Generosity Has to Be Engineered for a Healthy Business

Many of you are not looking at the level of generosity that you are putting forth to your team. And I get why you want to do it. I want you to be able to do it, but you cannot do it blindly. And in many cases, many of you are over your skis with the level of generosity you're giving. The business isn't built for that. So there's going to be an impact. There's going to be consequences for you moving forward with some level of generosity that really, that's for a company that has a better profit margin than what you've got. You have got to engineer your generosity.

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We are going to talk about something that I think many of you need to hear and to think about for yourselves and just approach something maybe slightly differently. We're going to be talking today about generosity. And I guess if I had to title this, it would be, "Generosity Has to Be Engineered." It can't just be intended. It has to be engineered.

And if it's not engineered, then the business itself cannot actually handle it. It can't afford it, so to speak. Why this is coming up, I've been wanting to do this episode for a long time, probably over a year. This has been a seed in my head. I've wanted to put this together. I've thought about different ways to share this and different ways to approach it, but just recently, this all clicked into place for me. Not only because I had a couple back-to-back instances where in the past, there's consistently I see what I'm going to be talking about today. I see it, and we have to address it. 

But there's been more sort of clumped together that I've had to have these conversations with owners and come up with a game plan. So that's one. And the second is I took a trip that, on that trip, I learned something and saw something. I was like, oh my gosh, that's it. That's how we pull this together.

So I think I've got the episode today. I'm hoping that this lands in a really great way for you guys to help you figure out, one foot in front of the other, what needs to change, if anything, when you listen to this, so that you can be as generous as you want to be, but that the business can stay healthy. The business can handle the generosity that you're putting forth to the team. 

So, I'm going to start with just addressing the idea of wanting to be generous with your team. I love that our clients want to be generous to their teams. I think much of that stems from the firms that you came from before you started your firm. You probably experienced something that you wished was different, and you think should have been different, and that there should have been more generosity, whether it's through the amount that your company paid for premiums for health insurance, or whether they offered health insurance, whether it was the bonuses, whether it was the hourly or production requirements.

There's all different kinds of ways that people can be generous to their teams. The firm can be generous to their teams, but it has to be engineered, and it can't just be put into motion and then you ride that wave for a while where all this generosity is put into motion.

And then you eventually, you realize like something isn't working. Why isn't this working? Why do I feel tight? Why do we feel stretched? Why can't I take home what I want to take home from the business? Why are people not doing XYZ? There's a lot of impact that stems from just intending good generosity and throwing things into motion without doing your due diligence and making sure that the math maths, if you know what I'm saying.

There's a way to do it. There's a way to get what you want most of the time. There's a way to be as generous as you want to be, but you can't just put it into motion because the business isn't engineered to be able to have that, to be able to handle that level of generosity. That happens all the time.

So, we're going to talk about that today because it can be a silent killer. And people don't really know why. And when we get under the hood and we start working with people, we can say like, okay, whoa, your people cost is X percent. I'll dig more into this. I see flags. My team sees flags. And we say, okay, so, here's the deal. Here's the truth of the situation. And so, something has to change. Let's talk about that. And then we'll talk about why is the people cost so high? We'll talk about how do we right-size things because there is a path. 

And when you start taking steps to right-size the health of the business so that you can afford the generosity that you want to give, then we start to see improvements. So there's a number of changes you can make when you realize you need to. We can talk about that. So, that's what we're talking about. And the generosity comes from such a noble place. You want to be good to your team. You want the culture to be great. You want people to feel like they're not being micromanaged, that they have the freedom to live their lives in ways they need to live it, but also work here at the firm, right? And I think that is beautiful. I don't think you should not have that as the goal. 

But just as I'm sort of alluding to before and so now we'll get a little more nuts and bolts, what ends up happening is that the firm takes the hit. And there are certain metrics that when you look at those metrics, you can see something isn't quite right. You can see that the business is struggling to be the entity it should be and be as healthy and as strong as it should be while supporting the weight that you have put on it with that generosity. And most of the time, generosity comes with a cost for the entity.

And when you are trying to make decisions about what and how generous you want to be and what benefits you wanted to put into place and what perks you want to put into place and all that, there's just more thought that has to go into it. It should take you time, like real time. 

