Are All Partners Created Equal

Are All Partners Created Equal How to Create Partner Scorecards Derek Schutz Director of Programs, Business of Law, Redwood Analytics Derek.Schutz@lexisnexis.com

Key Discussion Topics 1. Overview of Recent Trends 2. Historic Compensation Systems 3. What is a Scorecard? 4. Examples of Usage 5. What We Have Learned 1

Overview of Recent Trends 2

Changing Expectations Yes Permanent Change 2009 2012 Fewer equity partners 22.8% 67.6% More contract lawyers 28.3% 66.2% Reduced leverage 12.1% 57.7% Smaller first year classes 11.4% 55.4% Outsourcing legal work 11.5% 45.5% Do you think fewer equity partners will be a permanent trend going forward? 2012 2011 2010 67.6% 68.4% 63.4% * Copyright 2012 Altman Weil, Inc. 20% 40% 60% 80% 3

Growth Options What growth options, if any, will your law firm pursue in 2012? Acquire laterals 92.3% 3.2% Acquire groups 68.2% 8.2% Acquire law firm/s Open new US office/s 29.5% 27.9% 12.7% 13.2% Merger of equals 10.9% 11.8% Open new overseas office/s Consider being acquired 6.9% 6.4% 2.3% 5.5% * Copyright 2012 Altman Weil, Inc. 0% 20% 40% 60% 80% 100% Will Pursue Not Sure 4

Growth Trends Top Page Growth Title Options 2010 2011 2012 Acquire laterals 85.3% 91.6% 92.3% Acquire groups 54.8% 67.1% 68.2% Acquire law firms 19.7% 23.0% 29.5% Open new US office/s 17.6% 24.6% 27.9% * Copyright 2012 Altman Weil, Inc. 2012 Growth Options by Firm Size > 250 Lawyers <= 250 Lawyers Acquire laterals 89.7% 98.5% Acquire groups 57.4% 93.8% Open new US office/s 23.9% 37.5% Acquire law firms 21.9% 47.7% 5

Who Makes Partner? From a sample office 30% 25% 20% 15% 10% 5% 0% Law School Hires Lateral Hires 0 12 24 36 48 60 72 84 96 108 Months From Hire 6

In Summary: Law Firms: 1. Are seeing fewer equity partners as a permanent trend 2. Do not have the partner turnover they would like 3. Have associates that are not incentivized like the past 4. Trying to mine the middle ground where they can grow appropriately Some things to consider: 1. With a lack of associates looking to be the next leaders, how can a firm grow organically? What about succession planning? 2. How can successful lateral growth be maintained? 3. Partner demographics show aging populations, what is the plan? 4. How can law firms ensure continued success? 7

How do we Encourage the Right Behavior? You get what you pay for! 8

Historic Compensation Systems Mission No.1 is to Preserve the Partnership 9

The Importance of a Proper Compensation System Preserving Profitability = Preserving the Partnership Preserving = the Firm Profitability = Compensation Levels Threshold for Happy = Partners 10

Historic Compensation Systems 1. Equal Partnership 2. Team Compensation 3. Lock Step 4. Unit System 5. Eat What you Kill 11

Equal Partnership 12

Team Compensation 13

Lock Step 14

Unit System 15

Eat What You Kill 16

Historic Compensation Systems What kind of firm are you? 17

Scorecard Approach First and Foremost: You need to establish goals and metrics that drive your firms stated strategy 1. You need a strategy 2. People need to know what it is Secondly : 1. Establish the core metrics to be analyzed 2. Set realistic goals 3. Set stretch goals 4. Don t hesitate to add subjective criteria and ranking associated 18

What is Your Strategy? Recognize your strategy 1. Poll your partners 2. Ask your clients 3. Follow the money Potential issues 1. Strategy and tactics are often confused 2. Contrasting priorities (geographic/practice area driven) 3. Failure to achieve strategic goals 4. Unrealistic expectations 19

What is a Scorecard? A structured performance management tool geared towards aligning behavior with desired outcomes 20

Simple Scorecard Output Goals 1. Easy to read/distribute document to determine individual strengths and weaknesses 2. Result that is easy compare to stated goals and peer groups 3. Automated output that can be updated/adapted as needed 21

Simple Scorecard Output Goals 22

Balanced Scorecard Goals Kaplan & Norton 1. Translating the vision into operational goals 2. Communicating the vision and link it to individual performance 3. Business planning; index setting 4. Feedback and learning, and adjusting the strategy accordingly 23

