Professional Services Accounting ARTICLE -

Beyond The Numbers: A Fair System for Evaluating Partners

Target Audience: Legal Professionals, Professional Service Firms, Law Firm Partners, Law Firm Accounting

Evaluating partners relative to their peers is about as easy as comparing the proverbial apples to oranges. While partners share some basic roles and responsibilities as attorneys and owners, each is likely to bring something a little different to the table. How, then, do you ensure that performance reviews — and compensation decisions — are fair? Often, you need to look beyond the numbers.

Standard measurements

You likely start the evaluation process with a partner’s personal billable hours. Either too few or too many billable hours can be problematic. Too few hours may indicate that a partner is slowing down, has personal issues or has a declining client base. Too many hours, on the other hand, can be symptomatic of a tendency to hoard existing business because the partner isn’t sure he or she can generate new work. It can also reflect a desire to work alone, or that the partner just isn’t a team player.

Business origination probably also plays a big part in your evaluation process. But don’t just count the cases and clients directly attributable to a particular partner. The critical client relationship work that helps firms keep clients, and even bring in new ones, can be much harder to quantify. Much of it is long term and involves the efforts of more than one individual.

Wearing many hats

Your evaluation process also needs to consider the many roles partners play in your firm. You may expect your partners, for example, to demonstrate their ability as:

Administrator. This might include collection efforts, personnel management and team leadership roles.

Mentor. Consider how partners have transferred knowledge to new associates and mentored junior partners.

Marketer. How well do partners market their own — and their partners’ — services and attract new clients that fit the firm’s strategic objectives?

Relationship manager. This includes work that develops, maintains and strengthens client relationships.

Self-improver. Consider whether partners have upgraded existing skills and learned new ones to make them — and your firm — more competitive. For example, a partner who builds a reputation as an expert in a particular legal field can charge a higher rate and boost your firm’s income.

Not every partner will be successful in every one of these roles. But the evaluation process can help make partners aware of where their deficiencies lie and what skills need to be developed or strengthened.

Winning formula

You may want to develop a formula based on the skills and roles your firm considers important. But be sure your evaluation tools consider the four factors that determine a firm’s profitability:

1. Utilization — the number of billable hours or the work generated,
2. Rate — how much the partner can charge per hour or, for alternative fee arrangements, by matter or project,
3. Margin — how efficiently the partner uses firm resources, including associates and support staff, and
4. Leverage — the amount of additional billable work the partner generates for other attorneys and staff.

Breaking down the attributes and actions that influence each of these factors will give you a fairly complete list of the behaviors on which you should base evaluations.

All for one

Periodic evaluations help partners assess their own performance, and they’re essential to making fair compensation decisions. But you might also want to think of them as exercises in firm improvement. As partners address shortcomings and upgrade skills, they also boost your firm’s reputation and growth prospects.

What about unique practice partners?

All partners are unique, but some partners are more unique than others — for example, those who provide services outside your main practice area or as a standalone, self-supporting operation. Evaluating and compensating unique practice partners can be difficult.

If your firm reviews and pays partners based on billable hours and business generated, the process may be relatively simple. But when subjective factors — such as leadership skills and marketing results — are also considered in compensation, they can complicate matters if they aren’t applicable to the unique partner.

Problems may also arise when firms participate in tiered, lockstep or equal-share systems. The unique partner may feel greater ownership (and expect higher compensation) when he or she is the only one able to recruit and service certain clients.

You might instead consider a split fee arrangement, in which the unique partner receives 10% to 20% of the fee from self-generated work and 40% to 50% from work he or she both originates and services. Another option is for your firm and the unique partner to take an agreed-upon fee and then split anything above the agreed amount.

Find out how our expertise in professional services accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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