There has been movement by law firms across Canada from regional to single-profit pools. The majority of firms now operate under some type of integrated single-pool system. Understandably, the pressures generated when a firm switches to a new compensation model can be intense, stressful, divisive and, in some cases, career-altering. Even the suggestion of change to the status quo has partners scuttling into closed-door meetings and whispering frantically in impromptu hallway gatherings.
"Cold, clammy fear" is how one partner describes hearing of a change to his firm's compensation system. If you have been doing well under an existing system you do not want change. It is that simple.
One lawyer, speaking off the record, admits that "things get very tense" when the firm's remuneration system is about to undergo a change. "Compensation has a very direct effect both monetarily and also in the power chart. Obviously the biggest billers are the highest paid and likely the most powerful and influential partners in a firm. And those who have done very well under an existing system are going to be reluctant to change."
And this is the crux of the matter. We are not talking only about money, significant as that is. We are also talking, to use the words of the lawyer just quoted, about "the power chart." And we are not talking only about individual power, but also power within the firm and, for national firms, where the centre of gravity is or will be. These issues do not pertain only to Canadian law firms. They have also recently surfaced in the US and UK whenever firms merge and compensation and management structures are altered.
As gut-wrenching as it has been for many lawyers as their firms change to a single-profit pool, the inexorable march in that direction continues. Driven by money, competition and economies of scale, integrated profit centres help to create the most efficient legal service for a firm's clients. There are exceptions, but for many it simply makes good business sense to centralize various professional skills and service functions.
There are many different ways to split a law firm's profits-likely as many formulas as there are firms. Under a national compensation system, at least in theory, the firm focuses on one set of motivators and criteria for how the partners get compensated in all offices across the country. In dividing profits many firms award points for the participation of their lawyers in matters such as business origination, fees billed, fees collected, hours recorded, firm management and teamwork. Unlike the pure lockstep system, which compensates lawyers on a seniority basis, or the aggressive "eat what you kill" model, in which lawyers are compensated based on how much business they bring in, one major reason managing partners give for moving to a single-pool model is that all practitioners within the firm, the finders, minders and grinders, have to be compensated fairly.
When Borden Ladner Gervais LLP's (BLG) five legacy firms merged in March 2000, the original plan was to stay with regional profit centres and regional compensation decisions and then move to a single-profit pool at some point in the future. "That thinking lasted, I would say, about a month," says Sean Weir, the firm's national managing partner in Toronto. To provide seamless service "What we have to ensure is that there's no disincentive for files to be done where whatever lawyer had the best expertise or best ability to service that."
This is of critical importance. Having clients served by whatever partner has "the best expertise or best ability" is simply good business, particularly when you are competing with other firms who are doing exactly that. Deciding who has "the best expertise or best ability" and properly compensating the originator of the work, however, are different matters.
But the issue is not as clear-cut as "origination" and "best expertise or best ability." There are multiple variables. Weir points out that BLG does not have a formulaic approach to profit breakdown. "We have a merit-based system, but it is definitely not driven entirely by billings and business generated." He adds that BLG also emphasizes adherence to core values, education of associates and the activities of people who are practice group leaders. "Obviously, if you're bringing in a lot of business and you have good personal production, you're going to get well remunerated, but we also look and say 'did that person do anything for the firm?' It's not fair that the people who have contributed to firm development don't get compensated."
Factoring large in the single-profit pool model debate is how you treat the economic reality that rates, revenues and expenses are higher in Toronto. Non-Toronto offices of national firms frequently argue that they end up getting "stuck with the higher overhead." As one Calgary lawyer observes, "I think if a non-Toronto firm joins a national firm, they'll end up paying a lot of extra overhead and make a lot less. And if they have any good files, they'll have to go to Toronto." In short, he says, "they'll get screwed."
