Financial Openness Enhances Financial Performance

Published on: 
01/15/2014
In today's legal environment, becoming a law firm partner may be less of an achievement than ever.

A 2013 report by Georgetown Law School notes that as firms have struggled with sluggish demand growth and low productivity, they've increasingly raised the bar for equity partnership and, in many cases, increased the number of lawyers in non-equity partnership positions.

That illustrates the fact that, despite being called partnerships, LLPs or PCs, the governance of large firms has fallen to a very few in the organization ("the management committee"). The remaining "partners" have begun to look, act and think like employees, not owners.

The change in perception has a direct impact on availability of and openness about financial information. As law firms become more corporate, dissemination of key financial benchmarks within the partnership generally becomes more restricted. Firms large enough to be on one of several lists that purport to show gross revenue and profit-per-partner may disclose that information in round numbers.

But the real issue is how many "partners" in large firms have access to all the data. More to the point, how many partners — even if they have access — possess the business literacy to calculate, or even understand, the traditional key measures of law firm performance: realization, utilization, leverage and expenses?

How many know, or understand, the firm's collection rate, or even their own personal rate? And if partners are in such a position, the firm's associates — potential partners of the future — are likely even less informed.

Ideally, it would benefit both lawyer and firm to make available the financial performance information to determine personal financial contribution. Such information would include:

  • Monthly and annual billable hours;

  • Number of hours the firm has billed out per lawyer;

  • Direct expenses for compensation (including bonus and benefits), clerical help, technology, office space, etc.; and

  • Indirect expenses or overhead (the percentage of rent, insurance, utilities, entertainment and education that each associate accounts for).

The result should determine an individual net profit value to the firm: billings – [total compensation + direct and indirect expenses] = net profit.

The future of any lawyer in a law firm depends on whether the attorney is committed to success, as defined by maximizing net profit, and on whether the firm provides the means to succeed. The responsibility is a shared one, but every lawyer should realize that keeping one's job today is a personal responsibility, not a law firm one. Fulfilling that responsibility in a way that produces net profits for the firm is an ownership essential.

Today's lawyers need to be more sensitive to the financial needs and operation of the firm. Increased openness regarding financial information and better training in using it are essential. Too often, the numbers presentation at firm meetings is abstract and pro forma. If the presentation is at the personal level and the means for understanding is present, the chances increase that the lawyers hearing it will understand why they need to be concerned about the firm's financial health and their part in the process.

To be owners and employers in name means becoming so in behavior. In the end, the firm surely will benefit.

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