The impact of external influences such as the Legal Services Bill and age discrimination legislation all affect the environment in which firms operate and the structures and disciplines which evolve within the firm as it faces up to its particular demands and challenges. Before a firm can link performance to profit it must consider its culture and whether a shift in values is required to adopt a different style of reward system. What is important is that a firm recognises that its values and reward system are interdependent and constantly evolving. Fixed retirement ages will also be difficult to justify under the age discrimination legislation. The key point to actually putting the firm’s strategy into practice is the alignment of individual contribution to the firm’s overall good.
In the late 1990’s the consolidating accounting and auditing firms introduced the BSC to their organisations. Economic Capital (Financial Contribution): how well the firm combines its intellectual capital to achieve financial and commercial success. Strategy can only be implemented by a law firm’s partners and its employed lawyers if they perform not only financially but in all four areas. In our view, every firm should define carefully the objectives which it has for introducing a Performance Management System for partners which can lead to the setting of goals and targets which can then be linked to profit sharing. The firm needs to help each partner achieve absolute excellence in terms of their value and level of collaboration; to get there it will always need from every partner a substantial contribution on volume. While the first criterion is clearly limited by the number of hours in the day, the latter two can be extended almost without limit. We have recently been working with a number of firms to define the expectations of their partners on a Balanced Scorecard basis. In developing their plans to advance their careers and contribute to the firm, partners would be expected to show two things. The expectations for partner minimum requirements can be subdivided into five categories (or Key Areas of Performance) which are aligned with the BSC.
Within each of these core areas of performance, care should be taken to define measurable or assessable descriptions of factors that are relevant for judging whether a Partner meets the basic, moderate, high or extreme performance levels. It is clearly performance Indicators) and qualitative (based on how in the firm’s interests to see every partner achieving the exceptional performance levels in as many areas as possible. At least every twelve months, every partner should conduct a review of their performance together with either their department head of the managing partner, as appropriate.
In many years of appraising (and moderating appraisals), I have found that the most difficult and badly done section of the annual appraisals is the setting of objectives.
One problem is that this is an area which is normally left until last on the appraisal form and is dealt with when both parties have become tired or when time has run out.
The objectives are simply imposed by the appraising partner and not ‘owned’ by the appraised partner – the appraisee will view their involvement as insignificant.
Partner Profit Shares in a discretionary system comprises two main elements; first, there are incentives designed to motivate partners towards new levels of achievement and second there should be an element or ‘bonus’ to recognize and reward achievement after the event. The success or otherwise of each partner in attaining the objectives agreed with him or her. Many of these issues can be addressed with a more holistic system of overall assessment and judgment, which takes into account all relevant data. Evidences the capability to command a book of client business of at least four times the average profit per equity partner in the firm. Contributes to the building of the firms intellectual property including precedents, templates, case management and workflows.
Partners’ targets must be deeply rooted in a firm’s values and culture and aligned with strategic goals.
Recognising and understanding that there are a number of internal and external factors which influence and affect the way in which partnership profit shares are divided.
Regularly reviewing the individual partner’s progress and performance against the Firm’s expectations; the system should be clear and simple. Determining the profit allocation should be based on partners’ contributions to the progress of the firm and not just the attainment of pre-ordained targets. Encouraging loyalty is no justification because there are likely to be younger partners further down the lock step who have been at the firm longer and lateral hires who are brought in part way up the lock step.
Firms will need to provide real evidence of the business need to retire partners, which could come from a performance management system.
Most enterprises fail to deliver on their strategic objectives as they do not align any of the internal functions and operations to the new strategy.
The Balanced Scorecard is a state of the art technique for aligning an individual’s contribution to overall strategy. Today all four remaining big auditors – together with many law firms – are using the BSC extensively, in some form or other.
Our methodology requires in the first place a comprehensive study of the behaviours and accomplishments which are expected and valued of partners at every level in the firm.
Identify the areas where the firm must perform as a whole in order to achieve its strategic and economic objectives which can then be drilled down into ‘Key Areas of Performance’ on a Balanced Scorecard (BSC). Ensure that remuneration levels match contributions to strategic objectives of the Firm as well as the maintenance of cultural values.
Encourage partners to support new ventures and develop new services in line with objectives.