There should never be benefits or new ways of being generous to the team without some real due diligence behind the scenes so that you can check and make sure that everything is going to remain stable with the business while you are providing that benefit.

I'll give you a couple of examples of what I've seen just to the surface of my mind as I was preparing for this episode. The first one is, and that I see this with immigration firms. Immigration firms have been put through the ringer in the last couple years, as you might imagine. And if you have an immigration firm, if you own one, you know exactly what I'm talking about. Things have been up and down. There's been a lot less certainty. It's been challenging to operate a business and to run a business. It's been very challenging with what this administration has put forth. 

So, it is, that's a fact. We have to deal with that, right? Well, what you need to remember is that, and I've said this on a podcast before, I've already alluded to it and said it here today, the business, you have to think of it like an entity. It's a living, breathing organism. And it requires certain things, checks and balances in order for it to stay healthy. And that's tough when there's a lot of uncertainty, and you're put into this set of circumstances that you have even less control than you have, typically, as a business owner.

When immigration firms find themselves there, and these sort of by nature, I think are pretty generous people, just with the type of law that they practice, their heart is really in it. And so they want to make sure that they protect their team to the best of their ability. I have air quotes around “to the best of their ability.”

So you will see, I have seen firms carry the cost of the team beyond what the revenue can withstand for periods of time, for long periods of time. And it gets to a place where the team cost is so heavy that it makes it very difficult for the revenue to cover the cost of the team plus the other expenses, plus owner distribution, right? And when that starts happening, you have decisions to make. And when you can start to see the writing on the wall, you have decisions to make.

And most of the firms I work with were willing to take the hit or the risk and they said, you know what? Nope, I do not want to let go of team members. Even though they see the math and they see the writing on the wall. It's like, I think this is going to, we're going to be able to ride this out and we're going to come back and we're going to need all these team members. Plus, I don't want to do that to my team. Who does, right? And so they keep moving forward with the same cost even though the revenue is dipping, dipping, dipping, dipping. And eventually, and in one case, I watched an owner put their money into the firm month over month over month. 

Eventually, there is more panic that sets in. There is resentment that sets in. And, you know, when you think about the whole point of being generous to your team is it's almost like if I can imagine, it's you wanting to be generous to the team, and so you are pouring generosity into the team. And the entity is over to the side, being left behind, being forgotten.

And by forgotten, I'm not saying that, of course, my clients are looking at their numbers. It's not like they're being forgotten, but the problem is that you are pouring generosity towards people, and what needs to do that is the entity needs to pour generosity into people. But you want to put that generosity towards the people, and you do it, and you keep doing it, and you keep doing it, and you're kind of side-eyeing, watching the entity like, "Jeez, you know, like this is hurting." 

But you still keep doing it instead of making a decision to, I mean, in some cases, with the immigration firms I'm talking about, instead of reducing staff, no one wants to do that. I am aware. No one wants to do it. No one wants to have the conversations around it because they don't want to hurt their team. They also don't want to face that level of discomfort. No one ever wants to do that. And whether we're talking about law firms or any other businesses. So they keep trudging on. They keep trudging on. And meanwhile, we're in the red from a net profit perspective. The owner is pouring money into the firm every month just to cover everything. 

There is resentment building after month five or six of doing that, where it's like, hey, I'm working too in this firm, and I'm not getting a paycheck. Not only am I not getting a paycheck, I'm putting into the business. And I'm just carrying the business. That's what it starts to feel like, that the owner is carrying the business, which is exactly true. That's exactly what's happening. But there's generosity, and by the way, there are perks that are better than a lot of the perks of other firms that I work with. That was a choice from the owner, right? And so, carrying all those perks and that level of generosity, plus the generosity of just hanging on and paying for the team when the business can't afford it, but you're just doing it, doing it, doing it, it starts to stack and create a real problem.

Now, the example I'm talking about right now, this was such an inflammatory issue. It became that way. It was, you know, we all see this coming, we all see what's happening, we all, like it's all there. No one's ignoring it with conversation, but it's a choice. It's a choice. It's a choice. It's a choice. And then it gets to the point where it's almost like a flip. It's almost like a burnout from the owner. It's just like, I can't. I don't want to keep doing this. This is totally asinine.

