properly train associates, firms miss out on an opportunity to maximize profits from money they’ve already earned. “It’s not a matter of leaving cash on the table — it’s more like leaving it out on the street,” says Clark. A good example is the huge jump in profits that a mid-size British law firm enjoyed after he helped it standardize both the generation and processing of collections documents that made up the bulk of its work. “We were there only four weeks,” recalls Clark. “Without adding a single machine or employee, the firm was able to increase the number of documents and cases it moved by 29 per cent [and] raise fees about 23 per cent. That’s pure profit.” The bottom line is that the level of associate profitability in a firm depends mostly on the time and effort partners put into training and proper management. “Blaming and admonishing associates does not solve the problem. It’s up to law firm partners to lead associates to being more productive, more efficient, and more profitable in their work.”

Fred Esposito agrees. Director of administration with the Long Island, N.Y., firm Meyer Suozzi English & Klein PC and a law management consultant, Esposito says the recession forever changed the way American law firms do business. “There is a new paradigm, a new normal,” he tells Canadian Lawyer. “Many law firms, especially ones that dealt heavily in commercial real estate, suffered near-death experiences. There was a mad dash to stop the bleeding, including massive layoffs. But firms have cut as much as they can. Now their focus is on revenues and profit maximizing.”

Despite the seemingly cold and inhumane nature of it that makes it a divisive topic in some circles — even within some firms — Esposito says the notion of associate profitability is crucial for firms. “Associates ideally are profit centres. If they’re not, you have a serious problem.” One reason for that, he says, is the ongoing crackdown on legal fees that has created what he calls “a whole new arena” of alternative fee arrangements, bonuses, premiums, and flat fees. “Corporate clients now have perceived values of billing rates with services rendered [and] some institutions are hiring third parties to analyze their legal fees. The problem for many law firms is that they don’t have a handle on what their production costs are so they have no idea how much it costs them to produce that billable hour. Some firms are getting murdered.”

In addition to using time codes and other widely available, modern managerial and planning tools, Esposito says partners need to be more imaginative and open-minded in their approach to both their files and their work with associates. “They need to be more like project managers,” he says. “There is so much more accountability and scrutiny now over billing that firms need to work more economically and show time for the work they are doing.” In such a context, he adds, the efforts of well-trained and well-directed associates can be a game changer. “Partners need to educate associates to the point where, if you tell them what you want done and how to manage their time, they will be able to deliver — and they will. There is much more tension now on the business side of the practice of law. Understanding hours and communicating effectively with associates are now crucial elements of profitability.”

In Canada, which largely escaped the ravages of the recession, the need to understand and embrace the concept and workings of associate profitability has been less rushed. That doesn’t mean firms aren’t interested in — and can’t profit from — learning and adopting new practices and approaches to help them improve the quality of the services they offer and shore up and/or increase revenues and profits. “Things haven’t changed that radically here among law firms in regards to increasing profitability — at least nowhere near like what’s been happening in the U.S. or the U.K.,” says Gilfoyle. “Maybe there’s been less motivation here because the recession didn’t bite as hard.”

However, big changes are afoot at many Canadian law firms, including one national firm that is currently experimenting with the Six Sigma business management strategy. Developed by Motorola USA in 1986 — and now used widely by businesses and industries — the system aims to improve the quality of finished work by both streamlining operations and identifying and removing errors that affect quality from those operations. “In the current economic context, people are no longer willing to pay for something they don’t need, so the challenge for lawyers is to create value for clients and to convince them they are getting the same or even better value and service for the same or less amount of money,” says Gilfoyle. “The problem in regards to associates is that they can’t work many more hours because they are already hyper busy. So partners must look at charging them out at a higher rate — and the only way for partners to do that is to spend the time and energy required to make their associates more productive with the time that is available to them.”

One caveat to efforts by law firms to transform their associates into highly productive and profitable business units: young lawyers can become disenchanted with their lot in life and start looking for the exits. “The retention of associate talent can become a problem, especially among women lawyers,” says Gilfoyle. The focus on production in the practice of law can also create other challenges for associates — and can lead to problems for partners who lack the management and leadership skills needed to both detect and deal with them. “Many lawyers are perfectionists early in their careers,” says Allison Wolf, a certified business coach in Vancouver who works with lawyers and firms to improve their performances. “That success strategy becomes a hurdle when they are spending five times the amount of time they should to do a certain job. That puts negative stress on everyone in the office [and] that can be brutal.”

She says being a practitioner in such a high-reasoning and fast-paced profession as law already provides a tremendous amount of stress without concerns over productivity. “The deadlines, the long hours, the constant need for accuracy, the need to be at your best every day — all these things make the legal profession a demanding business to be in,” says Wolf. The key to dealing with those pressures is training and mentoring and supporting young lawyers to provide them with the professional skill sets and client-handling personal abilities that will both inspire and enable them to continue learning and to take on increasingly challenging cases — work that can be ultimately billed out at a higher rate.
The director of student and associate programs at Norton Rose OR LLP’s Toronto and Ottawa offices agrees. “We consider our associates to be our most important investment — but we don’t see them as profit pools,” says Michelle Gage. She says the firm has instituted several programs and initiatives devoted to legal and professional skills training in recent years — a timely move considering its now part of the global Norton Rose Group. “We’ve already learned a lot from them,” says Gage. “They are way ahead in terms of professional development.”

For his part, Letalik says he learned the importance of training — and witnessed firsthand the skills that global firms need and instil in associates to help manage their operations sharply — in the late 1980s when he ran the BLG office in London, England. “The Brits had maxed out their markets — much like the Quebec law firms did here in the 1990s — and they had the skill sets and the experience with privatization under Margaret Thatcher to successfully expand into Eastern Europe and China when those markets opened up,” says Letalik. In addition to being the first to practise globally, Letalik notes that British lawyers were also the first to segment offers to clients and create geographic spread. “I was completely blown away by how they ran things and their long-term vision. They were way ahead in terms of providing the professional development training needed to support their expansion and in understanding where they were, where they wanted to go, and how to get there. Being from Canada, where it was business as usual, I felt like a country rube.”

That’s why he says he was so keen to help set up a proper training program at BLG once he got back home — and why some colleagues scoffed at his plans at that PD meeting. But thanks to his efforts and those of PD committee members at each office who brainstorm and consider management ideas they find from around the globe, BLG now boasts one of the most comprehensive associate training programs in Canada that includes everything from entry-level training for young associates (BLG 101) to leadership training for senior partners (BLG 901). “The key was getting everyone to buy in,” says Letalik. “Lawyers are clever and they are trained to find fault. But the consensus and understanding within the firm that the benefits of training were good for business was simply overwhelming. Everyone wins.”

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