"When you're part of a single-profit pool," says Tim Leishman, principal of Leishman Performance Strategy Inc. in Toronto, "there is a pressure for rates as much as possible to all hit the same levels so that the partners in Edmonton will feel an upward push on their rates where they would say that my local clients really cannot afford the higher rates and the rates are being driven by Toronto." He says that some lawyers end up leaving large national firms since they "might feel that in order to service their clients for the kind of work they're doing, there's no longer an opportunity to do it in the national firms. The rate structure is simply too high."
Encouraging the flow of work to the people in the firm who are best suited to a particular file seems like an excellent reason to move to an integrated compensation system. Single pool proponents argue that if a firm sticks with regional pools there is clear financial incentive for lawyers to hoard files and do the work themselves, whether or not they are the best person for the job. But the issue of moving files around from lawyer to lawyer and, more importantly, from city to city, as encouraged by single-pool systems, has huge potential to create conflict.
The centrifugal force generated by single-profit centres can be immense. Work may be sucked into the biggest centre-and in Canada that centre is Toronto. Some speculate that within a decade a significant portion of high-end legal work previously done elsewhere will be done in Toronto. "It's a very real, concrete threat. You'd have to be a moron to think otherwise," says one.
One partner, speaking off the record, agrees with that assessment: "In the same way that Toronto has seen files leaked to New York, everybody else across the country has recognized, if they've had their eyes open at all, that Toronto is becoming more and more the centre of commercial transactions and that that's where the work is going to devolve, absent some local necessity to do it otherwise."
A partner in a mid-sized Calgary firm, also speaking off the record, agrees: "That certainly is what the national firms are trying to do. I saw that on my last job, there were some good files and they would deliberately involve people from Toronto, whereas before they wouldn't have. The Toronto people want to run the big files, the interesting ones with the large dollar amounts. What's going to happen is that the less interesting files are going to be left behind in the regions."
He goes on to add: "When you go to the single-profit thing, what lawyers do that the in-house counsel don't like is they tend to say, 'okay, we're one firm, we can pass this file around wherever we want.' Then the in-house counsel says, 'well hold on here, I want to know the people I'm dealing with, I want to make sure they're smart people, and efficient, and I don't want this getting out of my control.'"
The party line says that in-house counsel will get the best person for the job. But "who's the best one?" the Calgary lawyer wonders. "It's typically somebody from Toronto who thinks they're the best one. You'll always find that. I defy you to find a file that somebody from Toronto doesn't think they can do a better job on.
"I've worked with a lot of in-house counsel," he continues, "and I know they don't like things passed around, they don't like this, 'oh, we'll send it to Toronto to be researched.' They've never met the person and the rate went up 30 per cent." But, he adds, "there's going to be a lot more of it...you'll find if a big file comes in, the lawyers in Toronto are going to insist that they're the lead lawyers on it, and they wouldn't let the Calgary people be the lead lawyers, because, yes, it's a single profit, but they'll get a bigger share of the single profit."
Then again, another Calgary lawyer, who also spoke on condition of anonymity, insists that while this may be happening more often than it did just a few years ago, it's not going to affect the non-Toronto offices in the long-term. "I genuinely believe that the leaders of these firms want them to work and I think they're smart enough to realize that they're not going to make it work if they suck files out of regions. That's not to say it's not happening on occasion, but I would think as a trend that's something they're going to want to put an end to. It's counter-productive."
Reinforcing the need for greater efficiencies and enhanced client service, which many argue can only come from a single-profit centre and national practice groups, is increased competition among firms. Any corporate lawyer will tell you how competitive the legal market in Canada is. In-house counsel have become ruthless in shopping around as their own CEOs demand greater cost-cutting. "The competition and the pressures from in-house counsel are definitely being felt by all of the firms," says Leishman. Squeezing suppliers is one good way to cut costs and counsel are cutting deals with firms by promising exclusive work in exchange for lower rates.