Partner Scorecard Goals Law Firm Specific 1. Objectively measuring how partners are helping the firm meet its strategic goals 2. Consistently measuring partner performance a. Understanding where a partner excels or falls short can provide insight into development plan b. Changes overtime to the methodology will occur 3. Providing a tool that can help with goal setting and partner development 4. Providing a quantitative starting point for partner compensation determination (secondary) 24

How to Determine Goals and Metrics As owners of the firm, what are partners responsible for? On what criteria are partners assessed? Generating business for the firm Understanding client needs Providing work to associates Managing matter and client profitability Being innovative/visionary Inventory management Managing client relationships Performing legal work Mentoring and supervising others Being a team player Expense management Be a good lawyer 25

Goal: Build A Sustainable Organization What Would You Measure On a Balanced Scorecard? Grow Firm Revenue Enter selected new markets Engage new clients Increase client LTV Manage Drivers of Profitability Utilization Realization Leverage Margin/Yield Deliver Value Quality outcomes Efficient work Balance Practice Specialization & Breadth Expertise in key areas Complementary products Exhibit Civic Responsibility Support community Matter Management Staffing Project Management Recruit & Retain Talent Client Relationship Management Client Relationship Management Cross-selling Trusted advisor Succession Planning Operational Excellence Operational Excellence Rate setting Intake Cash flow optimization Create Efficiency Through Technology Attorney development Roles & accountabilities Knowledge management

Metrics and Score Criteria Each metric can carry different weighting 27

Sample Output 28 28

Partner Scorecard 29

Partner Scorecard 25% Previous Year Distribution by Score 20% 20% 20% 15% 13% 12% 10% 9% 7% 6% 5% 0% 3% 3% 2% 2% 2% 1% 0% 0.6-1 1.1-1.5 1.6-2 2.1-2.5 2.6-3 3.1-3.5 3.6-4 4.1-4.5 4.6-5 5.1-5.5 5.6-6 6.1-6.5 6.6-7 7.1-7.5 30

Example of Usage 31

Partner Metrics and Score Criteria 32

Different Weighting Examples Base Example Relative Weight Portion of Total Score Subjective 0x 0% Hours Owned 2x 24% Cross Sell Count 2x 24% New Clients Orig 1.5x 18% 2 Yr Attrition 1.5x 18% Hours Worked 1x 12% Associate Capac.25x 3% Realization 0 0% PM Hours 0 0% Client Development Focus* Relative Weight Portion of Total Score Subjective 0x 0% Hours Owned 1x 12.5% Cross Sell Count 2x 25% New Clients Orig 3x 19% 2 Yr Attrition 2x 19% Hours Worked 1x 12.5% Associate Capac.5x 6% Realization.5x 6% PM Hours 0 0% Weighting should support the strategy of the firm and practice area Flexibility for setting weighting by section/department/partner type 33

Different Weighting Examples Base Example Relative Weight Portion of Total Score Score Subjective 0x 0% 6 Hours Owned Cross Sell Count New Clients Orig 2x 24% 6 2x 24% 8 1.5x 18% 8 2 Yr Attrition 1.5x 18% 7 Hours Worked Associate Capac 1x 12% 6.25x 3% 4 Realization 0 0% 5 PM Hours 0 0% 6 Client Development Focus Relative Weight Portion of Total Score Score Subjective 0x 0% 6 Hours Owned 1x 24% 6 Cross Sell Count 2x 24% 8 New Clients Orig 3x 18% 8 2 Yr Attrition 2x 18% 7 Hours Worked 1x 12% 6 Associate Capac.5x 3% 4 Realization.5X 0% 5 PM Hours 0 0% 6 Weighted Score = 7.18 Weighted Score = 8.8 34

Subjective criteria examples How partners contribute to building the firm Team Player Innovation/vision Training/Mentoring Strong Manager (practice/office) Overall Subjective Average 35

Average Partner Score By Metric 8 7 6 5 4 3 2 Practice 1 Practice 2 Practice 3 Practice 4 All Practices 1 0 Average Weighted Score Average of Cross Sell Count Score Average of Hours Orig New Clients Score Average of Two Year Attrition Score Average of Hours Owned Score Average of Realization Score Average of Hours Worked Score Average of Associate Capacity Score Relative Weight: 2 1.5 1.5 1.0 1.0 0.5 0.5 36

Normalized Scores by Practice 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Total Score Rank: Practice 1 Practice 2 Practice 3 Practice 4 2 4 3 1 Average Weighted Score Average of Cross Sell Count Score Average of Hours Origination New Clients Score Average of Two Year Attrition Score Average of Hours Owned Score Average of Realization Score Average of Hours Worked Score Average of Associate Capacity Score 37