And by the way, they have a hole to dig themselves out of at this point as well. So this isn't just like, okay, make the decision that you need to make, release some of the team members, and lay off. I'm not going to try to sugarcoat the language, but truly, you're going to have to lay off people. 

And as you do that, then just settle in and stabilize and get things back under control. And that takes time. That does not happen overnight. So all of these shifts happen over time, over a series of months. None of them just happen overnight. That's really rare. You don't see something kill a business in a month. It happens and it's a decision. There's conscious choices being made in many cases to stay to hold status quo even though there's things outside of your control that are really making that difficult to hold the status quo. And so watching people go through this and continue to make the choice to float it. 

Now, I will say there is an example of one of the immigration firms I'm thinking of that they made a decision to reduce hours for people finally. This was after like four months of the owner putting money into the business, consecutive months. Okay, so they finally did make a reduction in hours. They went to a different kind of schedule, and that certainly helped. That made a big difference. And then there were decisions a couple months after that to release some staff. And by the way, the people that they were releasing weren't the best culture fits anyway. So there's that.

And from an objectively, which it's scary on the inside. I get that, guys. But objectively, from the outside looking in, it was like, oh my gosh, you're weeding your garden. You're tending your garden. Please do this. I know that it's scary and there's a lot of uncertainty. And what if the business comes back and you don't have these team members that were valuable and were needed when the business was booming? But this is an opportunity that you don't just get very often, and it is a good time to weed out. So that's, you know, from objectively, that's my tone, my voice, that's what I was trying to say. And here we are. 

The reason that we got here was the generosity. And the reason that we got here was because the owner chooses to be generous, and the generosity wasn't engineered. You have to engineer it. You have to look at the business and figure out when can you offer that kind of a benefit? When will you do that? What are you willing to dip down to with some of these benefits before something changes? Because what you put into place, if the business takes a hit, you're going to have to re-evaluate. That's just the truth of it because this all comes down to math. And you can decide the figures you're okay with. That can change. Those numbers may change. Your thresholds may change. But you have to consciously know what it means and you have to be willing to re-evaluate.

So, that's one example. It took a little bit longer with that one because there's so many nuances and I can't give you the whole scoop. That's not what this episode is about. It's just this one example, this one firm that's top of mind for me. No. So I'm trying to, I'm spending more time on it, but I can't. I'm giving you what I think you need to be able to see the point I'm trying to make.

Now, let's go to a second example. More common because this can happen to any firm. There's another firm that again, they want these generous benefits. They want really good lifestyle for their team.  Basically, their salaries are really good, really competitive with most cities, and they're not in a big city. So there's that. So the salaries are amazing, which again, I am all for as long as the math maths.

On top of that really good salary, there is great benefits that they offer their team members. And the billable requirements, this is an hourly firm, the billable requirements is about 2.9 a day. Now, that's their minimum that they will accept. But a lot of people, as we know, will fall to their minimums. So saying that basically means that's the standard. Anything over that, good job, right? 

So 2.9 hours a day is what it works out to be, what they're supposed to hit for the year, okay? The hourly rates are not the billable hourly rates for their attorneys, for example, are not that high because they are not in a big city. They are in an area where they really feel like this is on the upper end of what's being offered in their state and in their region. So they're keeping it capped. So it's somewhere around, you know, $375, $400. In some cases, less for some attorneys. Okay, so there's that. Then on top of that, if they meet their minimum, so the 2.9 hours a day, whatever that works out to be for the year, then there's a percentage of production that the attorney receives above that marker. 

So there's a real opportunity for these attorneys to make such great money, which is so good, right? I want people, I want team members to make great money. But the firm can't really afford it because everything above the 2.9 hours a day is proving very difficult to be able to fund the percentage that is being given. It's difficult to fund that because, really, the business needs it. The business needs it because of the very reasonable, very solid salaries that are being offered and the benefits that are being offered.

Now, on top of this, the owner really cared about this, wanted to provide to team members three months of maternity leave, full paid, full benefits, like there's no change for that attorney for three months or for the team member. Now, because it would be any team member. So that's on top of the generosity that's already been laid out.

