The Distribution Systems of Chinese Law Firms (Part 2)
In the previous part 1 article, we talked about few distribution systems commonly applied in Chinese law firms. This article will continuously discuss few more distribution models and what else should a firm look at when seeking growth and development.
The Simple Unit (Formula)
For qualified, productive partners who can also find clients and engage in non-billing business, some law firms use a relatively direct and completely objective formula to calculate the partners as mentioned above' profit; this formula is known as "The Simple Unit".
A typical formula might be that each partner receives:
one unit/point for each year with the firm
one unit/point for x amount of production (fees billed or fees received)
one unit/point for x amount of client generation.
The Simple Unit is calculated on a pro-rata basis (proportionate allocation). The significant difference between the simple unit and the system we will look at in the next paragraph (Modified Hale and Dorr) is that the former looks at the overall proportions whilst the latter are designed for a more individual goal. This is a very easy-to-understand system; employees can easily understand and compute. Michael J Anderson quoted in this book 《Partner Compensation Systems》: "every partner knows precisely what they have to do to earn the income they desire, and they know at what level all of the factors are weighted."
The downside of the simple unit formula is that: As the calculation is based on the production -- the heart of this system, it triggers potential hoarding of clients and files.Although the Simple Unit is a relatively objective system, it still considers seniority and non-billable time to some degree; it can cause animosity among the younger partners and impediments to future recruitment. If a new partner starts from zero-point/unit, compared to their peer based on the seniority factor, this point-based system will seem less motivated to young professionals
Modified Hale and Dorr
In the 1940s, the Boston law firm Hale and Dorr created the first incentive-based distribution system. Under this model, three types of partners can participate in profit distribution, namely:
1. Finder, a partner who expands customers and has a source of cases.
2. Minder (maintainer)-a partner who maintains customer relationships.
3. Grinder (worker)-a partner who engages in business.
According to the book, 《Partner Compensation Systems》written by Michael J Anderson, for instance: the Hale and Dorr system can be described as 10% (of profit) to the finders(who are responsible for sourcing cases), 20% to the minders (who are responsible for keeping client relations), then 60% to the grinders who engage with the business, as for the remaining 10% of profits, goes to a discretionary pool, which is allocated at year's end to the partners who have shown exceptional performance. This system gives out a clear footprint in terms of each partner's individual contribution; under the guidance of Hale and Dorr, partners will know exactly what to do to increase their income. Depending on partners personal goals and work/life balance, they can choose whatever they prefer, and the profit they would make from the selected responsibility will be expected.
However, every system has its weaknesses. There are many aspects for growth in a law firm, and some of them are not as profitable. For example: divide responsibility for firm management, training or mentoring juniors, practice group leadership, recruiting or committee work.
Many law firms do not have an equal distribution in these sectors; in this case, Hale and Dorr's encouragement on partners' individual financial growth could be harmful to a law firm to obtain a steady, balanced development. The nature of this system is to motivate partners to choose work towards their own goals, which means they will always select the billable work ahead of the non-billable work. As a result, partners in a law firm will become more individual than working as a team and will not be suitable for team building if the goal is to focus on the overall firm growth.
Each law firm has its own staff composition and different market positioning. There will naturally be differences in strategy, culture and environment. A good leadership person and competent in-house management team should completely understand the characteristics and which structure/system should be adopted to increase the firm's most significant strength to an optimum level in the competition. We need to be aware of these changes, be adaptable to the law firm's strategic positioning, distribution system, or corresponding law firm structure. Otherwise, it will bring management confusion, eventually leading to recruitment impediments.