As we approach the end of 2016, law firms across the US and around the globe are grappling with, not only their market positions in terms of size, practice and/or industry focus, and geographic reach, but also with the new economic realities of the legal marketplace. Having a business plan that considers the new pressures on profitability, while simultaneously positioning themselves to compete in an anemic growth environment has left many firms struggling with how best to build a strategy forward to grow revenues and profits to keep pace with compensation expectations of partners.
Nine-month quarterly flash survey results from Citi Private Bank showed further support for the need of law firms to look introspectively for new ways to formulate a sustainable strategy to create real growth year over year where it counts – the bottom line. 2016 saw the return of associate salary wars. And just as in the pre-2008 era, many Am Law 100, and some Am Law 200 firms, took the bait. What is surprising is that aside from the sector of the market that experienced the greatest revenue growth, the Am Law 50 (5.4%), many firms reacted without consideration to how these increases would be paid for or the related impact to profits per partner. Many firms that increased associate compensation levels saw a significant acceleration in expense growth in the first nine months (lawyer compensation expense increase in the overall marketplace was 4.1% compared to 3% at the six-month point).
This leads to the question, or should I say the presumption, that those firms that joined the band wagon on associate salary increases are anticipating at least 4.1% in revenue growth to hold, not grow, current profits. Assuming all partners are on board with making the same as the year before, or less if new partners were made to kick off the year. However, according to the Citi Private Bank flash survey revenue growth industry-wide grew only 3.7% for the nine-month point. Moreover, when you consider that the primary drivers of that revenue growth were billing rate increases of 3.2% and modest shortened collection cycles of 0.6% versus actual demand for services, which rose a meager 0.3%.
For those firms that made the move to raise associate salaries to keep pace with the big boys one can only hope that this talent retention strategy was part of a larger strategy that included more focused profitable services platform re-engineering, reducing under performing equity partners and associates, and/or the implementation of correlating overhead expense reduction initiatives. Absent these additional strategy components or a significant large new client and or litigation which is expected to sustain itself for at least into the near future, I wonder if increasing extraordinary bonuses for productivity, efficiency and profitability would not have been the better talent retention strategy.
Only time will tell whether firms that engaged in the 2016 associate salary surge campaign did so with a real strategy towards profitability growth or just took the bait. If they took the bait they will certainly want to make the development of a comprehensive strategic plan a priority in 2017. And as with any successful strategic planning process, they will want to ensure that it includes not only an articulated mission, vision, and related goals, but a clear understanding of market strategy and competitive position, and possess the elements of organizational engagement and transformation to carry it out – leadership skills and a culture of accountability. On the other hand, maybe the results of the recent elections will lead to a Trump bump in the legal marketplace and it will just all work out, which for some just might be the strategy – wait and see what happens next and react to that. I would not hold out great hopes for those that continue to ignore the new realities in today’s legal industry and employ the latter approach to planning their firm’s future.
Now more than ever, law firms need a business strategy. And something more than just an annual retreat and a written plan that sits in a binder on the shelf until the next retreat. The plan needs to be strategic in its market position and differentiation (value proposition) based on client feedback and intelligence gathering, both internally and externally. It needs to be communicated across the firm. And most importantly, the Managing Partner and leadership team must be willing, and allowed, to take the bold steps necessary to create a culture of accountability for the behavioral changes that need to be achieved to reach the desired results up and down the organization. This will most certainly need to lead back to a re-alignment and refinement of compensation as a critical component of its’ overall strategic plan going forward. So, I ask the question again. “Will the surge in associate salaries prove to have been a misguided strategic move for law firms?”. Stayed Tuned.
About the Author
Michael Blanchard is Practice Group Leader for GLC Law Firm Consulting, a business consulting group exclusively devoted to counseling lawyers and law firms on strategy, growth, leadership development, compensation, and turnarounds. He can be reached at firstname.lastname@example.org or by calling 585-662-8720.
- David Altuna and Gretta Rusanow, “Citi Report: Third Quarter Growth Slowed”, Law.com,
November 15, 2016, http://www.law.com/sites/almstaff/2016/11/15/citi-report-third-quarter-growth-slowed/?slreturn=20161104000903 Top of Form