And I deeply understand the why behind the what. I understand this owner. I get them, you know, they want their team to be able to have a life outside of work. They want their team to be able to do the things that they want to do and feel real job satisfaction. I love that, but the way that it's been set up isn't sustainable in the long run. Having conversations, it's we're starting to see, okay, how else can we make this work? What needs to shift? Or are we not going to change anything, but then my expectations of a profit margin and, like, what I'm trying to do there, profit margin and distributions, those have to change greatly. 

The other thing is that when you find attorneys in these scenarios, they are floating the business. So the money that they are bringing in through their work and through origination, they are floating the business, and that is very tough for owners to swallow as well because they're getting tired, and they're not taking home enough.

So it's almost like, listen, you don't have to change anything. Something has to give. You're either your expectations have to change about what the what's possible for this business if you don't want to budge on any of the benefits you've had, or we need to change something within the nuts and bolts of how this is all working so that there can, the business can be healthier, meaning a healthier profit margin and which would mean that there's enough going around to cover all of the expenses plus there's some left over, which is exactly the way it should be. 

Those are two examples. I can go further into those, but I just need you to see these are the facets that people are dealing with. Those are bigger examples. I will tell you very consistently, I see things or scenarios where it's not quite as generous as what I've just shared with you, but it is too generous for the business.

So I will see maybe there's benefits, and they pay 100% of the premiums for their team, and they pay really good salaries. And their billable requirements or their production requirements, they're not that high, or maybe they've never been set. That could be another thing that I see a lot. There's never been expectations set about what needs to be true.

Another scenario is I see where there's been some things set. It's usually not been well thought out, but there's some expectations set when it comes to production or billable requirements. And they're super generous with their benefits. They give bonuses that are really generous. But the billable hourly rate or the flat fees, if they are a flat-fee firm, are not high enough to make sense in this equation. So they need to make an adjustment there. They either need to raise their flat fees. Most of the time, they're not really deeply evaluated anyway, and they're undercharging for the work because they're undercutting what they thought it would take them to get it done. 

And so that just the way that they price their flat fees wasn't as intentional as it should have been. So that's often times why they're too low. But sometimes, for example, with billable hourly rates, they need to go up. It should be, inside of Velocity Work, it's common understanding that's what we look at. And I'm not trying to get people to the top of the scale all the time, at all. At all. I'm just trying to get them to make adjustments that will greatly affect their bottom line and let's everything hum in a better, more sustainable way.

So anytime you look at these situations and you see, oh, this isn't working, it's too tight, you do have to look at different facets. But one of the things that always comes up, actually, I don't want to exaggerate. It doesn't always come up. It comes up consistently, is the level of generosity versus what's expected out of the team. Or another way to say that, a level of generosity that the business can't keep providing because it's not set up in a sustainable way.

So it's eating, eating, eating, eating, eating at the health of the entity, and usually people are pretty unaware of it. They don't really know what the problem is. They don't really know why things are tight. They could guess at some things, but really, when it comes down to it is the generosity that is being provided wasn't engineered; it was just given. It was just intended, and so thus it's born, right? And without looking at the consequences or the impacts on the entity itself. 

I don't know if you guys can see yourself in this. I know some of you can, but I want you to evaluate with where you are being generous, which is great. Are you also setting expectations that match so that you actually can provide that generosity? Where you're being generous, even if you reached that expectations, can the business keep it going?

And I'll tell you, the thing I look at with a business is just top-line indicators to me of health in a business and if it actually does have enough cash coming in, enough revenue coming in that it can support the full picture and all the things that need to be supported. I look at net profit, of course, and I see where that margin is sitting. 

I did a whole episode on net profit and P&Ls earlier this year so you can go back if you want to listen to that. I also look at people cost percentage, which is the percentage of revenue spent towards people. That means it's like their all-in cost. That is their salaries or their wages, that is any bonuses, that is any benefits that the company pays for, which includes not just health benefits but retirement, CLEs, dues, conferences that where they are developing themselves. That is people cost. It's your investment in a person.

What it does not include, I know I've talked about this in the podcast, I should probably not go down this rabbit hole, but it does not include like software licenses for that person. No, no, no, no. That's overhead. That you have to provide that so the person can do their job. That's not an investment in the person. So this is really about what you're investing in the person. That's the all-in cost we're looking at. 

