LAWBIZ COACHES CORNER: Financial openness enhances financial performance

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Becoming a partner in a law firm may be less of an achievement than ever.

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

This illustrates the fact that, despite being called partnerships, or LLPs or PCs, the governance of large law 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.

This 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, and the firm’s lawyers generally, tends to become more restricted. Firms large enough to be on one of several lists that purport to show gross revenue, and revenue and profit per partner, may disclose this 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 had access, would 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 their own personal one? 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.
• How many hours the firm has billed out per lawyer
• Direct expenses for compensation (including bonus and benefits), clerical help, technology, office space, etc.
• 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 individual himself or herself is committed to success, as defined by maximizing net profit, and on whether their firm provides the means to succeed.

The responsibility is a shared one, but every lawyer should realize that keeping one’s own job today is a personal responsibility, not a firm one. Fulfilling this responsibility in a way that produces net profits for the firm is an ownership essential.

All lawyers today need to be more sensitive to the financial needs and operation of the firm. The necessary conditions for this to happen are increased openness with financial information, and better training in using it.

The “numbers presentation” at too many firm meetings generally is abstract and pro forma. If the presentation is at the personal level, and the means for understanding is there, the chances are better 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 — and the firm definitely benefits.