From Accounting and Financial Planning for Law Firms, May 2013
Recently, while speaking with a new client, the question of “How do we evaluate our partners” came up.
The participating event was a mediocre 2012 which produced a diminished profit pool for distribution at year end. The management committee was confronted with their annual Solomon like task of dividing the reduced profits and were forced to abandon their normal lenient approach to partner evaluations that had grown up over many years of lush profits and a desire to promote collegiality and the “one firm, firm” approach that was popular among organizational development consultants in the 1990’s.
My client, a mid-sized general practice firm headquartered on the East Coast has a 100 year history of representing premier clients at premium fees. The firm’s culture and compensation philosophy was one that long remembered past contributions, was slow to recognize developing trends and reluctant to penalize current misbehavior.
As a result, 2012 was a difficult year for the management committee. They had to retain the top preforming partners and keep the up and coming partners satisfied while remaining true to their long compensation traditions with 25 percent less to distribute to the partners.
How they accomplished this speaks volumes about the firm’s leadership and culture. The top tier of partners collectively agreed to take less and distribute their forgone profits to the rest of the partners. And while this approach was commendable and helped the firm out of its’ immediate problem it also triggered a discussion about how best to measure partner contributions to the firm and how they would be rewarded.
The management committee agreed that partner’s would (in the future) be rewarded for:
- Their financial contributions that furthered the strategic objectives of the firm.
- Their non-financial contributions around firm hygiene, mentoring associates and “living the values” of the firm and upholding it’s traditions.
The objective of this article is to document ten financial metrics that are simple, clear and concise that this firm did (and any firm can) adopt. I hope to return to the subjects of hygiene, values and traditions at a later date.
The metrics were designed to:
- Encourage the partners to support the firm’s business model: That is to encourage the firms partners to serve larger clients and to introduce (cross sell) other partners and their services to those clients.
- Identify those practitioners who are “sole proprietorships” within the firm (that is attorneys that create only enough work for themselves) and need practice development training.
- Identify small clients and/or small matters undertaken by partners that should be worked on by associates resulting in improved training opportunities for the associates and more profits for the firm.
The Basics:
Metric #1: Attorney Utilization
- Utilization = Billable hours collected / Budgeted hours
- Indicator of individual productivity
- Most valuable when used in conjunction with other metrics such as realization; high or low utilization in itself may not be an indicator of an attorney’s value to the firm
Metric #2: Attorney Realization
Attorney Realization = Total number of individual client hours recorded – Total number of client hours written-off / Total number of client hours recorded expressed as a percentage.
- Indicator of individual attorney skill development
- Indicator of individual partner mentoring and/or management skills
- Indicator of specific client profitability
Metric #3: Total Fees Collected
- Total Fees Collected = Total fees collected – (Total fees written-off + total fee bills reversed)
- Indicator of revenue for the firm
- Indicator of individual partner productivity
More Advanced:
Metric #4: Average Number of Matters per Timekeepers
- Average number of Timekeepers per Matter = Total number of matters / Total number of timekeepers
- Indicator of individual partner leverage on clients/matters
- Work is created for other attorneys, and thereby assumed to be completed at the appropriate levels within the firm
Metric #5: Partner Collections Net of Own Time
- Partner Collections Net of Own Time = Total fees collected – Fees collected from own hours
- Indicator of management and leverage
- Work is created for other attorneys in the firm, indicating a presence of large clients and/or large matters
- A factor in determining which attorneys will contribute to the firm’s profitability model
Metric #6: Percent of Fees Billed
- Percent of Fees Billed = Total fees recorded / Total fees billed
- Indicator of client profitability management
- Indicator of practice management
Metric #7: Percent of Fees Collected
- Percent of Fees Collected = Total fees collected/ Total fees billed
- Indicator of client profitability management
- Indicator of practice management
Metric #8: Percent of Time Spent on Clients with Less than $10,000 in Billings
- Percent of Time Spent on clients with less than $10,000 in Billings = Total time spent on clients less than $10k/ Total time spent on all clients
- Indicator of profitability to the firm
- Indicator of an attorney’s client focus (i.e., small vs. large clients)
Metric #9: Percent of Time Spent on Clients Greater than $50,000 in Billings
- Percent of Time Spent on clients Greater than $50,000 = Total time spent on clients greater than $50,000/ Total time spent on all clients
- Indicator of profitability to the firm
- Indicator of an attorney’s client focus (i.e., small vs. large clients)
- Indicator of specialized legal expertise
MBA Level
Metric #10: Origination Efficiency
- Origination Efficiency = Total dollar value of partner originations / Value of partner client development time (total client development time X hourly bill rate)
- Indicator of individual partner profitability
- Indicator of an attorney’s client focus
- Indicator of specialized legal expertise
I know the introduction says that there are 10 indicators but I personally like this one so much (and this type of false labeling upsets the Editors) that I had to include it.
Metric #11: PD ROI
- PD ROI = Total value of partner’s annual originations / Total value of all practice development time
- Indicator of client development skills
- Indicator of willingness to work with other partners to develop new business (compare practice ROI to individual partner ROI’s)
- Indicator in Partner Role contribution definition
Firms will find some of these indicators more useful than others and that is to be expected. No one set of reports will work for all firms. Additionally, most can be modified to specific firm requirements as individual circumstance requires.
All of them can be distributed electronically and while they are defined on an individual basis can be prepared at the practice or office level as well.
The important thing is not their preparation or distribution but in how they are used. If reviewed and discussed on a monthly basis with the specific partners and used as input into the annual partner review process they can help a firm direct the activities of the partners to their best and highest use.
If they become just one more report unread and unused by partners and management then the difficulties faced by my client will be more frequent and more stressful.