In law firms, partners are represented by two separate yet equally significant groups. The innovative partners who drive the firms forward, and the old guard who advocate for the status quo to protect their incomes. These are their stories.
Lawyers are not generally known for their accounting expertise.
It is not that accounting concepts are too difficult for lawyers to learn. In fact, a lawyer can be a very quick study when working with accounting concepts which are relevant to their files.
The problem arises when it comes to matters which affect their own income. In these cases, lawyers tend to apply their creative talents and their persuasive skills to cloud the issues in their favour.
My first exposure to this tendency was in my third year of practice when my firm decided to do a “profitability analysis” on each associate’s practice with a view to motivating all of the associates to work harder. The overhead allocations were artificially high with the result being that every associate was apparently losing the firm money. I recall one of the highest billing associates remarking that the best thing that he could do to improve the profitability of the firm was to leave. I suppose that it cannot be said that the exercise was not motivating, because it motivated him to leave the firm and to solicit another highly performing associate to leave with him.
My next experience was with a lawyer who did not want to accept a profitability analysis that made him look bad. This partner had a high-volume residential real estate practice. The revenue line for his practice was great. However, his overheads were unusually high. The firm employed two law clerks and a legal assistant for his practice. Since this was back in the day when it was necessary to search title manually and close deals at the registry office, the firm also employed two full-time conveyancers who spent most of their time on his transactions. During the busy summer season, the articling students and junior lawyers would be seconded to assist with closing transactions.
In any discussion about profitability with this lawyer, he only wanted to talk about the top line. In his view, we were making ridiculous amounts of money because he brought in a lot of revenue. The arguments could become quite silly as he resisted any effort to have a meaningful discussion about the overheads and how they affected the profitability of his practice. To compound issues, he strongly believed that as a founding partner of the firm he should be one of the highest earners. Ultimately the only solution was to persuade him to leave the firm.
As our firm embarked upon a process to improve its accounting and reporting and to become adept at understanding the profitability of the various practice areas, partners would twist themselves into knots to argue that their area of practice was more profitable than it was, instead of making changes to how they operated their practice.
One of our early efforts involved measuring all of the office space and allocating the rent among the various lawyers based on the number of square feet used by members of each department.
One partner whose department was looking bad in the analysis insisted that the entire analysis was meaningless because the rent allocated to his department was calculated at the same rate as the rent allocated to the other departments where some of the clerks had offices with windows.
(The clerks in question were using the offices with windows because those offices were the only space available for them at that time.)
By his reasoning, offices with windows were more valuable than offices without windows, and the overheads had to be recalculated on that basis. The fact that rent under the lease was calculated at the same rate for all of the space was irrelevant.
Having discredited the overhead allocations, this lawyer succeeded in his goal of discrediting the entire process and deflecting comments on his own profitability.
By far the most pervasive nonsense that I saw when we tried to develop systems to track profitability came when it was time to allocate responsibility for bad debt.
The originating lawyers who brought in a lot of clients whose work was done by other lawyers, insisted that it was the lawyers who did the work who had to be responsible for the bad debts. In the view of these originating lawyers, having introduced the client, their responsibility for doing the work and getting paid was over.
On the other hand, the lawyers who did the work complained that they were often told by the originating lawyers that they could not request a deposit or that they had to take on a notoriously poor-paying client. Another complaint was that the originating lawyer had quoted unrealistically low fees. In the view of the working lawyers, it was the originating lawyers who had to take responsibility for getting paid.
The result, of course, was that since the partners could not agree on who was responsible for bad debts, no financial consequence could be imposed on anyone for incurring the bad debt and draws and compensation could not be tied to collections. The originating lawyers had to keep getting paid for bringing in the work and the working lawyers had to keep getting paid for doing the work. The fact that the bills were not paid did not seem to matter much. Unsurprisingly, collections remained poor for many years.
I observed many other examples of lawyers refusing to accept the financial realities when they did not like how the realities impacted their income allocation. Some of my favourites were:
- “In my practice I do not have to use the library or the online services, so I should not have to pay any portion of the overhead for them” (said by someone who should have been using the library and the online services way more than he did based on the quality of his work).
- “In my practice I do not use the receptionist much, so I should not have to pay a full portion of the overhead for that position” (said by someone who had a high-volume transactional practice and frequently met with clients in the reception area and sent many, many couriers that had to be arranged by the receptionist).
- “Litigation is the cancer on the back of the firm while the real estate department is carrying everyone” (said by a high billing real estate partner who employed a qualified lawyer to work as a legal assistant and insisted that the firm rent a car for her so that she could get to work.) At the time, each litigator shared one significantly less expensive legal assistant with another litigator. (When that partner departed and we were able to do a proper profitability analysis, it showed that in fact the litigation department was the most profitable department in the firm.)
Over time my firm addressed and resolved most of these issues. With the help of great professional management, processes were put into place to measure performance and profitability in an objective manner that could be relied upon for making good management decisions. Even then, however, from time to time I would see partners try to challenge the system for their own benefit when the system got in the way of their egos and their personal ambitions.
I have observed the following about lawyers: (1) they tend to be quite competitive; (2) they often see their share of the firm earnings as a measure of their worth; and (3) they do not like change. When you put all of this together and try to introduce a change which will negatively impact their earnings unless they change their behaviour, they fight like hell to preserve the status quo.
In my experience, lawyers are often better at twisting the rules for their own benefit then they are at changing their behaviour to be more successful within the context of the rules that are in place.
The bottom line is that while having good profitability analysis is key to building a successful law firm, implementing it is hell and there may well be casualties along the way. In the end, it is all worth it (unless you destroy the firm trying).