As Carly Jacobs, senior partner at law firm Williams and Jacobs, LLC drove home from the firms annual golf tournament to meet her husband and go to the firms family picnic that evening at Riverwalk, she was thinking very carefully about what she had observed that day. The golf tournament at the Springbrook golf course had always been a big hit with the employees. But, frankly this year it seemed to clary that the level of energy and laughter typically of this event was low.

Under Carly direction, the firms office manager had carefully designed the four person scramble teams to help individuals from different law practice groups within the firm get to know each other better, Carly was therefore disappointed to see that most of her colleagues were choosing to sit with members of their own group during lunch rather than with their golf teams.

She and her retired partner, Isaac Williams, had originally designed the firms business model to create healthy competition between the professionals that form each practice group at Williams and Jacobs LLC. The firms annual bonus pool is sustainable, and it's is distributed based on operating profits for each practice grout. Carly liked the competition. It kept everyone motivated to serve clients and grow business within the practice. It was supposed to help employees be more conscientious about cost in the firm In Carly's view, however, cost continued to be too high, and overall firm profits this year were essentially flat. This was affecting everyone's bonuses as well as the distribution of net income to the partners.

After handing out the bonus letters the day before, Carly was expecting some disappointed comments, and she was correct. There were grumbling about costs -specifically about the amounts some practice groups were spending on travel and training. This discussion revived old arguments about how costs were being assigned across practice groups.

Building the Williams and Jacobs law practice:

23 years ago Isaac Williams and Carly Jacobs debuted their firm as an estate and trust law practice. Issa had been a partner with one of the large firms in downtown Chicago, where Carly was a promising associate having graduate three years earlier from Michigan State university near the top of her class. Issacs recognized Carly his dream to establish a small firm outside the city where he could build on what he had learned about successfully running a law practice. Carly was convinced, and soon they both tendered their resignation and signed a contract for a shared office space on ferry Road in the city of Naperville.

Within five years, Carly was a full partner in the firm, and Williams and Jacobs, LLC had opened its own standalone office on napery Boulevard. The initial work helping clients file amended tax returns was evolving into a full fledged tax practice that complemented the estate and trust services. The tax practices become a second anchor for the firm with the arrival of new partner who specialized in tax.

One of the promoted associated also began a practice focused on bankruptcy, enlisting the help of recently retired law school professor to serve in a "of counsel" Role, which is a senior attorn who-while not actively involved in the day to day work of the firm -is either available for consultation related to his other her specially or manages a particular practice or clients on part time basis.

The bankruptcy practice is at an early stage and is still evolving. In fact bankruptcy has yet to report an operating profit, which means this practice group is not yet practicing in the bonus pool. The bankruptcy group is obviously concerned ,and partners are worried about the drag on overall firm profits.

The firms compensation model:

As the firm grows, the separation between the practice becoming blurred. This blurring is generally, a good result, as clients access multiple services and some of the firms professional become skilled in multiple practices. In particular, the estate and trust practice often crosses to provide combined client services with the tax and family practices estate and tax also occasionally require bankruptcy support.

She had a regrets about the decision to leave the big Chicago practice so many years ago and start her own firm with Isaac Overall, the firm has been a success, but profit performance over the last few years seems to indicate a leveling off, or worse.

