Origination Credits limit your growth
In 1908 the American Bar Association published the Canons of Professional Ethics by which lawyers were forbidden to advertise. Only business cards, a professional letterhead and listings in directories were allowed. This prohibition to solicit for work only ended in 1977 when the US Supreme Court held that lawyer advertising is partially protected by the First Amendment (Bates v. Arizona State Bar 433 U.S. 350).
When I started in the legal profession, the elder partners still felt it was more appropriate to sit in their office and just wait for clients to call. Actively going out to find new clients was considered ‘not done’.
How much has changed since. Today being a law firm is being a business before anything else. Today’s law firm partners need to get from behind their desks to go out and get new mandates and new clients. I would say that the main difference between an experienced senior associate and a partner must be the ability to get new matters coming in.
In one of my previous blogs I explained why partners should work less. Partners have a responsibility to fill the pipeline that will keep the associates fully occupied. If every law firm associate would work the same amount of hours as an office worker at a bank, an insurance company or any other business, they would make 1700 billable hours without breaking a sweat. The fact that associates at many law firms are at 1500 hours is largely because partners are not putting enough efforts in filling the pipeline.
Bringing in new business is paramount for partners. Fact is that the majority of partners rather sits in the office than go out for new business. The brutal truth is that these partners should never have been made equity-partner in the first place because they lack the business skills. Reality however is that partners with little or no business skills are simply a fact of life. In order to encourage (or force) reluctant partners to bring in new business, many law firms have introduced some form of ‘Origination Credits’.
These origination credits come in many different forms and vary widely between law firms. What all systems have in common is some form of financial reward for the partner who brings in a new client or matter that is handled by one of the other partners in the firm. There are examples of law firms where a partner will until eternity get a percentage, of all revenue billed by other partners in the firm, for a client that he/she at one time ‘brought in’. I even know an example of a partner of an international law firm who literally stopped working after he happened to be the one to pick up the phone when a large multinational called with a new matter because their usual lawyer was conflicted. This client remained with the firm and generated millions in revenue over the years, working with many partners in multiple jurisdictions. A percentage of that adds up nicely as it turned out.
Obviously most firms do not have ‘life time’ rewards, and also the firm mentioned above does not have it anymore. Firms cap the number of years that the ‘originating’ partner will receive credits. This could be anything between 1 and 10 years. Some firms have a special committee overseeing distribution of credits, others have a 50 page document outlining in great detail who will receive credits for what, how many and how long. Some firms have no official origination credit system, but let the partner who ‘owns’ the client keep all the revenue in his/her name regardless which partner is actually doing the work. A corporate partner could end up with all revenue created on employment matters for ‘his’ client. Whatever the system, all systems are skewed towards ‘self-enrichment’ rather than benefitting the firm.
This is exactly the reason why origination credits are such a bad idea. It is just another incentive to promote selfishness rather than teamwork. As with other KPI’s the system will be manipulated. I recently came across an associate who had brought in a new client. After putting that client in the name of the partner she worked for, she found herself being called in by one of the other partners who insisted the client should be put in his name instead, because it was his paralegal who had introduced her to the client in the first place. I guess all readers will agree that this is not the kind of conversations you want in your firm.
Origination credits are a fix to a problem that should not be there in the first place. Every equity-partner must by definition be able to get new clients and new matters. Commercial skill is the only relevant distinguishing factor between equity-partners and the rest. Being a brilliant lawyer is not enough, it is the business skills that count. Law firms should significantly raise the bar at the gate.
Origination Credits are also to a large extent random. They typically benefit the elder partners who have built a solid reputation and also have the largest network. Origination credits might even prevent these partners from introducing younger partners into their network. The credit system also favors partners who are contact partners for international networks (Terralex, Multilaw, Lexmundi, AIDJA, and many others) and favors those who are listed as ‘practice head’ or ‘local managing partner’ (international firms). As the earlier example showed, even just picking up the phone might be enough.
Getting a new client can to a large extend be just random luck. Keeping a client on the other hand can only be the result of delivering great service and an excellent product. Keeping clients requires talent as does growing the business by introducing other partners and practice areas to the client. Most clients are unaware of the existence of origination credit systems. Those who are aware, are strongly opposed as they see that it is not their (the client’s) interests that are central but the interest of the partner. The partner might attempt to monopolize the relationship or only introduce other partners that are willing to share the credits of any work that might come out later.
Speaking with partners we know that origination credits could also become an hindrance when the expertise of two or more partners is required to develop a new market segment. Finding partners prepared to invest time and effort might require negotiations and a prior agreement on how to divide the credits once clients come in. This kind of internal discussions stemming from self interest are preventing law firms from growing their business. Looking at the data shows that law firms without a system of origination credits are more successful than those who have it. Something to consider if your firm is in the latter category. We at TGO Consulting could help you to migrate from one system to the other and help you grow your business based on teamwork and alignment of partners.