In order to successfully compete, firms must find ways to add more bang for the buck-firms that do not will be the losers. There will be a shakeout respecting those firms that cannot up the ante by adding increased value. "Sophisticated clients understand that the legal world is changing quickly and if the lawyers are keeping up with that they are probably adding more value per hour today than they ever were 10 years ago," says Leishman.
Sharpening the importance of a competitive edge in fees and value delivered is the hard attitude of in-house counsel who, generally, have little sympathy. Many in-house counsel balk at what they see as the "outrageous fees these guys are charging." So says Seymour Trachimovsky, general counsel and corporate secretary at DuPont Canada Inc. in Mississauga, Ontario. Notwithstanding close relationships with partners at firms he uses, "talking directly about compensation is a little bit like talking about sex. You don't do it. I'm paying 20 per cent more than I was a few years ago. We've had discussions, there have been a lot of tears shed. Crocodile tears, I guess. That's the reality of it. This is what we have to pay. I think we're paying way too much."
"Corporate counsel should be complaining because there is a lag time in lots of areas of work where the value you're providing for the increased rates is not there and sophisticated clients know that," says Leishman. "All firms raise their rates at the same time, so it's difficult within a jurisdiction to claim that there's a lot of choice on rates among larger firms. The choice in rates is usually to go to another jurisdiction or to manage your work more effectively and efficiently. That's how general counsel are dealing with the raises in rates. Lots of firms are raising rates just because everyone else is, but they're not adding value as quickly and they will feel it. And general counsel are right to look at those firms and say 'you're not keeping up, you're charging us too much, you're not managing your files properly, how can you justify these increases?'"
"I don't doubt for a minute that there is concern about a national pool," says Trachimovsky. "They're all interested in taking as big a piece of the pie as possible. I think that kind of thing can be handled by phasing in such a compensation system. It would probably take a good five or six years to go through that exercise, but I think you could do it with minimizing the squealing on the part of the hogs."
Unhappy in-house counsel aside, there are plenty of lawyers who feel their compensation is never enough. Disparate compensation can drive a real wedge between partners. If you are making less than the lawyer in the next office, there is an underlying message that you are not as good. While some are not as focused on the money, others become obsessed with it.
For some, "there's nothing else in life," says one partner at a Calgary firm. "You have a huge spectrum in attitude. Lawyers tend to see their compensation not just in terms of what groceries they can buy with it, but in terms of self-worth and importance and value in the world. And that's part of the reason they fight so hard about it. It's not really the money. And the ironic part is nobody else knows what they're making because it's all confidential. So we see a partner who'll fight tooth and nail for this, and the only other people who know he's done this are other partners. It's a twisted life, it really is. Law is peculiar that way."
When disagreements arise as to how the pie is cut, it can have immediate consequences, as some of McCarthy Tétrault LLP's partners discovered last year. Following the adoption of a corporate governance model and national profit allocation, more than 20 lawyers left the firm's Calgary office. One big problem cited by former partners was the disparity in income between partners. Speaking off the record, more than one former partner claimed that Calgary incomes were cut, some by as much as $100,000.
According to one such individual, "there was a huge chargeback made to the partners in the Calgary office of a whole bunch of receivables and WIP that had been written off that had been allowed to accrue over the years by existing management. Over the years the offending partners and those accounts were never dealt with, so somebody, to the surprise of everybody in Calgary, made a chargeback of all these numbers against the Calgary numbers, and all in the first year. People were just aghast. All of a sudden people were losing incomes of a third to 50 per cent.
"It's an art, it's not a science, unfortunately," he adds. "They just got it wrong. For those of us who were really ticked off, if there was an allocation that you didn't really want to fiddle with, it was your first one under the new system."
Another former partner in the Calgary office agrees: "The day they brought in the new compensation report at McCarthys, I looked at it and I thought it's not worth staying here, forget about what I make, whether it's good or bad, this is a disaster." He remembers thinking, "It's going to get so many people upset and make it an unproductive place."
