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The bottom line on the cost of associate loyalty

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Published on 8/18/08

Lawyers and law firms that find themselves faced with more business than they can reasonably handle (assume we're talking normal times and not today's "twilight zone" conditions) may decide to add a new associate. These associates are typically paid an annual salary, often with bonus. The danger to the firm is that these lawyers focus more on earning a higher salary and bonus than on meeting the client service that justified their hiring.

The associate lawyer is in a silo, building a book of business that justifies a bonus instead of building loyalty to the firm.

The issue here is leverage — hiring and using associates as a cost-effective way to do billable work while boosting partner profitability. Leverage is only effective when associates are effective.

But associates cannot and should not remain with their firm unless it is profitable for the firm to keep them on an ongoing basis. At some point, associates must earn more than they cost the firm. In fact, large-firm managing partners agree that it takes, on average, from three to five years to break even on the investment in a new lawyer.

The firm must decide which associates are keepers and how much leverage they add. The answer can be expressed as a simple equation showing an individual's net profit value to the firm: billings - [associate's total compensation + direct and indirect expenses] = net profit.

Creating a bottom-line figure like this can help resolve a not-uncommon dilemma. Say the firm has always given decent year-end bonuses to associates, but in the current year accounts receivable are uncomfortably high. Meanwhile, expenses (including associate salaries) are higher. If receivables don't get received, the firm cannot afford to pay the bonuses that associates are accustomed to.

Basing such an action on the bottom-line figures of the P&L sheet and making sure associates understand the reason for it can go a long way toward heading off hurt feelings and outright discontent that undermine loyalty.

Firms sometimes are tempted to terminate associates that they presumably had good reason to hire in the first place but subsequently decide they can't afford. That not only is costly, it undermines the loyalty of the remaining associates. There is no reason why these lawyers can't be transferred from their current practices to other practice areas in the firm that are still growing. After all, these attorneys are trained in the culture of the firm and should be capable of learning new technical skills.

The real solution is to hire an associate only when needed and to make the most of the associate as a resource. If firms want to strengthen their performance, hiring the right person the first time for the right job will create more profits.

The most effective way to do that is to provide education for that person to improve their skills and then involve them in the financial and organizational life of the firm so that they understand and appreciate their role and look forward to the future. That's the path to associate loyalty — and firm profitability.

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