Financial targets for law firms

Bithika Anand and Nipun Bhatia discuss how to set revenue targets for Indian lawyers

Law firms are increasingly benchmarking the performance of their lawyers against established targets rather than relying on personal perceptions. These are financial goals set in terms of turnover or billable hours that a lawyer needs to achieve in a given time frame. They may be defined at the firm level, team level or individual level. Firms also have non-financial targets, i.e. initiatives that may not immediately generate revenues but help in developing the brand in the long run.

It is common for managing partners and partners to monitor financial information, billings and recoveries without communicating this with lawyers. However, there is a growing trend where financial targets are communicated to lawyers and a dialogue is held with them periodically regarding their performance. Through this article, we examine whether financial targets motivate lawyers to work better or intimidate them.

The topic has received a mixed response. Partners are of the view that targets provide a direction to lawyers and are the most objective way of measuring their performance. Lawyers, on the other hand, feel that targets could become a cause of added stress, disturbing their focus on the work at hand. A few points should be considered by managing partners to achieve the purpose of setting targets without making them a bane for lawyers.

First, there is no one size fits all approach. Firms have so far been considering the usual approach of expressing targets as a multiple of the cost of fee-earners. It is, however, about time that targets be determined in more innovative ways. Firms should conduct a thorough exercise of studying financial data regarding overheads, mark-up, etc., and then use different variations, methods and ranges for setting targets. Due consideration must be given to factors such as the size and age of the firm. The method of ascertaining financial targets must not be copied from others as each firm operates in a specific environment.

Next, targets must be achievable. Targets that are too high will discourage lawyers from achieving them right from the beginning. On the other hand, targets that are easily achievable could create complacency, without encouraging lawyers to push themselves.

Setting targets will have no meaning if support is not provided to lawyers, especially since most of the work is allocated by the managing partner. If lawyers are not actively engaged in business development, the managing partner should encourage them to undertake such activities and provide them due mentorship/guidance. Partners can also accrue additional or weighted credit towards new business generated by them.

In terms of methodology of setting financial targets, there is no blanket approach that is applicable to all partners/firms. Due consideration must be given to aspects like geographic location, practice areas, client-mix, etc. Lawyers located in smaller cities cannot be expected to achieve the same level of revenue as lawyers operating out of metros. Due regard must also be given to factors like the different paying capacity of clients, cost of operations and nature of services for each lawyer/partner.

Lawyers handling budding practice areas cannot be given the same targets as ones handling developed practice areas. Similarly, a partner that handles individuals, small entities or start-ups may not be able to bring in the same revenue as a partner working for MNCs and large corporate clients given the different charge-out rates.

To sum up, targets must be set with the perspective of creating awareness among lawyers to manage their practice in a successful manner in the long run. It is also of crucial importance that firms introduce structured programmes to inculcate a strong business sense in lawyers. Concepts like business planning, practice development, team costs, indirect costs and mark-up for profitability should be discussed with lawyers from the early stages.

It is critical to understand the significance of targets in the context of a law firm’s overall business priorities prior to assigning them to lawyers.