Legal Village

Measurements - and what we make of them

Posted 21/06/2007 by Christoph von Teichman

'The measure of success', the subject so thoughtfully discussed by Phillip Fletcher on 5 June, has two aspects: how do we - how does the outside world - measure our firms' success and compare it to that of other firms, and how do we internally measure and evaluate the success of our lawyers, our offices and practice groups or departments and compare it to that of other lawyers and offices within our firms?

The external aspect depends in the first place on what kind of data legal publications request, analyse and put into their tables; there are few reliable sources of information besides these tables (not all of which are entirely reliable either - some, especially in continental Europe, appear to be based on a bit of creative guesswork more than on hard data). A notable exception is the work done by Citibank in the US which, to those participating in its surveys, provides highly useful comparisons and supplemental data beyond those published in the annual tables. In Europe there is nothing comparable.

The key questions are: how we react to these published statistics; which aspects do we pay the most attention to; and which parameters influence our behaviour? As Phillip convincingly argues, no single figure or measurement should ever be considered in isolation. To focus solely on PEP (and on a desire to climb the ranks in the PEP tables), for example, can incentivise law firm management in quite the wrong way.

Obviously, if you want to improve your PEP but find it difficult to grow the first P - profits - maybe it easier to reduce the second by 'de-equitising' some of your equity partners, or by showing them the door straight away?

It is hard to look at some spectacular increases in PEP in recent years and not suspect that some creative management of equity partner numbers is behind them. I have doubts whether this really helps a firm's standing in the marketplace, its ability to attract talent or whatever other objectives it may have; it certainly won't help with preserving a collegial culture within the firm.

Phillip also touches on the internal evaluation criteria that firms apply. Here, things become even more complicated. What data do we measure; what do we publish internally and to whom; and how does the data correlate to the way we compensate our lawyers?

To state the obvious, the key issue is to incentivise behaviour that is good for the firm and to disincentivise behaviour that is destructive and corrosive. In my experience, this is best achieved by a system that is balanced and transparent and is administered fairly.

• Balanced. No single criterion should trump all others. For example, if billable hours is your sole focus, you could be creating an incentive to work inefficiently. This may not immediately hurt the firm as long as clients are willing to pay, but pretty soon its competitiveness will suffer; clients are not stupid. If the amount of billings is king, this could incentivise people to hang on to a client even though someone else in the firm would be much better-suited to handle the relationship. If realisation is the main thing you are looking for, this could cause people to cling slavishly to standard rates out of a fear of being punished for poor realisation, even though a bit more flexibility could be in the long-term interest of the firm. And if you do not reward your lawyers for their non-financial contributions, these will wither and your firm could be turned into a collection of money-obsessed egomaniacs.
• Transparent. There should be no secret about what people are doing, what they are contributing and how they are being rewarded. A transparent system generates its own incentives - lawyers don't like to be seen as lagging behind their peers. But you need to be careful because you do not want to engender egotistical, un-partnerlike behaviour. Data that causes people or offices within one firm to compete against each other is obviously unhelpful. That is why we at Latham & Watkins, perhaps uniquely among big firms, do not have profit centres; we do not prepare accounts by office, department or practice group. This occasionally causes frustration among legal journalists, who want to find out how our London office is doing compared to New York, or Frankfurt compared to Paris, and sometimes they simply do not believe us when we tell them that we don't know. But we really don't. We evaluate our lawyers individually, with a great deal of emphasis being placed on teamwork, sharing of clients, cooperation across offices and the like, so as to make sure people are incentivised to work together. For us this works extremely well.
• And finally, fair administration. This is obviously the key to it all; even the best system on paper will not do you any good if it is abused in practice. I remember a story about a German firm that introduced performance-related bonuses some years ago to complement what had been a pure seniority-based lockstep system. All the younger partners got very excited about this new flexibility, obviously hoping for a chance to be rewarded for their good work on top of their place on the ladder. As it turned out, all the bonuses went to the senior people anyway, causing no end of disappointment among the junior ranks; some partners even quit a short while later.

Obviously, 'fair' can mean very different things to different people. But if firm management has the trust of the partners and acts in a demonstrably balanced and unbiased way - and is ready to explain its decisions - even those who feel they might have done better will accept those decisions.

Needless to say there is no one system that is right for all firms, but as a general matter I think a purely mathematical model based on nothing but figures is less efficient than one that uses quantitative as well as qualitative data and appropriately considers the hard-to-measure non-financial contributions of lawyers such as mentoring, involvement in the administration of the firm and community service in addition to the numbers - and one that doesn't necessarily take the numbers at their face value but looks at what's behind them.