In theory all partnerships are based on trust. Partners jointly own the firm and all contribute to its prosperity and success. That’s at least the theory. In reality trust is not at the basis of the partnership and a system of checks and balances is needed to make sure each partner performs and contributes in a more or less equal amount. Law firms currently focus on measuring inputs like revenue, billable hours and origination. Leadership focuses on individual lawyers as the key performance indicators.
Law firms are insufficiently aware how strongly the metrics are detrimental to behavior. Most firms measure the revenue and the number of billable hours each partner creates. This might seem the most logical thing to do, but: ‘what you measure is what you get’. If partners are assessed on revenue and hours, then that is what they will produce before anything else.
No incentives to cooperate.
Once one starts measuring personal revenue, partners will start competing with each other to be ‘billing partner’ and put the file in their name. Holding partners accountable on the basis of their personal revenue is not going to encourage cross-selling. The firm will lose out on opportunities.
From the client’s perspective law firms should be integrated partnerships. All partners cooperating in a collaborative harmonious way looking after the client’s interests. In reality all too often partners are trying to monopolize the client relationship in order to maximize personal revenue even if it is at the costs of the greater good of the firm.
No incentives to become more efficient.
Clients have started to demand that law firms enhance the efficiency of the work process. Spending as few hours as possible, but as much as necessary. This introduces a completely new way of working for a lawyer who is used to have almost complete freedom on how time is spend. Actively trying to reduce time spend on a matter or on a client would go directly against the interest of the partner.
Partners and associates alike have to make the required number of hours in order to comply with the norm. We have been called to a law firm where senior associates started to leave because the partners needed to make the hours themselves. This might seem like an extreme example, but it happened. For associates typically their bonus would depend on the number of billable hours they make. Little incentive to become lean and mean with time spend.
Overcoming the ‘prisoners dilemma’
The prisoner's dilemma is a well-known paradox in decision analysis in which two individuals acting in their own self-interest pursue a course of action that does not result in the ideal outcome. The typical prisoner's dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result of following a purely logical thought process, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.
Stated simply, the prisoner's dilemma stipulates that personal interest seems more desirable, but it often leads to a worse result if two parties are both acting in self-interest. Interestingly this is precisely what we see happening in law firms: as long as personal interests prevails, the firm as a whole will lose out.
A more balanced system.
Focusing predominantly on revenue and hours has served law firms well over the past decades. Today’s reality demands that more balanced and sophisticated measurement systems are put in place. We know a small number of law firm partnerships who do not measure anything individual at all. These exceptions might well be the only true partnerships. However, I’m not convinced this is the best way to go.
Like any other business law firms need measurable and quantifiable KPI’s for their partners and lawyers. These performance metrics should focus on what is in the best interest of the firm as a whole. What and how exactly will greatly depend on the system of profit distribution. Lock Step, Eat-What-You-Kill and anything in between.
Today we are actively working with our clients to develop and implement these new and more sophisticated systems of performance tracking. Always with a clear eye on the interests of the firm as a whole. Rewarding cooperative behavior.
The time has come for law firms to overcome the prisoners dilemma…