The coronavirus is impacting the legal services sector in a variety of significant ways. In this interview with Asia Law Portal, Rob Green, CEO of GRM, examines how law firm partner remuneration may change post COVID-19.
Will we see any changes to law firm Partner remuneration in the coming years?
This is a huge question and one that I would welcome participating in a roundtable on.
In my mind, post-COVID could be a defining moment for law firm fees and therefore Partner remuneration, however because of current organizational structures and remuneration models there may be little to no move in the short-term.
But if that is the case, I personally think firms will be missing a great opportunity to revolutionize the industry that in the end could make them more profitable, flexible, make sure the right people are rewarded with the right incentives and that their spend is focused on the right areas like training, recruitment, remuneration and tech. Conversations around removing the lockstep model and “selling time” have rumbled on for years. Post-crisis could be the time that the law sector finally moves forward with a new era in remuneration, but it will take some brave souls to make the decision to move fully to a merit based system.
Whilst there is not much we can be sure of at this time, one thing we at GRM are pretty confident of, is that there will be extra scrutiny on every Partner’s personal billings and collections and their “take home” will be reflected in what they are actually, monetarily, bringing to the firm and a gradual move away from guarantees and lockstep models, firstly in-house and especially when hiring additional Partners.
Law firms around the world have, in the main, acted swiftly and decisively to protect their revenue from the impact of COVID-19. Most firms are well capitalized and they want to stay that way, even if their client spend is temporarily reduced or delayed.
It certainly appears that the common message is “we are protecting the firm, but we are also very busy with new instructions”, preemptive measures are the call of the day and we’ve seen very similar moves across many firms, including, but not limited to: –
- Reduction in partner distributions – between 10-50%, differing levels for equity and non-equity partners
- Capital calls
- Reduction in base costs (base salaries)
- Delay the funding of pensions
The biggest lever firms have is to defer partner payments. For the big law firms, usual is around 30-50% (payout v revenues collected), so each month you defer a payment, you are covering quite a big chunk of the expenses.
As its purely a deferment, you can protect the future payouts by deferring and cutting other costs in the immediate. So far we’ve seen very few furloughs and/or retrenchments, but with many Partners we talk to admitting collections are down, over 50% in some cases, the retrenchments are very likely to come in the next few months in phase two, if this persists.
So what will phase 2 look like? If revenue reduction persists there could well be tactical retrenchments, allowing the firms to restructure for a future where there will be extra scrutiny on Partners to complete work themselves and less need for large teams of Associates as the work may not be fed down as often.
The flip side to that may mean that there could be more pressure on younger lawyers to actually generate new clients themselves. Those that struggle with this may leave their current firms, they may be retrenched, they then may struggle to get in somewhere new, and this could lead to high numbers of people leaving the law, like we saw after the crash of 09.
This is, of course, possible, but so is the opposite – it’s a tough time to accurately predict, but signs are that phase 2 is likely if revenue collections continue to prove to be tricky.
Once things settle down, phase 3 will see strategic hiring and strengthening at most firms, at the Partner level, but it is our prediction that these hires will take even more time, as there will be extra scrutiny on not only the revenues and client base that the Partner has generated in the past, but also what revenues can be expected from the client base moving forward – there will be tough negotiations and Partners with proven business development skills will be much sought after.
In the same breath, there may be extra scrutiny on companies and their finances, by the Partner that is potentially joining. At their current firm they may have very clear visibility of the finances, the strategy, the practices that have been (temporarily or permanently) decimated by COVID-19, those that survived and those that thrived.
Any new firm looking to attract a Partner may be faced with very open and honest questions about the firms ongoing performance.
We believe that with less reliance on the physical office, we could see Partners running much smaller teams, self-regulated, targeted by the firm for revenue but then left to their own devices, small pods where Partners almost create a firm within a firm, this will be brought on by a move in Partner remuneration to a pure merit based system. There will inevitably be much less emphasis on actually being in the physical office.