Encourage, motivate, value and reward high achievers who are critical to the firm’s strategic success and who contribute to an exceptional level. Sustain concepts of teamwork between partners with greater collective responsibility for the performance of practice areas. Encourage and reward the most capable partners to lead the firm and practice areas as effectively as possible.
Value performance which contributes to the sustained growth of the firm and one firm approach.
Embrace a firm-wide approach to enable partners in different practice areas to be rewarded on a consistent basis. Clarify the differing roles of partners as working lawyers, producers, managers and owners. Enable the firm to attract and retain partners of the highest calibre and introduce partners from other firms. Be linked to internal training and review processes which support the development of partners’ development and improvement in performance. Recognise that partners have different qualities and should be encouraged to focus on areas where they have strengths whilst contributing in all areas.
Define the requirements and appropriate performance levels for partners at each stage of progression on the firm’s lockstep ladder or partner career structure both qualitatively and quantitatively.
First, they would be expected to show how they have performed and what they have accomplished for their level of seniority. Overall Contribution to the Firm as an Institution–Knowledge Management and Solutions (Structural Capital).
These can be quite simple in some firms (especially where a high level of collegiality and trust exists), but I have found that many firms (where partner trust is low) require a model which is quite complex and prescriptive in order to persuade partners that a large measure of objectivity and ‘evidence’ will be employed in the assessment process. This does not relate to the overall hours spent on firm business or the degree of collaboration, but to the value that the partner brings to the firm. Preferably, partners should outperform their expected requirements by a wide margin whatever their level in the partnership.
The most important rule is to ensure that the targets and objectives are linked to the overall strategy of the firm. Check that the objectives are prioritised (use words like ‘must’, ‘should’ and ‘could’ to give a sense of this). However, whether reviewing partner rewards or assessing partner promotions and progressions, the danger is that the process of deciding these elements can be cabalistic, anecdotal, uninformed and inconsistent. If lawyers are to be rated, they generally expect to see full details of the evidence presented and assessed – lack of trust usually means that a rating process can be long drawn out and complex if it based on factors other than financial performance.
Ratings tend to look at achievement of the measurable objectives or attainment of key performance targets rather than the value added to the firm by the partners contribution. A Rating system assumes that the value of a partner’s contribution to the firm’s performance increases because of a single year’s short term performance. Even with well defined and agreed objectives, there are many other factors which influence how successful a partner has been.
The process of setting objectives is usually done very inconsistently, and criticisms of ‘soft targets’ abound.
Ratings also work off individual performance, rather than contribution towards team performance.
Ensure the system is changed as infrequently as possible, and put as much effort as possible into fair and consistent implementation. If you want to reward Partners on a Performance-related basis, develop a fair ‘balanced score-card’ approach to reflect overall contributions to and roles in the Partnership, before you attempt to introduce any merit based system. Settle only for the pursuit of excellence, recognising that to be content only with the pursuit of competence will lead to inevitable decline.
Understand and manage expectations, avoiding, if you can, any system that requires over-frequent and repetitive subjective assessments with all the anxiety, loss of time and raised temperatures which are inevitably involved.
Avoid too rigid or formulaic an approach, although some degree of certainty and pre-determination is vital.
Try to achieve some measure of clarity or transparency between the elements of reward which are seniority based and those which are performance based.
Do not lose sight of the need for open and honest communication on a constant and consistent basis. Above all, recognise that you are dealing with a set of individuals with a complex combination of confidence, ability, ambition, arrogance, fear, paranoia, resentment and frustration. What targets should a firm set for its partners if it wants to build for its future and not just recognize past achievements? In the words of Jack Welch in his book Winning, “it should be clear and simple, washed clean of time-consuming bureaucratic gobbledy-gook.
Most firms lie on a spectrum between the traditional collegiate firm which harnesses performance from its partners through a value system of trust and expectation of future higher rewards further up the lock step and the more entrepreneurial ‘eat-what-you-kill’ firm which harnesses performance by emphasising internal competition for rewards based on yesterday’s performance.
Lock step reward systems can favour or adversely affect older partners and this is potentially age discriminatory falling foul of age discrimination legislation.
