Two important performance metrics that are commonly overlooked
As the year slowly draws to an end, for many law firms a familiar topic is on the table. At least for those that end their fiscal year on 31 December. This is the time for law firm leaders to zoom in on individual partner’s performance. Having only one more month to go, the balance can be made with a reasonable amount of accuracy.
Universally the focus is on a partner’s revenue and billable hours. This may seem logical, but actually it is an unreliable metric. The core of the issue is that a file for administrative reasons will be in the name of the partner who originally opened it. As a consequence all the revenue generated in that file will be put under the name of that partner. Even if other partners had a substantial contribution in completing the file, the revenue they created will not show up under their name.
The matter is further complicated by ‘origination credits’ or the ‘billing partner’ concept that attribute all or part of the revenue to the partner that originally ‘brought’ the client or manages the relationship with the client. There can be several other distorting constructions be found in the wild. All of them blur the view on the true financial contribution of the individual partners.
Not only revenue is unreliable and biased as a yardstick for partner performance measurement, the same holds true for billable hours. The number of billable hours made by a partner are also not a usable measurement of performance. In general it should raise suspicion rather than praise if a partner makes a lot of billable hours. Partners should distribute the work to the associates and use a substantial part of their time to go out and find new matters and new clients.
Why measure performance in the first place?
So, if revenue and billable hours are unreliable metrics to use, what metrics should law firms use to monitor performance and provide partners with insights on how they are doing? Before answering, probably another question needs to be posed first: why are law firms closely monitoring individual partner performance in the first place? For any ‘eat what you kill’ firm the answer is probably easy, but for pure lockstep?
In theory, measuring would spur partners to do the best they can. In reality measurement is a compensation for a lack of trust. If partners in a lockstep firm would completely trust each other, why would they want to measure individual performance as performance has no consequence for the profit distribution? Focus on individual performance tends to undo some of the fundamental benefits of equally sharing the profit as it emphasizes inequality and creates an unsafe environment for some that become vulnerable.
Actually for any law firm, the average file size should be an important metric. If two partners both have a revenue of 1 million (just for the sake of the example) and partner A has 10 files of 100.000 and partner B has 100 files of 10.000, partner A clearly has the better practice and will contribute more to the overall reputation of the firm. For files, size does matter. Larger files are more likely to be strategic than small files. Larger files are also more profitable to work on as it will be easier to spend a full day on the same file, rather than an inefficient start-stop on multiple smaller files.
What I am saying here is that partners should be stimulated not to gather revenue regardless, but focus on working on the largest possible files they can get out of the market. If there is too much emphasis and pressure on revenue alone, partners will be inclined to take any file in order to meet their targets. They shouldn’t. Average file size should be made an important metric in any high-end law firm.
Feeding the little birds
If a law firm had to live only off the revenue created by the partners, profit shares would plummet. In order to reach an acceptable and competitive profit, any law firm needs leverage. More than the billable hours of the partners, the billable hours of the associates contribute to the net-result. Even with today’s high salaries and office costs, the profit margins on the associates are incredibly high. It is therefor of vital importance that partners provide the associates with all the work they need to reach at least 100% utilization.
Not only utilization is an important metric to monitor, but also the ratio between partner hours and associate hours. Partners should be required to keep all associates fully occupied. In an ideal situation, there will not be a single associate that does not meet the targets. Only by closely managing the utilization of each individual associate, a law firm can properly manage profitability.
In reality things often do not function optimally. Partners can be preoccupied with meeting their own billable hours target and do work that should have been done by associates. What we also see a lot is that workload distribution is very unevenly distributed between associates. In such situation, part of the associates makes a lot of hours while some others are seriously under-utilized.
The problem here is that under-utilized associates do not get the same learning experience than the ones that work a lot. This will further widen the gap. Partners should have an obligation to equally distribute the work and provide all associates with enough work to meet the targets. Like the mother birds, partners have to feed the little birds, all of them.