Whilst some models employed by law firms will be more radical than others, we are sure, in some cases, to see a monumental shift to zero guaranteed income, but a larger reward of the profit share, and Partners focusing on building a highly functioning, small team around them, cutting expenditure and focusing on working like Trojans to maximize profit.
An article by Robert Millard “Aligning partner remuneration with strategy “, published in the Cambridge Strategy Review, he stated “For firms in which the level of contribution by individual partners to the firm’s overall economic performance varies significantly, holding a lockstep together can be a well-nigh impossible task. Small wonder, then, that several of the London firms who found themselves on the losing end of these defections (2015/16 to US law firms) are re-examining their lockstep’s in order to discover ways of modifying them without losing the inducement to collaborate that is so important to their cultures and to their ability to function as premium global businesses”.
A move away from lockstep and to individual merit based, profit sharing, in lieu of guaranteed salaries, is very, very likely on a large scale, especially within SME law firms in the region.
How might the working environment change, that could potentially lead to a different remuneration model employed in the law?
The first thing that might change is that some firms, if they are able to, may look to scale down on physical office space. There could be some interesting battles ahead between law firm and landlord.
Those that stay in their current offices, will have to abide by new regulations, like changing office layouts, making hallways one-way, requiring masks and divides between desks, disinfecting the fridge and workspaces, shared utilities like coffee dispensers being done away with, the list goes on and on, and the entire facility will be under review.
Once we find our feet on the office space conundrum, firms will be able to look more closely at revenue and in particular: –
- Base salary, increases and cuts, benefits and short and long-term incentives for everyone.
- Share plans and remuneration trends
- Shareholder activism consequence management methods.
- Remuneration aligned to strategy and much more aggressive targets for individual fee earners
There are many options to replace the 1/3, 1 in 2 models, and it is very likely that lockstep remuneration will die off to be replaced by a much more merit based system.
As a poor example, no one has a problem paying someone 10m if they make the firm 30m in profit, but guaranteeing them 10m in the years they don’t make 30m, alongside the days of carrying partners with weaker books/practice areas, will likely be gone.
With the quadruple whammy of pressure from clients on legal spend, the strengthening of in-house teams with New Law and Law Tech aiming to constantly reduce fees and time spent on legal matters, alongside the client desire to no longer spend big bucks on drawn out litigation or pay for someone’s personal time spent, we could be on the cusp of a new dawn in law.
Firms will be focused on individual targets and what the person needs by way of support to help him or her achieve it with much more focus on the Partner to deliver and not hand work down to juniors, and less time spent in offices.
Once you start looking at the potential new workspace environment, the remuneration, the embracing of tech, the desire to drive down the cost of law and other such factors, you start to think about what the future may look like for Law Students studying now, those seeking articles and newly qualified’s who have a dreams of being a partner one day – the working environment and the remuneration may look very different in the next 10 years.
What does the short-term look like for law sector remuneration across Asia?
Whilst there has been an undoubted slowdown of revenue collections in some firms, which is likely to continue as the impact of lockdowns are felt more acutely, there have been plenty of fiscal upside for your average law firm CFO in this current time.
There has been an immediate stop on a few spend areas and going forward, there will be a lot more scrutiny on spend at every level, from travel, flights, accommodation, marketing/BD/conferences, trainees, graduates, HR and remuneration.
These areas alone could see huge savings in this fiscal year, and going forward we can expect the belts to be tightened a little more and the need for certain spend to be questioned.
In fact, my personal feeling is that we will see more money spent on recruiting the right people, rewarding the best performers and training those that need it, with more focus on the digitization of libraries and other aspects of the modern law firm and more emphasis on law tech and the development of in-house incubators – and big savings on travel, marketing, less support staff, physical office space and all the equipment that goes with that, amongst other areas where money can be saved.
Whilst we have a chance to reshape the law firm remuneration model, it is likely to be a gradual thing that happens, as we wait and see what the real impact of this global pandemic has on the global and local economies.
Times will change, but maybe not quite that fast.