Clifford Johnson, the firm's managing partner in Calgary, expresses exasperation with the position taken by many of the lawyers who departed: "For someone to complain about management writing off bad accounts is just bizarre to me. If you're not ever going to collect it, what's the point of keeping in on the books? This is a business that's cyclical, particularly in Calgary. We live and die with the oil industry. You can have huge swings year to year."
Barry Ryan at McCarthys in Toronto expresses understandable reluctance to talk about his firm's compensation model. He champions the firm's decision to change to a single-profit system: "If you do not have a commitment to a national profit pool, I think you are constrained in terms of the ability to deploy resources," he says. Ryan goes on to add that he believes "an overwhelming majority of partners understood why the change was needed and what the change held by way of potential for the firm as a collectivity. But more importantly, what the change meant in increasing individual opportunity. And that's not spin."
Nevertheless, when you speak to some of the firm's former partners, there is anger. "They sort of attempted to build consensus for a while, but then when they didn't get it, they just strong-armed it through. There wasn't genuine consensus. There was nominal consensus, people finally said, 'okay, we'll go along with it.' It was no surprise to me that things didn't work."
"It's a governance structure that's totally different, like the big accounting firms. It's run by a very small executive," says one former partner who left the firm last year to join another major player. "You can have all those governing rules, but at the end of the day it's still a partnership and that's what I think was forgotten."
"Did we get 100 per cent approval?" asks Ryan. "No. Did we get very close and an incredibly overwhelming support for it? Yes." He adds, "there will be partners who will choose not to be part of a very large law firm. And that's a choice we respect. It's no surprise that in a law firm of eight hundred lawyers, a few may well say 'I don't want to be part of that big, large organization.'" He concludes, "I don't think there's any more to it than that."
Also coming to the firm's defence is another former McCarthys partner. "I think a lot of it was innocent ignorance. Where the system broke down was just a lack of information. That's why they've made an effort this year to get to know the local offices better."
But there remains a sense of bitterness when speaking to some of the firm's former lawyers who've moved on to other Calgary firms. As one puts it, "There's nobody from Toronto who tells me what to do."
Johnson probably provides the best summation. "Unfortunately, people can be a little bitter, so it's hard to get a true picture of things. Are there people who left that I would dearly love to have back? Absolutely."
When Stewart Saxe of Baker & McKenzie does dictation in his Toronto office, he does not call on his administrative assistant for help. Instead, he simply downloads the information onto his computer, pushes a button and the information instantly zips off to Indonesia. It returns to his desktop within an hour, typed and ready to send to a client. Baker & McKenzie maintains a word processing service in Jakarta, where specialists in several languages are standing by 24 hours a day. Correspondence from the firm's office in London, England may be followed by correspondence from Houston, Texas, then from Sydney, Australia.
Such economies of scale are simply part of everyday business for a law firm that promotes itself as being one of the largest full-service firms in the world. Baker & McKenzie prides itself on its technological capabilities and global reach. The firm's global offices have made deals with airlines, hotels, and hardware and software manufacturers by way of joint purchasing. "The practice of law today is requiring increased efficiencies if we want to keep making the kind of incomes we make," says Saxe, managing partner of the Toronto office.
And now, to further integrate the firm and-they hope-to increase profits, Baker & McKenzie's Toronto and Calgary offices are joining a single-profit pool. Last September, in addition to announcing record global financial results of US$1.134 billion, the firm's partners voted to implement a North American single-profit pool incorporating all nine US offices and the Toronto and Calgary Canadian offices. "The US offices started this about a year-and-a-half ago," says Saxe. "And we jumped on for this fiscal year."
Saxe and his Canadian partners should have good reason to welcome the new regime-not only did the firm's revenue in the US grow by more than 7 per cent last year, but average profits per partner increased by 14 per cent. Saxe cites "Canadian caution" for waiting to join the Americans. "Let's have a little look and see how this is working." Responding to street talk that his American partners are making at least 25 per cent more than their Canadian counterparts, Saxe replies, "that's a focused question we really wouldn't look at."