Firms therefore need to introduce some form of performance management to assist in managing (and at times managing out) the older partners sitting at the top of the lock step. Hence, age discrimination legislation could force law firms to adopt some form of performance review whether their value system suits it or not. In a law firm where the owners come to work every day, weaving the new strategy into the daily practice is quite challenging.
The Balanced Scorecard is a management system invented by two Harvard Business School professors Robert Kaplan and David Norton.
The Balanced Scorecard is therefore a powerful methodology to align the firm’s every day operations to its long-term strategy.
Having said this, no one wants to create “clones” or expects that every Partner is excellent at everything. We have found that this then results in the establishment of criteria which are complementary not only to the firm’s assessment processes for promotion and rewards, but also to the firm’s overall strategy and objectives. At entry level, for example, the indicators might suggest that a partner should show evidence of training and education both undertaken and planned in order to achieve deeper specialisation and industry knowledge. What is important is that ay evaluation system should measure people on relevant and agreed criteria that relate directly to the partner’s contribution. The firm should aim to encourage its partners to relentlessly work at extending their strengths and making sure that even in their weaker areas they achieve the basic standards. It is therefore proposed that partners who have been practising for longer to achieve higher performance results on the grid than less experienced partners. The firm’s goal is to help every partner through the grooming process to strive for the “extreme” performance levels which the firm has identified for its star partners.
These types of review have been frequently placed by law firms in the ‘too difficult’ pile, but we have recently seen (and helped) a number of firms produce state-of-the-art working 360° models. Any sophisticated system should attempt to address this by providing a methodology to ensure, as far as possible, that the result will be fair and reasonable and objectively arrived at, whilst ensuring, at the same time, that the process does not become bureaucratic, cumbersome, costly and time-consuming. The problem is that if you score low, it can result in an argument; if you mark high, it can make the appraised partner complacent or arrogant. The success of law firms in the future will depend heavily on the extent to which they can improve and renew their intellectual capital (IC) i.e.
It is to date probably the most successful business tool to drive strategy through an organisation in the corporate world; it is easy to understand, flexible in design, uses people in the organisation to create it and does not create an administrative burden. Its purpose is to translate vision and strategy into all the actions that the firm undertakes. The creation of a Partner Development Programme can then normally assist partners to develop across four levels of partnership – new partners, intermediate partners and experienced partners (with a fourth aspirational level to describe the truly exceptional role model).
The second and perhaps more important point to be shown by partners is that they are striving to improve and are working towards higher levels or grades. The contribution should be both quantitative (based on how people deliver on their measurable objectives and Key they deliver on desired behaviours). For example, instead of “work to improve cash collection”, one might say “by the end of the next quarter negotiate interim billing arrangements with the following clients”. Most appraisers tend to play it safe and mark somewhere in the middle, thus making the entire scoring process rather pointless. The behaviour of partners is governed by their values and attitudes which in turn are based upon their previous experiences. In recent studies some 80 – 90% of larger corporations have implemented some form of the Balanced Scorecard (BSC). It is the competence of a firm which attracts the clients, and such competence increases with use. To bring about changes in the way partners are valued and rewarded, we must create some forces and influences which will gradually affect partners’ experiences and then their attitudes and behaviour.
Ultimately a partner might be expected over the course of time – for example- to be able to show evidence of exceptional fame.
These notes concentrate on how to get the best out of partners across all areas of IC by setting the right targets and sharing profits based on the achievement of those targets. First I have aligned the model to reflect the concept that the main constituent assets of law firms are elements of intellectual capital, rather than tangible assets. This might perhaps be an ambition to be recognised nationally and internationally or named in one or more Directories as a leading expert.
First, a balanced scorecard approach encourages partners to believe that there are other things which the firm values as well as financial performance.
Second, I have developed the Balanced Scorecard methodology to fit the environment in which lawyers develop their careers by serving their clients, processing their work, and making profits. This developmental dimension to the scorecard therefore stresses the external elements of the criteria; this should not only be an internal performance assessment methodology but an important tool to help focus partner development and ambition.
Second, the firm must have in place the policies and procedures which will help to give partners the comfort they need to trust in the new arrangements. Third, the firm must work hard on the firm’s climate and environment to ensure that a supportive culture exists.
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