Employer taxes, I didn't say that. That is a requirement for a business, for employees. So employer taxes should be included in that. The all-in cost, that total amount divided by the revenue, the top-line revenue or income coming in, that is people cost percentage. You could do look at that for one month. You can look at that over a 12-month span. We look at it always, but that number matters.

And I will say it does seem that the sweet spot when people are really hitting their stride and finding a very healthy place to sit, it's somewhere between 35% and 42%. Every once in a while, the sweet spot is 43%, 44%, 45%, but usually not above 45%. So, people cost 35% to 42% is the window that I'm initially looking for when I'm working with someone, and I try to see, can we get it to that realm? 

And then the other metric that I look at is the producer multiple. The producer multiple, I've talked about plenty on this podcast, but somewhere between three and five. If it's below a three, I know there's likely not enough money coming through the door because the only money that comes through the door is through the producers. There's not enough money coming through the door to cover everything in the business.

Producer multiple equation is the income that comes in divided by the all-in cost of the producers, not just not all people, just the producers that pushed those files forward, pushed that legal work forward so that you could get paid for it. So that is paralegals, attorneys, in some cases, legal assistants who are really moving the file forward, and even if you don't bill hourly, if you had to bill hourly, if there's a portion of their job that you would be billing because of the work that they're doing and pushing that file forward, that counts, right? 

So when you factor in all of that and you look at it and you get a producer multiple, that also is a part of the story. So if I have those three numbers, I have the net profit, I have the people cost percentage, and I have the producer multiple, I can tell what it feels like in that business. Now, there's more to learn. There's more to, you know, get under the hood, but I can tell.

And oftentimes, one of my hunches that I need to go learn is if I see that net profit is lower than it should be for a business that's running healthy. So if it's, you know, 10%, even 15%, to me is like, okay, that's not, it could be way better than that. So that's good to know. And the people cost is sitting above the 42%, and the producer multiple is under a three. Oh, we have so much work we can do here.

And I know that one of the things I have to check in on is why is the people cost so high? Is it because you're super generous towards the people? Is it because they don't have expectations on billables or production? I don't know, but that's my job is to go dig in. And a lot of the time, I find that they are very generous with what they are giving to their people, and in a way that doesn't make sense for what comes back through the door.

So, hopefully that helps. Those are three numbers that just to give you an inkling when you can look at, is the generosity I provide, is, can the business handle it? One way to go get a read is to look at those three numbers and see what they are and then figure out, huh, okay, is this the generosity that's contributing to this being off? And then that will create or trigger more questions in your mind. 

That's good because then you can follow your nose to that like get underneath whatever questions you have and have a look. All of that matters. And that's, you know, when someone comes into Velocity Work, that is literally what we are doing. We are looking at everything and we are providing insights to the clients about the truth of their situation because it is a lot. You can do it. It's not that you aren't smart enough to do it. You're totally smart enough to do this. You could do what I just said. You could go dig in to have a look. But it helps when you have a partner.

So the people who come in to us, we do that heavy lifting. We look at everything, and we present it to the client, and then we can ask those follow-up questions, and then we can dig in on some of the answers to those follow-up questions. We can get to the truth of the situation and that's important for you to do. That's the whole point of this.

And many of you are not looking at the level of generosity that you are putting forth to your team. And I get why you want to do it. I want you to be able to do it, but you cannot do it blindly. And in many cases, many of you are over your skis with the level of generosity you're giving. The business isn't built for that. So there's going to be an impact. There's going to be consequences for you moving forward with some level of generosity that really, that's for a company that has a better profit margin than what you've got. And that's for a company that has because it can sustain it. The business can sustain it. You have got to engineer your generosity.

So, the last thing I want to share with you, I went on a trip, a solo trip for my birthday. It was the trip of a lifetime, quite honestly. I will do an episode on this at some point down the road. It was very enlightening, very eye-opening. I went with very specific intention in my mind, and I got that out of it. Now, what I will say on this episode is one of the things I learned when it comes to history and how our company got started and what worked, what didn't work, all of that, I really dug in hard to that.

