Alternative Fee Arrangements (AFA), Partner Compensation, and Sales Commissions
At the International Legal Technology Association (ILTA) annual conference last week, alternative fee arrangements (AFA) was a hot topic. One dinner discussion with a few forward-thinking friends got me thinking about how firms cost matters and how best to handle sales commissions.
What, you ask, there is no such thing as sales commission at a law firm.
Let’s face it, beyond the few firms still on lock-step partner pay, partner compensation reflects “rain making.” In most businesses, the partners who brought in the business would be paid a commission on the value of the deal (um, I mean matter or client).
Would it matter in setting an AFA price if law firms, irrespective of what they called commissions, separated out the “legal labor value” of partner work from the “sales value”?
In most businesses, commission is a “below the line” cost, meaning it is not part of the “cost of goods solds”. If, for example, partner R(ainmaker) brings in a $1mil matter, suppose her commission is $100k and that amount is accounted for separately. If both R and partner G(rinder) can do equivalent quality legal work, then, for costing purposes, both R and G should figure in to the cost at the same hourly rate.
If, however, commission is bundled into R’s rate, then the matter may appear more expensive than it really is or the firm may mis-allocate work between Gs and Rs. Of course most firms don’t really have a great understanding of costs, so there is some circularity here. And my analysis assumes the net value to the firm of the $1mil value is actually $900k because of the commission paid.
Can anyone help with a theoretically sound approach for how best to think about this question?
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