At Baker & McKenzie the historical compensation model, based on providing incentive for individual performance on an objective basis, has changed to a subjective exercise. Income at Baker & McKenzie was determined by four criteria: origination credit; work credit; a seniority credit; and, in the local office, a division of associate profit. That four-criteria formula is still the starting point under the new system, but for the first time a portion of income will be discretionary to a committee. "It's probably going to evolve and it's complicated," says Saxe, "but approximately speaking it's 20 per cent." The main re-allocation criteria include a minimum of 70 hours annually of pro bono work, business development and service on firm committees. "The old system would only have rewarded you if you kept work in your own office," says Saxe. "This new system is going to reward you for moving work to other offices."
A core three-person elected committee sits in on compensation decisions for the entire region's partners and they are joined by each partner's managing partner and regional practice group leader. That committee will decide, applying the new criteria, the allocation of that final 20 per cent of a partner's income. "This isn't a sea change, this isn't a paradigm shift, this is simply a better alignment of economic incentives for good regional citizenship. That's all it is. It's an adjustment," says Saxe. "This is a move away from a formula. I think people would be reluctant to return to one because the whole idea was that formulas are just too easily captured by creative writing submissions."
Indeed, several lawyers interviewed for this article are critical of creative submissions, seeing the idea of partners blowing their own horns as one of the pitfalls in dividing profits. One mentions the arbitrariness of the system, saying that once partners start writing down their contributions to the firm at the end of the year you can "see the bullshit level rise."
One Calgary lawyer, speaking off the record, expresses doubt as to how confident lawyers can be that work they source will be fairly attributed. Computers track billing, but when you start talking about origination, it's hard to know which of several people has the best relationship with the client. At his firm, "we ask lawyers how many dollars of billing are you "responsible" for, not just what you billed, but what you sourced, what you generated, what you caused others to bill? And when we add up those totals from our own partners as to what they feel they are personally responsible for, it always exceeds firm gross revenues by a significant margin."
With the motto "one region, one firm" McInnes Cooper is the only major Atlantic Canada law firm to commit itself to the single-profit pool model. Wiley Spicer, QC, the firm's managing partner, believes that the model speaks for itself. Partners know that if they bring in a certain amount of work their remuneration will be based on their contribution to the overall firm, not just to a regional-profit centre they happen to be a part of. This "makes a huge difference in the way you think about your day-to-day work," says Spicer.
"Every partner understands that it's in everybody's interest that we all do really well," says Spicer, who is based in the firm's Halifax office. As he puts it, if one office were to underperform, it's in everyone's best interests to help that office. "Because the better they do, the better we do."
When firm rainmakers, such as former New Brunswick premier Frank McKenna bring work in, "It doesn't matter if it goes to our New Brunswick offices or to Newfoundland or to Halifax or to Prince Edward Island, it's all going to one pot," says Spicer. "If you were the rainmaker, like Frank, and all of a sudden you found that the firm itself was having squabbles about where the work went, I don't think that would be terribly conducive to having somebody like McKenna around."
Spicer insists that younger lawyers at McInnes Cooper appreciate the single-profit pool. "They really understand that this firm in fact is different, so they can take areas, like business development for instance, and they'll pull together groups of people from all the offices to go hunting for some particular goal without any worry at all about where it eventually ends up."
But it's not all sweetness and light. Spicer admits that there have been growing pains as the firm went through mergers. Its six offices have existed as a single entity for just three years. "We've had some people leave because they basically didn't share the vision." But, on the other hand, "now what we're finding is we're getting a lot of people joining us because they understand that it's an attraction to be able to work in this kind of environment," he says. "What I'm finding is people that are pretty enthusiastic and if they're enthusiastic then they're going to be committed. And if they're going to be committed, everything else flows from that."
