How to incentivise partners to improve your firm's financial performance

‘Cash is king’ is a well-worn cliché. But, looking at data on the financial performance of law firms, as a profession we are not improving. As banks are more cautious about lending to lawyers, performance against financial metrics become more vital to our businesses.

Every firm has a number of key performance indicators. They are likely to include fees, lockup and chargeable hours. But, not all firms have adopted targets and incentives to encourage delivery of these targets. I propose below a simple system to encourage equity partners to perform against targets.

The purpose of targets is to encourage better billing, credit control management and profitability. Firms adopt a combination of information, monitoring and incentives to deliver these targets. Partners and other fee earners must constantly be reminded of their responsibilities to bill and collect fees.

It is common for target fees to be set. A target may be calculated for each fee earner and set at the start of each financial year, as part of the budget process, for the purpose of monitoring and appraising individual fee-earner performance.

Additionally, a fee target may be set for the whole firm, often on a quarterly basis, and be used to maximise the output of fees during that quarter by driving the work-in-progress (WIP) element of lockup down to the lowest possible level at the end of the quarter (and earlier if possible). This target should be designed to stretch, but to be achievable.

It is hoped that this target and the countdown to the end of the period succeed by generating substantial billing at the end of the period, although that in itself is a habit that needs to be broken.

Other financial measurements normally include ‘WIP days’, which measures turnover of WIP and billing performance, ‘debtor days’, which measures credit control, and ‘lockup days’, which is the total of WIP days and debtor days.

A high figure for WIP days indicates that the partner is building up WIP and not billing early enough. A high figure for debtor days shows that bills are mounting up and are not being paid. Other targets may be linked to margin or client billings, but the ability to monitor these statistics will depend upon the sophistication of the firm’s IT systems.

It is easy to work out what the key targets are. The challenge is to create systems that encourage the achievement of those targets. One way of doing this is to introduce drawings targets for equity partners.

Monthly drawings can be linked to lock-up and other targets and adjusted upwards or downwards according to performance against the targets. Measures for the drawings criteria should be designed around the objectives and needs of each firm.

The likely targets would include billing sufficiency (fees vs. cost base – a requirement that billing over a period exceeds the cost base), debtor days, WIP days and timesheet completion. The achievement of each target may vary, so different combinations of the bonus/penalty may apply.

The scheme should introduce a range of potential drawings from a maximum to a minimum. A partner performing at the norm would receive a basic monthly drawing, but would receive a bonus payment for each target achieved.

Conversely, any partner in the penalty zone would lose. The effect of a penalty is only to postpone payment of the drawing, which then appears in later distributions. The tests can be applied on the last day of the month and the results reflected in the drawing paid at the end of the following month.

It is important that partners are able to track their position against targets through the period, so their position should be shown in figures available to them. As performance on these targets improves, they can be adjusted by firm management to encourage further improvements. Performance against these targets should be monitored by the management so that performance issues can be discussed at partners’ appraisal meetings.

This is a simple system that, if designed carefully, can have a dramatic effect on partner’s motivation, cashflow and profitability.

What do you think? Do we need to press partners on financial performance?

Guy Vincent is a partner and the former managing partner at UK law firm Bircham Dyson Bell (www.bdb-law.co.uk)