Dealing With An Outlier

In the small to mid-sized market, it is not unusual to encounter a firm that consists of relatively similar practices in terms of volume and rate coupled with one extraordinary practice. I refer to this one extraordinary practice as an outlier. For firms in this situation, handling the outlier practice may be a real challenge.

Normally the outlier practice is the most profitable in the firm, and the partner or partners involved in this practice want their compensation to be reflective of this contribution. In many instances, their compensation may dwarf the compensation of their peers. Partners in lower billing rate practices must generate more hours, and thereby work harder than their counterparts to produce the same level of income. In some instances, resentment can form, and an otherwise profitable relationship may crumble.

While compensation should follow contribution to profit, outlier practice partners need to recognize the unique benefit that comes from practicing in a firm with lower overhead. Partners with outlier practices can maximize their income since they can generate higher billing rates without having the native costs associated with higher profile firms. At the same time, partners who benefit from an outlier practice’s positive impact on the firm’s earnings, should be equally appreciative for an enhanced income earning opportunity.

Assuming that a firm tries to compensate its partners at a rate of 85% of contributed profit (typical in well-run firms), 15% of a partner's practice profitability is for the firm's benefit. Of course, not every partner has a great year every year. But if a firm is compensating for profitability and dealing with unprofitable partners, consistently profitable partners will be paid in this range. Alternatively, if a firm is weak, and the profits of the outlier practice are needed to augment the income of other less profitable partners, issues are undoubtedly eminent.

Firms need carefully assess the value of each partner’s contribution to firm profitability. Are they paying their partners at market, or at least in proportion to their contribution if the firm is unable to pay at market in the short term? Pretending that highly profitable partners are not really highly profitable, is normally illuminated when these partners leave for better opportunities.