Law Firm Articles

Realization and Compensation

In the United States, the key statistic in managing a law firm and compensating its timekeepers traditionally has been revenue (except perhaps during recessions when expenses receive heightened attention).  What is the key metric law firms use to measure one against another after profits per equity partner – Revenue per … partner, lawyer, timekeeper, and person… take your pick.  What is the key metric used to gauge suitability for partnership – book of business measured by fees collected (revenue).  What is the distinguishing ranking for compensation purposes – originations and personal production both measured in fees collected.

That is beginning to change.  Firms are examining the profitability of practices, clients and partners.  Managing to margin is the new initiative law firm leaders are talking about.  Firms are developing profit tools internally or acquiring analytics packages to bolt onto their financial systems.  Partners get these tools to assist them with pricing, staffing and other aspects of managing their practices.  Once accepted, the metrics generated by these tools are integrated into compensation programs along with the other factors considered when making those decisions.  Margin (also referred to as profit margin) looks at the relationship between profit or contribution to profit and revenues.

This article looks specifically at realization, one of the three components of revenue, and how realization can be factored into compensation decisions.

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