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How Analytics Are Changing Partner Compensation

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By Jonathan R. Tung, Esq. on October 23, 2015 9:58 AM

What took so darn long? Law firms are now moving into the 21st Century of data analytics. Analytics have been adopted by so many sectors of business one almost wonders why law firms have been so slow to adopt the use of real time data analysis in running their own businesses.

The traditional practice of determining a partner's compensation based on highly subjective criteria is going the way of the dinosaur. Increasingly, the change has been credited with a major observation: increased revenue does not necessarily mean increased profit.

Old Habits Die Hard

Lawyers are often accused of being extremely settled in their habits. Visit the office of any midsized firm headed by the original partner and it's almost certain that the bookshelves will be festooned with old Appellate volumes with dust from the Nixon Administration.

Some lawyers have staunchly dug in their heels in response to the paperless movement. Similarly, using new technology to determine partner compensation has also been considered taboo.

How Firms Determine Partner Compensation

Recently, Aderant published a whitepaper that looked at the issue of partner compensation. It found that while a number of law firms were basing partner compensation on the very subjective measure of bringing in clients and revenue, more and more firms are using analytics to determine new partner compensation. 

This is somewhat in response to pressure from clients, and also the realities of the global recession which has caused many firms to look for new sources of money in order to better balance their books. But according to Aderant, the move to use analytics really started picking up steam around seven to eight years ago when margins were beginning to be looked as a place to squeeze extra funds.

It's Not About Profits, but How you Keep 'em.

Traditional models of partner compensation relied, again, on revenue and the number of people that partner might introduce into the firm. This seems like a "well duh" mistake, but a significant number of firms still do this, according to the Aderant whitepaper. Excuses followed. Some firms defended by saying that they simply didn't have the data for profitability.

That response says two things. It says that the particular firm in question isn't tracking its numbers at all. And number two, because of number one, it bases compensation on something as random as throwing darts at wall. What does that say about the practice?

Proprietary technology is at the fingertips of attorneys, but more and more freeware analytic technology is being made available. Analysis used to involve an accountant with pen and paper. Excel once was a revolution. But, today, data analytics has made keeping track of firm revenue easier than ever. Therefore, partner compensation should no longer be left to chance.

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