One of the things I learned was that when this country was first founded, they did not impose any taxes on the citizens. Okay, I can see why, right? Okay, they just came from a monarch that took a bunch of their money, and it's not like it came back to them, and they didn't want to do that. They didn't want to recreate that. So that was out the window. They were not going to do that. Well, two years in, they were about to go bankrupt. They had to figure this out. And they actually tried, I don't know if you know this, but there were efforts put into place to try to, like they asked for taxes, for example, and just said a number, said it's voluntary. And what they got was like a ridiculous, laughable fraction of what they asked for. So, okay, that didn't work. And they're about to go bankrupt.

Ultimately, what they decided, and this is what I loved, and this is when all this clicked together for me. I was sitting on the steps of the Jefferson Memorial, looking out and thinking about this generosity thing. This had come up, you know, recently, and I was thinking about that, and then thinking about this is all just sort of converged in my mind.

Our country did the same thing. It put generosity into place that it couldn't sustain. It was not going to last. And the country wasn't going to last. They were going to go bankrupt. And so, what they realized was that the very thing that they wanted to do, there needed to be a mechanism for the generosity that the entity could provide.

So you think about that with your firm, it's also true. You think about that with our country, that also was true. And so the very thing that they were afraid of is what allowed for generosity in the future. Now, we all have different opinions about how things run in this country. This was obviously 250-ish years ago. But my point is this, it was the same for them. It was the same for the people who were at the helm at the time and coming together to make decisions. 

And what they came to was, we can't afford to do that. And so then they imposed taxes on citizens. But can you imagine the reason that they did it was because they saw, oh, it doesn't work. You can't do it. And we tried a couple different ways to try to make this work so that we don't go bankrupt. You have to do it. So it's like, okay, we have to ask for something from the people. We have to get really clear. And then when we do that, then we can provide the generosity. And it's the very thing, it's the mechanism that allows for you to engineer the generosity. 

So there were all kinds of parallels happening in my head. I'm probably not doing it justice right now, but that the main thing that hit my brain was the very thing that you want to do, the generosity that you want to provide for your team can only come when you recognize a mechanism for it. That's what I mean. You have to engineer it. Then it can be a thing. So do that. And remember that when you pour into your people, you pour generosity into your people, but you are sidelining, you are not even looking at or giving the time of day to what is possible for the entity and what is okay for the entity.

You have to focus on the health of the entity because if you don't focus on the health of the entity, you can't take care of your people. And here, by the way, I want to change my language around that. You don't take care of your people, the entity does. And that's the thing. So when you focus on the health of the entity, the reason that's important is because it takes care of your people, not you. So you putting forth generosity doesn't make sense. The entity putting forth generosity is what makes sense. You have to focus on the health of the business and then once you do that, then we can talk. Then we can look at with the excess, what can we now provide that would excite us and it would be so great for them? 

It's not about you. You providing generosity puts you in a path where that just like an example where I told you before, the owner is funding this business. That is not a scenario we want to get ourselves into. This is not about you providing generosity. This is about the firm providing generosity.

I know at this point, it sounds like I'm repeating myself, but I do not think that I can say this enough times. It needs to sink in. You have to focus on the health of the entity and the business because it is what takes care of the people. It is what can be generous to the people. That's the main point.

And if you can get that and just have that awareness and look through a new lens at your scenario, then we've done our job here on this podcast. You don't have to have all the answers. You have to be awake. And you have to start looking at where maybe you've been making calls that are not first, like the health of the business isn't put first, the people have been put first, and that's so backwards. Ironically, it's backwards.

All right, everybody, I hope you have a wonderful rest of your day. I will see you here next Tuesday.

Hey, want to watch the video of this episode? Head over to Velocity Work’s YouTube channel. You’ll find the link in the show notes.

And we give away some pretty great free resources that help law firm owners who aren’t clients learn some of the core principles that we use in our framework. An example is a Producer Calculator, which lets you put in your producer salary and production numbers to give you a sense for how healthy your firm is and how your team is performing. Head over to velocitywork.com to try it out.

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Thank you for listening to The Law Firm Owner Podcast. If you're ready to get clearer on your vision, data, and mindset, then head over to VelocityWork.com where you can plug in to quarterly Strategic Planning, with accountability and coaching in between. This is the work that creates Velocity.