Revenue targets are increasingly the norm for private practice lawyers, but are these useful? Rebecca Abraham reports
As lawyers and accountants coexist and compete, their fortunes have had a tendency to rise and fall hand in hand. However, in recent months, their paths have diverged with accountants, more specifically auditors, across India having run into strong headwinds.
In January, the 11 partnership firms making up the Price Waterhouse network in the country were handed a two-year ban from issuing audit certificates to listed companies as a penalty for the firm’s role in the 2009 Satyam scam.
Then came increased instances of auditors resigning midway through their terms. Among the most prominent of such resignations was that of Deloitte, which stepped down as statutory auditor of a listed fruit juice maker, Manpasand Beverages, at the end of May.
The company described Deloitte’s exit as “a minor hiccup”, but, for auditing firms, such resignations are significant when seen in the light of the mandatory audit rotation that came into effect in April 2017, triggering the loss of longstanding clients. A rush to win new clients ensued and commentators suggested that cutting corners during the vetting of prospective clients might well have contributed to the rash of recent auditor resignations.
A senior audit partner at one of the larger firms was recently quoted in The Economic Times as saying: “A year since the audit rotation, the skeletons are tumbling out. The firms realize that revenue targets for audit partners could backfire because the most important thing about auditing is perception.”
Nevertheless, increased regulatory scrutiny and the audit rotation process appear to have set in motion a realization that audit partners labouring under revenue targets do face pressure to sign on dodgy clients.
Faced with no such constraints, larger law firms are increasingly specifying revenue targets for their partners.
While such targets are norms in most developed jurisdictions, it is remarkable that the practice is being adopted in a legal market where sole proprietorships continue to dominate the landscape and where power within partnerships, which are few and far between, is typically in the hands of founders.
Revenue targets were first introduced in India over a decade ago at the now-extinct Amarchand Mangaldas. However, their growing prevalence is being attributed to the hiring frenzy and heightened competition in the market following the inception of the two firms – Cyril Amarchand Mangaldas and Shardul Amarchand Mangaldas & Co – that emerged from Amarchand Mangaldas in 2015.
“Billing targets are much more of an issue in the present environment of enhanced competition in the market and the excessively high packages being offered by law firms to experienced lawyers and even fresh law graduates,” says a private practice lawyer, with more than 25 years’ experience, who did not want to be named.
Unlike counterparts in the West, Indian law firms are under no obligation to reveal details of their finances. As a result, all such information is guarded closely and most lawyers will discuss the subject only on condition of anonymity.
Sawant Singh, one of three founding partners at Phoenix Legal, a 15-partner mid-tier firm, is an exception. Holding that “people are goal achievers”, Singh says revenue targets are necessary for individual lawyers if entities such as his quasi-lockstep firm are to build an atmosphere of excellence. As such, he says the firm has set revenue expectations for lawyers at each level.
In addition, while the quantum of annual increments that the firm’s 80 or so lawyers earn is based on their individual strengths and weaknesses, the bonus each lawyer receives depends entirely on the achievement of their revenue target.
“Bonus is a measure of how much money the firm makes and, in deciding who gets how much, we try to eliminate human intervention,” says Singh.
Having revenue targets for associates is rare where structures of firms – even the partnerships – are much less evolved than in most other jurisdictions.
Bithika Anand, CEO of Legal League Consulting, has had a ringside view of the development of law firms in the country over the past two decades. While speaking of “increased awareness that performances will be measured in terms of financials, i.e. billings and recoveries”, she points out that this typically applies only to senior lawyers at firms.
In the vast majority of law firms, the managing partners or the founders are the primary rainmakers and lawyers working below them are paid fixed salaries and receive fixed annual bonuses. As a result, there is little need for performance evaluation systems that take into consideration billings and recoveries.
This appears to be the case even at top-tier entities, such as Dua Associates, which says “meeting targets is not a singular assessment factor” at the firm. Instead, it believes in an “overall review of contribution, which takes into account the experience, seniority and standing of the professionals in the context of disseminating their knowledge and experience downstream to the younger lawyers”.
Challenges to be met
The exact formula for arriving at revenue targets, where they are important, vary across firms. Most will, however, go by the internationally accepted norm of partners bringing in revenue that is a multiple of their remuneration.
“Firms had different philosophies about targets, but the bottom line was that I was expected to build a practice that brought in three times what I could expect to earn,” says a prominent listed company’s general counsel, who recently explored making a shift to private practice.
In the process, he spoke to senior lawyers at three of the country’s top firms, quickly realizing that meeting targets, in itself, was not as daunting as doing so in an atmosphere where there was downward pressure on legal fees. Add to this the looming challenges of conflicts of interest that limit the ability to work with competitors.
“There is some very serious pressure on partners,” he says, adding that, in his particular area of expertise, “the market size is not such that you can achieve high targets”.
Yet, such pressures are par for the course at the more competitive firms. Singh at Phoenix Legal, reports that a lawyer, who performs at an above-average level can hope to make the full annual bonus. Accordingly, he says that, while 80% of the firm typically make between 75% and 100% of the bonus, 10% of lawyers get less than 75%, while another 10% routinely overachieve and so get more than the full bonus.
“If you meet all your targets that is an exception in itself,” says Singh.
In Western jurisdictions, where revenue targets are the norm, lawyers at high-achieving firms produce up to 2,500 billable hours per year. In achieving these targets, they have the support of the firm, which can provide assured access to the corridors of power, both in business and politics.
In contrast, lawyers in India at similarly high-achieving firms can struggle to widen their contacts as senior lawyers can be less than willing to open doors for their juniors. This adds to the challenge of meeting targets, especially for first-generation lawyers without mentors.
“There is a general aversion to sharing access with clients,” says a lawyer, who pointed out that pressures of meeting targets were known to have led to nervous breakdowns, as well as other mental and physical problems.
Legal market watchers and insiders in India point to a lack of professionalism that plagues law firms.
“Foreign firms are not as unreasonably expectant, or even unscrupulous, as Indian firms,” says a lawyer who set up on his own after watching revenue generated by rainmakers at more established firms being frittered away on what he saw as unnecessary infrastructure and other costs.
“The whole exercise of revenue targets is good, but needs to be handled very differently by firms in India,” says Anand at Legal League Consulting.
Having observed and advised law firms on devising compensation structures, which can include a variable component, Anand is of the view that law firms can also tend to be poor communicators when discussing such matters with their lawyers.
“The formula for targets is invariably set by the top management, often without detailed discussions with the lawyers and partners, who have to work towards it,” says Anand, adding that the limited engagement could result in partners not taking the targets seriously.
“It’s a strange situation, where targets are set without the management and the partners really buying into it and, sometimes, the entire exercise does not produce a positive outcome”.