Spicer's endorsement of single-profit pools is not shared by everyone, including competitor Stewart McKelvey Stirling Scales. Stewart McKelvey took a good, hard look and then took a pass. Stephen Mabey, the firm's COO, firmly believes, "if it ain't broke, why fix it?" After interviewing most of the firm's partners, an overwhelming majority of them decided to stay with the regional profit pool model. "We didn't see the potential gains we might achieve from going to a single-profit pool coming close to outweighing the turmoil and distraction that would likely be created."
Looking to the corporate market, in which deals have not been as plentiful lately, Mabey points out that, "I've seen work, [at other firms], that was normally farmed out to other offices go right back to the generating office because they first and foremost were going to make sure that those lawyers were busy. So how did that single-profit pool better serve those clients in making sure the right people did the work? Saying that a single-profit pool determines the quality of client service is perhaps at best a red herring and at worst simplistic."
Mabey is convinced that Stewart McKelvey partners are happy with the status quo and emphasizes that the firm has lost no partners as a result of staying with regional profit centres. "I would challenge some of the single-profit people, certainly in our region, if they can say that categorically that they lost no partners or didn't disaffect any partners when they went to a single-profit pool."
Spicer admits that "change isn't for everybody." The difficulty with firms that have regional-profit pools is that "once they start on that basis, it's very hard to change it. The world's getting smaller, marketplaces are getting smaller, and I don't think in the long-term you survive by having separate partnerships that are fighting with each other for business."
As noted at the outset, we are not talking only about money, significant as that is. Regional vs. single-profit pools impacts directly on "the power chart" within any national or major regional firm. And around the corner to arguably accelerate redistribution of money and power is...mobility.
First, there is electronic mobility, ie. technology. "If I fly to Toronto or Montreal, I just plug in and away I go. It really doesn't matter where I'm situated," says Paul Albi, managing partner at Davis & Company, a Vancouver-based rapidly expanding national firm. "Technology is a fact of life that has significantly facilitated client service and allowed us to be much more integrated."
Second, there is physical mobility. One Halifax lawyer, who insisted on anonymity, believes that the National Mobility Agreement adopted last year by the Federation of Law Societies will transform the business of law. The agreement sets out principles that govern temporary and permanent mobility among signatory common-law provinces. "It essentially permits lawyers to work across the country free from the entanglements of the provincial jurisdictions. Interestingly, the only two provinces that haven't signed on are New Brunswick and PEI who obviously feel the most threatened. But that's not going to stand up over the long term. I think they'll come to realize that they're going to have to be able to compete against lawyers from other provinces.
"But that [physical mobility] is going to be the biggest long-term factor because if I can go to Toronto and practise law on any given number of cases without having to be called to the Ontario Bar, that kind of mobility is going to generate substantial change in how we practise and query whether Toronto firms will think they need to have Calgary offices. It may be cheaper just to put the guy on a plane for a week or two. I'm not saying the Calgary office would disappear necessarily because there's local work to be done, but the historical necessity of having a Calgary office to be a national firm may not be necessary anymore." He adds, "On the commercial side, I think it really is going to be interesting to see. Why do you need to hire somebody in Alberta if you can go and do it?"
The experiences of BLG, McCarthys, Baker & McKenzie and McInnes Cooper in introducing single-profit pools are not necessarily specific to these firms. They are representative of transition, frequently difficult, that all major firms in Canada, the US and UK will face or are facing as they grow but, at the same time, struggle to gain competitive edge in a harshly competitive market by cost-efficient use of "whatever lawyer has the best expertise or best ability" to service a particular file.
Last December a split emerged among senior partners at Freshfields Bruckhaus Deringer, the UK-based global legal powerhouse. At issue was how far to internationalize management. The firm's management structure had joint Anglo-German practice group heads and co-senior or managing partners from the two jurisdictions. Under this system, approximately a third of the global firm was unrepresented at a senior level. Apparently a good number of UK partners were opposed to making management more representative. "What you want is the best man for the job, regardless of nationality," insists one source.
Sound familiar?