Taking aim at budget targets

Neil Oakes
Law firms of all shapes and sizes have been setting fee-earner budgets for many years. In many firms this process has involved two common and consistent features:

1.  budgets are set based on a multiple of the fee earners’ salary
2.  most fee earners fail to achieve their budget.

It is little wonder that budgets, although always intended to motivate, actually function as a significant de-motivator (for all involved)! Let us take each of these ‘features of budgeting’ one at a time.

1.  Budgets are set based on a multiple of the fee earners’ salary
There is a natural market price range for fee earners which is usually a function of their capacity, skill, professional standing and performance coupled with the supply of and demand for their labour. Once employed, other factors such as organisational commitment and contribution come into the mix.

I appreciate the logic of requiring (or hoping that) an employed fee earner will bill and collect 3.5 times their market salary, to pick a figure. However, I am unconvinced of the desirability of a direct function existing between salary, budget and, inevitably, price. Why should salaries increase simply because price increases or why should price increase simply because market salaries increase? In both of these circumstances what we are asking an employee to do (what we are paying for) remains unchanged.

Regardless of pricing methodology, the value of legal services should determine their price. ‘Value’ is a difficult concept to quantify (in large part because it is a qualitative concept) and is ultimately judged (and therefore determined) by the client. That said, a market price range also exists for specific legal services.

Whether that is a fixed price or an hourly rate by and large does not matter. Most clients will look at the total cost and make the value judgement. I greatly doubt that that judgment process involves consideration of a lawyer’s ‘year of practice’ (1st year, 2nd year and so on) but this is often how we price, compensate and budget.

2.  Most fee earners fail to achieve their budgets
In any one year some fee earners exceed their budget and some do not. Some firms monitor budgets regularly and some do not. Differences do exist. There is, however, one repetitive similarity that exists in every small firm that I have encountered; most employed fee earners perceive that hitting or missing their budget has little to do with them. They usually perceive it to be a function of the amount and the quality of the work that they are delegated by partners.

In the past 10 years I have encountered significantly fewer employed lawyers who created and built their own client base than I encountered during the 10 years prior. Nevertheless, we press on with a system that implicitly assumes all fee earners are capable of client acquisition and development.

Of course, some firms do not require or expect this of their people. If partners source all work and delegate it to employed fee earners, why beat them up with a budget? Give them the work and the timeframe required to complete it, make yourself available for queries and do all the good stuff vis-à-vis managing people (that so many people have written and spoken about) and let them get on with it. You do not need an author budget to know who is performing and who is not in a small firm.

All employed lawyers should know what a minimum acceptable contribution looks like. Some firms will express this in billable hours, others in terms of fees rendered – but it should be clearly understood and lived. There are two important principals to reinforce here; first, nobody ever progresses in a truly professional firm by simply achieving minimum acceptable performance and, second, no one stays in a truly professional firm if they fail to meet minimum acceptable performance.

By replacing author budgets with an enforced standard of minimum acceptable contribution you can remove the distraction of the budget and rely on an individual’s innate desire to achieve, a feature common to most of the lawyers that I meet. Employed fee earners will not slow down when they hit a budget target, because there is not one. They will not coast due to the budget target being inconceivably difficult, because there is not one. They will not develop an entitlement mentality when they achieve budget, because there is not one.  Their market worth is their market worth; not 30 per cent of their budget, as recruiters would have us believe. Furthermore, any returns that accrue from pricing at true value, pricing with fixed fees or pricing on scale accrue to the organisation, not the individual, regardless of who does the work.

Do not panic! All of my clients who do this have improved the performance and the culture of their firm. None of them dropped to the levels that minimum acceptable contribution alone would create. Their lawyers work hard and are rewarded appropriately, they are valued for their total contribution, not their performance relative to budget. Those fee earners who formerly achieved about three chargeable hours a day (it is more common than you think; the average for small firms is about 3.8) actually do not work there anymore.

Neil Oakes is the director of FMRC Legal, a consultancy which provides performance benchmark research, training and management advice to law firms throughout Australia and New Zealand.
http://www.fmrclegal.com .