Harvard case study reveals Law firm ‘collaboration’ pay system

A case study to be used in the Harvard Business School curriculum, has revealed that American law firm, Duane Morris, encourages collaboration in the way it pays its lawyers, in its culture and even the personality traits the firm seeks in lateral hires.

The study notes that there is a good business reason for collaboration. Client work has become increasingly complex, and large firms are responding with an increased focus on specialisation. The high-value work requires multiple lawyers with differing expertise to work together. “Collaboration was, in fact, extremely valuable to firms” in 2013, the case study said. “It allowed them to take on increasingly sophisticated client work, which in turn let them charge higher prices.”

Partners told Harvard business professor Heidi Gardner and her researcher that Duane Morris doesn’t pay outsize compensation for being a rainmaker, and doesn’t pay based on billable hours alone. The system encourages collaboration rather than fights over origination credit and the hogging of work.

The compensation calculation begins with metrics that show the profitability of each lawyer.

Attorney profitability is calculated by comparing the revenue collected on a lawyer’s matters with the costs of that lawyer, measured by the lawyer’s salary and overhead, according to the case study. If Attorney X earned $200,000 and cost $190,000 in overhead, Attorney X’s costs to the firm for the year were $390,000. If X worked 2,000 hours, the cost per hour worked out to $195. The findings can then be used to see whether X was more or less profitable than he should be.

Duane Morris Chairman, John Soroko told Harvard researchers why the numbers were important. “Many firms just look at the size of each person’s book of business,” he said. They see three lawyers with $4 million worth of business, and compensate all of them the same for their rainmaking, he said. But those firms aren’t looking at the costs and value associated with that business, he said.

The profitability calculation primarily drives pay, but the executive committee looks at other factors, taking into account a self-evaluation memo written by each lawyer. Mentoring, administrative roles, the ability to generate new business, internal referrals, the efficiency of the partner’s team, attitude and work habits enter into the calculation. Any partner may see the full array of compensation information, though “remarkably few” ask to see the numbers.

Partner Sharon Caffrey told researchers that the compensation system doesn’t overemphasize rainmaking. “There is a balance between rainmaking and work effort,” Caffrey said, “so we don’t have a lot of rainmakers with huge books of business receiving credit disproportionately, who then have many service partners who do not receive credit for helping the rainmakers achieve success.”

—ABAJOURNAL