Putting Information to Use Observation #1: One practice performed relatively well in terms of partner hours worked but relatively poorly in terms of associate capacity Tactic: Assess whether work is being appropriately leveraged to associates or right-size these sections 38

Normalized Scores by Practice 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Total Score Rank: Practice 1 Practice 2 Practice 3 Practice 4 2 4 3 1 Average Weighted Score Average of Cross Sell Count Score Average of Hours Origination New Clients Score Average of Two Year Attrition Score Average of Hours Owned Score Average of Realization Score Average of Hours Worked Score Average of Associate Capacity Score 39

Putting Information to Use Observation #1: One practice performed relatively well in terms of partner hours worked but relatively poorly in terms of associate capacity Tactic: Assess whether work is being appropriately leveraged to associates or right-size these sections Observation #2: Two practices perform well in terms of realization but relatively poorly in terms of hours worked. Tactic: Look for opportunities for creative pricing to reduce capacity 40

Normalized Scores by Practice 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Total Score Rank: Practice 1 Practice 2 Practice 3 Practice 4 2 4 3 1 Average Weighted Score Average of Cross Sell Count Score Average of Hours Origination New Clients Score Average of Two Year Attrition Score Average of Hours Owned Score Average of Realization Score Average of Hours Worked Score Average of Associate Capacity Score 41

Putting Information to Use Observation #1: One practice performed relatively well in terms of partner hours worked but relatively poorly in terms of associate capacity Tactic: Assess whether work is being appropriately leveraged to associates or right-size these sections Observation #2: Two practices perform well in terms of realization but relatively poorly in terms of hours worked. Tactic: Look for opportunities for creative pricing to reduce capacity Observation #3: One practice has partners that own a significant book of business and have excellent retention of the clients Tactic: Cross breed best practices from these partners 42

Normalized Scores by Practice 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Total Score Rank: Practice 1 Practice 2 Practice 3 Practice 4 2 4 3 1 Average Weighted Score Average of Cross Sell Count Score Average of Hours Origination New Clients Score Average of Two Year Attrition Score Average of Hours Owned Score Average of Realization Score Average of Hours Worked Score Average of Associate Capacity Score 43

Putting Information to Use Observation #1: One practice performed relatively well in terms of partner hours worked but relatively poorly in terms of associate capacity Tactic: Assess whether work is being appropriately leveraged to associates or right-size these sections Observation #2: Two practices perform well in terms of realization but relatively poorly in terms of hours worked. Tactic: Look for opportunities for creative pricing to reduce capacity Observation #3: One practice has partners that own a significant book of business and have excellent retention of the clients Tactic: Cross breed best practices from these partners Observation #4: One practice has partners that perform well on Cross Sell Tactic: Emulate best practices across groups 44

Normalized Scores by Practice 2 1.75 1.5 1.25 1 0.75 0.5 0.25 0 Total Score Rank: Practice 1 Practice 2 Practice 3 Practice 4 2 4 3 1 Average Weighted Score Average of Cross Sell Count Score Average of Hours Origination New Clients Score Average of Two Year Attrition Score Average of Hours Owned Score Average of Realization Score Average of Hours Worked Score Average of Associate Capacity Score 45

Cross Sell Score Comparison Practice 4 6 3 0 Practice 3 22 14 2 Lags (0-3) Practice 2 Practice 1 3 28 18 3 11 0 Meets Goal(6) Excels (8-10) 0% 20% 40% 60% 80% 100% Numbers within each bar are the count of equity partners 28 equity partners lag expectations for cross selling 18 equity partners meet expectations for cross selling 11 equity partners exceed expectations for cross selling 46

Sample Output 47 47

What We Have Learned 1. Not a one size fits all solution 2. Take the personal element out of it, use for business development/strategy 3. Essential to have support from the top 4. Positioning is important ( scorecard may not be the best term!) 5. Alignment with firm and practice strategies 6. Not just a reporting exercise 48

What We Have Learned 1. Tie into business and strategic planning 2. Affects staffing plans for the future 3. Provides insight into strengths and weaknesses of the firm 4. Reinforces the behavior of partners vested in firm sustainability and growth 5. Use as a compensation tool is secondary 49

Parting Thoughts 1. Compensation MUST be tied to your firms strategic goals 2. No compensation system will appease everyone 3. Communicate, Communicate, Communicate 4. External sources WILL NOT solve your problem 5. Not everybody has the same skill set or wants the same thing 50

Questions/Comments 51

Are All Partners Created Equal How to Create Partner Scorecard Derek Schutz Director of Programs, Business of Law, Redwood Analytics Derek.Schutz@lexisnexis.com