Redwood Analytics

I have spent the better half of the last decade working with firms on the drivers of profitability.  If you are knowledgeable on the topic these drivers have many acronyms (e.g. RULES) but for simplicity sake I will list the generally accepted ones below.

1) Initial goal valuation (Rates and Hours)
2) Utilization
3) Realization
4) Direct Costs - Leverage
5) Indirect Costs - Overhead
6) Inventory Management

As I have travelled from firm to firm and analyzed these drivers of profitability, I have received many war stories on why realization is down, or why a certain area cannot leverage, etc.  In addition to analyzing these drivers of profitability I have also come to know many partner compensation models.  It is my belief that the 6 drivers listed above are only tactical.  The true profit driver is the partner compensation model, plain and simple.  If you want change - make it hit the wallet.  All of the analysis and reporting that is done on the tactical drivers could be considered an exercise in futility if a firm's partner comp model is not structured properly.

If your firm has a partner comp model focused on working fee receipts with little emphasis on the profitability of those hours, then do not waste your time with realization reports.  If I am a partner that works at a firm with this model, my goal is to take on as many hours as possible regardless of whether they are good hours or not.  If your partner comp model primarily focuses on originating fee receipts, instead of the profitability of those fee receipts, don't waste your time analyzing leverage.  Why as a partner would I push work down at lower rates when work can be hoarded at the top levels (perhaps even with significant discounting) and result in a higher revenue number?  Firms like to believe in unity, and everyone looking to help one another, but human nature tells us otherwise.  Many partners look out for their own interests and their compensation.

I have delivered many presentations and written many posts on alternative arrangements and on how to create a structure and process within your firm to handle the tracking and execution of those engagements.  At almost every firm I have worked with, the partner compensation model needed to be addressed.  If you are engaged in a fixed fee arrangement that calls for efficiency and you are rewarding compensation on hours worked...you are building a losing proposition.  If you are engaged in a blended rate engagement and you are analyzing realization without looking at overall profit on the entire matter you could be punishing partners who work on these matters.  To build a sustainable organization that constantly works on opportunities within the firm, the partner comp model must reward the right actions.  There are many firms out there that have implemented comp decisions that have all but eliminated tardy time entry.  There are other firms that had major inventory management concerns that have implemented punitive consequences for carrying unbilled work past 30 days.  These firms now reap the benefits of having some of the best bill speeds and age of WIP metrics out there. 

If you want to make a difference at your firm, then partners on the comp committee need to look at the whole picture.  The old standard of fee receipts and hours worked just doesn't cut it anymore.   To drive change, you must be willing to change yourself. 

Finally if you make the change in the comp system and several partners complain...you just did your first analysis to identify those colleagues with opportunities to improve.