\fTable 2. Bonus Pool for Last Year Estate/Trust Family Tax Corporate Property Bankruptcy Office Staff Total Bonus pool assigned to practice $12,223 $37,950 582,999 $47,851 532,054 SO $15,220 $228,297 Practice group compensation $536,640 $395,520 5612,000 5872,640 5364,320 5337,560 $294,000 $3,412,680 Bonus percent of compensation 2.3% 9.6% 13.6% 5.5% 8.8% 0.0% 5.2% 6.7% Practice group bonus pool % 28% Staff group bonus pool % 2% Notes (see Exhibit 3 for key date): Bonus percentage of compensation is computed by dividing the bonus pool by the group compensation. This represents the employees' bonus on top of compensation.Table 3. Revenue Analysis for LEI: Tear Average Billable Rate: per Hour Bhtefrnet Family Tax Corporate Prurmpel'lmr Bankruptcyr Partners $320 $3210 $360 Associates 5180 $130 Paralegals $65 STD Interns $80 $30 Of Counsel Total Billable Hours ' Corporate Partners Associates $5.850 Paralegals Interns Of Counsel Total 5290 $150 $55 $340 Bankruptcyr 51,330 51310 $1,052 $813 Table 4. Profit and Loss Report for Last Year Estate/Trust Family Tax Corporate Property Bankruptcy Total Client Revenue Partners $444,800 $742,400 $1,219,920 $1,087,200 $459,000 $400 200 $4,353,520 Associates 682,500 334,260 1,111,500 318,750 273,600 2,720,610 Paralegals 126,000 105,000 70,850 275,100 118,200 57,860 754,010 Interns 135,200 253,600 388,800 Of Counsel 75,600 561,000 313,500 276,420 1,226,520 Total Service Revenue 51,328,900 $1,409,400 $1,760,230 $2,727,400 $1,209,450 $1,008,080 59,443,460 Costs of Service Of Counsel payments (55%%) ($41,580) ($308,550) ($172,425) ($152,031] (5674,586) Professional salaries (436,800) (296,640) (563,040) (727,200) (276,000 (291,000) (2,590,680] Paralegal salaries (99,840) (98,880) (48,960) (145,440) (88,320 (46,560] (528,000) Intern wages 56,100) (111,100) 167,200) Payroll tax, benefits, etc. ($106,080) (580,093) ($133,253] ($183,416) (571,760) (568,676) 643,278) Travel and entertainment (14,450) (24,130) 67,785 [164,855) (27,438) (21,750) 320,408) Court and filing fees 61,130 39,765) 21,980 [119,876) (21,444) (87,650) (351,845) Postage & delivery 1,295) (5,111) (3,663 (2,786) 850 (4,610 (18 315] Total Costs of Service ($761,175) (5853,169) (5894,781) (51,454,673) ($658,237) ($672,277) ($5,294,312] Administrative Expense Overhead Rate Office staff salaries and wages (545,447) (536,417) ($49,184) (595,498) (537,823) (529,630) ($294,000) ($5.98) Payroll tax, benefits, etc. (5,908) (4,734) (6,394) (12,415] (4,917] (3,852) (538,220) (0.78) Supplies and travel (89,565) (71,769) (96,930) [188,203) (74,539) (58,394) (579,400) (11.78) Marketing (76,094) (60,976) (82,352] (159,898] (63,328) (49,611) (492,260) (10.01) Insurance (malpractice, etc.) (138,428) (110,924) (149 812] (290,880) (115,205 (90,251] 895,500) (18.21) Training and licensing (50,935 (40,815) (55,123] (107,030) (42,390) (33,208] 329,500) (6.70) Ques and subscriptions 9,312) (7,462) 10,078) (19,567] (7,750) (6,071) (60,240) (1.23 HR development (7,602) (6,092) (8,228) (15,975) (6,327 (4,957] (49,180) (1.00) Mortgage interest [15,289) (12,251) (16,546) (32,127) (12,724) (9,968 (98,905) (2.01] Property tax 3,055 (2,448 (3,306] (6,419) (2,542 (1,991 (19,760) 0.40 Building maintenance (9,756 (7,818) (10,559) (20,501] (8,120 (6,361 (63,115) (1.28) Equipment purchase and maintenance (30,069) (24,095) (32,542] (63,185] (25,025) (19,604) (194,520) 13.96) Utilities [11,006) (8,819 (11,911] (23,128) (9,160) (7,176) (71,200) (1.45 Computer and technology [18,983) (15,211) (20,544) (39,888) (15,798 (12,376) (122,800] (2.50] Offsite storage (2,309) (1,851) (2,499) (4,853] (1,922 (1,506) (14,940) (0.30 Accounting and payroll [12,266) (9,829 (13,275) (25,775) (10,208] (7,997) (79,350) (1.61] Bank interest and charges (691) (554) (748) (1,452) (575) (451] (4,470) 10.09 Total Administrative Exp. ($526,715) (5422,065) ($570,030) ($1,106,794) (5438,352) ($343,404) ($3,407,360) 69.30 Other Inc. Rate Other Income - office rents 2,968 2,378 3,212 6,237 2,470 1,935 19,200 50.39 Operating Profit $43,978 $136,545 $298,631 $172,169 $115,33 ($5,666) $760,988 Bonus pool (30%) (228,297) Average per Partner |Net Income $532,692 $53,269 Notes Costs of service are traced directly to each practice group. Payroll tax, benefits, etc. in the costs of service are for professionals, paralegals, and interns. These similar costs in adminisrative expense are for office staff. Administrative expenses and other i allocated based on billable hours in each practice gro