Harvard Business School recently conducted a study of Duane Morris’ operations in a post-recession legal sector and found that the firm has managed continued growth through attorney collaboration and a focus on compensating lawyers at all levels on a cost-versus-contribution basis.
It’s the second study Harvard Business School has done on the firm. The first study was conducted in 2006.
Duane Morris Chairman John Soroko told The Legal he recently decided to reach out to the school again to see whether it would be interested in doing a follow-up study, given how drastically the legal profession has changed since the economic downturn that began in 2008.
Soroko, who took over as chairman from Sheldon Bonovitz in January 2008, said he was proud of the story the firm had to tell and was confident that a new study would back up its claims that it maintains a nonhierarchical culture focused on teamwork and fair compensation for lawyers at every level.
The 2006 study now serves as a snapshot of a firm that had recently begun the transition from a regional firm to a national firm and had its sights set on international expansion. But with those ambitions came concerns about maintaining the firm’s culture and avoiding the then-burgeoning trend of increasing associate starting salaries and widening gaps between firms’ highest- and lowest-paid attorneys.
Of course, the recession that took hold two years later caught many in the legal industry by surprise, but the 2013 study shows a firm that managed to stay the course and continue growing in part by compensating its attorneys based on the actual profits they generate rather than simply the hours they bill.
At the time the first study was conducted in 2006, Duane Morris had just completed its first merger, bringing on 64 lawyers from San Francisco-based Hancock Rothert & Bunshoft, and had only one international office, in London.
Today, the firm has offices in Singapore, Hanoi and Ho Chi Minh City, as well as joint ventures with firms in Singapore and Oman and an alliance with a Mexico City firm.
According to the study, Duane Morris grew its fee revenue by 14 percent over five years, from $368 million in 2008 to $420.5 million in 2012.
In addition, according to the study, its profits per equity partner (PPP) grew by about 21 percent during that period, from $725,000 in 2008 to $875,000 in 2012, while its equity partner tier grew from 120 attorneys in 2008 to 127 in 2012.
The study said Duane Morris’ revenue per lawyer (RPL) grew by about 8 percent in the past five years, from $635,000 in 2008 to $685,000 in 2012, while its total headcount has grown by about 6 percent, from 578 lawyers in 2008 to 613 lawyers in 2012.
Part of what has driven and helped sustain that growth, according to the study, is a focus on attorney collaboration and cross-selling, which the firm aims to foster by taking a more in-depth approach to attorney compensation beyond simply rewarding lawyers for hours billed.
According to the study, Duane Morris calculates compensation based on its matter contribution analysis (MCA) system, which it developed in 1992.
Under the MCA, the study said, an attorney’s profitability is determined by comparing the projected hourly cost of employing the attorney with the actual hourly cost of employing the attorney.
An attorney’s projected hourly cost is determined by adding up his or her salary and overhead cost, then dividing that figure by the attorney’s target billable hours, according to the study.
An attorney’s actual hourly cost to the firm is determined using the same formula but substituting the actual hours billed for the projected billable hours, the study said.
If the actual hours cost is less than the projected hourly cost, the attorney is deemed to be more profitable than expected, according to the study.
The MCA requires the firm to track not just the hours billed, but the cost incurred in doing that work.
An example of an individual attorney report attached to the study showed that an attorney in the firm’s corporate practice with a preferred hourly rate of $680 was paid around $1.1 million and cost the firm an additional $351,500 in overhead and minimum contributions in 2012.
Assuming, for the sake of argument, that attorney was an associate with a target of 1,900 billable hours for the year, he or she had a projected cost of about $753 per hour.
According to the study’s example, that attorney actually billed 2,060 hours in 2012, so, under the MCA, he or she was more profitable than expected, costing the firm about $694 per hour.
Soroko is quoted in the study as saying that the MCA is an alternative to most firms’ compensation models, which typically only consider the revenue a lawyer generates so that three lawyers who each bring in $4 million of business would be paid exactly the same.
“But, in reality, your $4 million worth of business took six people to produce, and you generated time value of $3.5 million in producing $4 million,” Soroko said in the study. “Julia’s $4 million took $4.5 million worth of time value and 10 people. Robert’s $4 million took $7 million to produce, and it took 20-some people. So the costs and value are entirely different, and that would drive different partner compensation.”
According to the study, while the MCA establishes the basis for compensation, other factors play a role in determining an attorney’s final pay, including the efficiency of that attorney’s “team,” which is made up of anyone who received 25 percent or more of their work from a single partner.
Sharon L. Caffrey, a partner in Duane Morris’ Philadelphia office who chairs the products liability and toxic torts division of the firm’s trial practice group, was quoted in the study as saying her own compensation was additionally influenced by her role as a practice leader as well as her involvement in Duane Morris’ women’s initiative.
Susan A. Laws, a partner in Duane Morris’ London office, is quoted in the study as saying Duane Morris’ compensation system emphasizes “fairness over the absolute amount of money paid,” which helps to drive collaboration among attorneys.
“At other firms, the ‘eat what you kill’ mentality can drive other behavior—people hogging work to themselves, people fighting over who introduced a client to the firm,” Laws said in the study.
As several lawyers noted in the study, collaboration and cross-selling have become increasingly important as the firm has taken on more complex legal work over the years, but not everyone is a natural at either concept.
“You see lawyers who keep themselves busy with work they generate, and they either push work down to associates or call on people in their area to help out,” one anonymous partner was quoted as saying in the study. “But then you see other partners who generate a lot of business, not only in their specialty—they are just generating business. And they call on all the corporate lawyers, labor/employment lawyers, IPO lawyers and trial litigators. And that’s the person who knows how to get into that marketplace and is really good at cross-selling.”
As the study showed, the number of collaborative matters—client projects for which at least two Duane Morris partners billed time within the same year—at Duane Morris has been on a steady rise since 2005.
That year, according to the study, Duane Morris had just under 8,000 collaborative matters. In 2012, the study said, the firm had around 11,000 collaborative matters.