Over the past 100 or so years, legal firms have come up with innovative ways to encourage behaviours from partners and staff. Most of them involve bonuses in terms of value, or position, and most of them result from fee credits.
Now you might think that a fee credit is a simple, this person billed this much and therefore gets the same in fee credits, you add up all the credits and it equals the fees. Sadly, you’d be wrong. In the course of trying to ‘engineer’ certain behaviours, the carrot of fee credits has taken on numerous guises. As specialist consultants in systems and reporting, we think we’ve seen everything in this area, at least everything up until today, because tomorrow there’ll be another one. What seems to be missing, in our minds, is balance and reconciliation.
Let’s look at some examples:
Example 1 – Pro-Bono work
A firm agrees to do some work pro-bono for an organisation. Let’s keep it simple and say it’s for a not-for-profit organisation as part of corporate citizenship and firm ‘feel-good’ marketing. The firm makes this decision and the firm’s fee earners work on the matters, and as you’d expect, the fees come to a total of exactly zero. Now it wasn’t the fee earners (typically) who made the decision to work on these matters, nor to agree to the pro-bono arrangement in the first place, so it’s a little unfair on them that they get no fee credits for their efforts. Many firms will ‘artificially’ report these credits against these fee earners so they are not penalised.
Seems fair, so what’s the problem?
Actually, there’s a few…
Firstly no-one is ‘paying’ for this time, yet we are providing credits (and presumably bonuses etc.) based on it. There is, therefore, no filtering of the value being provided in most cases. Additionally, there is often no detailed analysis of the time being recorded on these matters, and they can, in some cases, become a ‘dumping ground’ for unproductive hours.
As no-one is paying for the fees, and yet the credits are being applied, the firm gets itself into a position where it is paying or promoting based on values that simply don’t exist in reality.
Example 2 – Internal Legal Work
Another common one, where the firm needs legal services. It could outsource these to another firm (and it probably should for other reasons, but that’s a whole separate discussion!) or they can be provided from internal resources in normal legal practice teams within the firm. Again, there is no cash involved, and yet the firm provides fee-credits in a very similar way to pro-bono arrangements, with most of the same associated issues.
Again, no-one is paying for the fees, and yet the credits are being applied, the firm is paying or promoting based on values that simply don’t exist in reality.
Example 3 – Internal Referrals
The granddaddy of the issues in this paper in my opinion. Despite protestations to the contrary, lawyers are pretty selfish with any work they manage to uncover, stumble across or which simply lands on their desk. By default the lawyer (assuming the work appears valuable) will tend to try and do the work themselves or within their team so as to retain that fee credit value for themselves.
For many years, many firms have invented many ways to try and incentivise lawyers to refer work to other teams and partners in their firm, where it’s obvious or likely that the other’s areas of speciality better suit the work and will provide a superior result for the client. It’s a good idea and sometimes the designed systems are good and well thought through, but not often.
So we often see a variety of fee-credit or fee referral reports being tossed around which variously provide recognition for:
Personal Billings of partners and senior staff
Managed billings of partners and senior staff
Referral fees or referral credits of partners and senior staff
In isolation these are not terrible, but on more than one occasion we’ve seen them get added together to form a view of overall fee management or influence, and this is where the mess really starts to get messy. All three of these numbers are THE SAME FEES, simply dissected differently. You can’t add them together EVER.
Now I know it’s important to score partners and senior staff on all of these metrics, and that people are very keen to have a single measure of performance. I get that, but adding them up is not the answer unless you do something radical*.
The issues with these referrals are mostly well known within firms, but for completeness include:
Back to back referrals where pairs of partners refer work alternately to each other artificially to increase referral credits.
Ongoing “client” referral credit arrangements whereby matters after the initially referred one continue to attract referral credits despite having little or nothing to do with the initial introduction.
Client loyalty is not really a big thing these days, and clients will only stay with a firm or partner when they are getting good value, exceptional service and attention. If a better offering shows up, they will move quickly, so whilst the initial referral may have some value, it disappears fast, with the retention of the client almost totally dependent upon the referee after the first matter. I’ve long suggested that whilst there is some sense and value in “matter” referral credits, I think client referral credits should be a thing of the past.
Shared referral credits, whereby more than one partner or senior staff member is allowed to claim credit for referring a client or matter. Sometimes also called “Degree of influence”
Artificial discounts provided to entice a client to the firm (and hence trigger fee credits) whilst discounting fees to the point where the fees are actually generating losses (but rarely measured) in real terms.
There’s others, but you get the gist.
So when we take of these fee-credits from all these examples, we can very easily end up with total fee credits exceeding the firm’s total fees. That’s not smart in my opinion.
Is there a solution to this madness?
Actually, there is, and it’s surprisingly simple, albeit EXTREMELY unpopular. As I often say, you can be right, or popular.
The fee credit arrangements are largely an artificial construct on the income side of the books, the solution is to balance this with an artificial construct on the expense side, and the benefits are much greater than they appear on first blush.
So let’s look at the three examples again, with the balancing construct in place.
Example 1 – Pro-Bono work
Ultimately someone in the firm has made the decision to do this work for free. It might be the firm at corporate citizenship level, it might be the marketing team or it might be a specific relationship manager. No matter which ‘department’ is involved, they should pay the fees, as in, incur a debit to their income & expense (departmental) statement equivalent to the fee credits being provided. They should budget for it, and they should receive, scrutinise and ultimately approve the invoices from the executing team BEFORE the fee credits are granted.
Example 2 – Internal Legal work
Like example 1, the department requiring the work be done should pay for it, in terms of a debit to their overall income statement. They should budget for it and approve invoices etc. before fee credits flow.
Example 3 – Referrals
This one is clearly not the same as examples 1 and 2 as there are actually fees being earned here. The solution is similar but a little more complicated.
The answer is effectively a ‘Sales Commission’ being paid from the referee department/partner to the referrer. The commission amount becomes real income in the hands of one team and a real expense (cost of goods expense) in the hands of the other. There are a few rules to add to keep this as clean as possible:
A referrer has no more than one week to negotiate and have approved a referral arrangement with the referee.
The arrangement should follow firm guidelines, but can be separately negotiated. Anything outside the normal guidelines requires managing partner/senior executive sign off.
Shared commission arrangements (degree of influence) are of course possible, so long as it all balances.
The arrangement must be signed electronically by both parties before the first bill is raised on the matter.
In the event of disputes around arrangements the managing partner/senior executive makes a ruling and all parties are bound by it.
Ideally the commission is for one matter only and can be a fixed amount or a percentage of fees. Presumably parties could agree to other arrangements.
Modern practice management systems will be able to automate the financial arrangements, but otherwise a simple report and a few journals from the finance team will get the job done.
So we now have a very straightforward and fair measurement system that doesn’t require any fancy footwork to calculate, and definitely won’t exceed the actual fees of the firm on consolidation.
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