The success of business development activities continues to be highly prized in partner profit sharing systems all over the world. The tracking of originations is, however, mainly carried out in North America and not much elsewhere. Historically, this practice used to be an essential part of formulaic compensation systems but originations are now being used in systems where an overall subjective or discretionary assessment is made of partners’ contributions. Tracking originations should therefore be considered by all firms
Within the last couple of years surveys from Edge International and Major Lindsey & Africa (MLA) have confirmed the importance of originations. In the MLA survey, for instance, 96% of US respondents listed the practice as very or somewhat important. The basis for the originations formula goes back seventy five years, when the Boston law firm Hale and Dorr created probably the first incentive-based compensation system. Under this, 10% of profits would go to the finders, 20% to the minders, 60% to the grinders and 10% to a discretionary pool for allocation on a subjective basis. One firm that still uses originations extensively is US firm Flaster Greenberg. In that firm 30% of the total amount available for distribution is allocated based on origination, 19% based on minding and 51% based on production.
Whilst originations are almost certainly the best way of tracking the success of business development efforts, it is widely recognised that other metrics have to be used as well. One US law firm told me that in most situations there is no single financial metric that fully captures the origination of clients and the proliferation of their work. They therefore continue to track the revenues and profits of clients by both originating lawyer and those responsible for the management of client matters whether or not they are the originating attorney.
Any origination policy and process would need to be agreed in accordance with the following five principles
1. Defining Originations
The key to any origination designation is that the originating partner must show that the firm has received the business because and only because the originating partner had a pre-existing relationship or because they created a relationship in the sales process but for which the firm would not have been hired. One off or fortuitous clients would therefore not be able to show sufficient “But For” causative effect.
In addition origination sharing is usually appropriate where more than one partner has a pre-existing relationship and all those partners work together to obtain the engagement or where one partner has a pre-existing relationship that they actively use to leverage the opportunity for the firm to be engaged, but another particular partner’s involvement is highly instrumental in obtaining the engagement. In cases where a team of partners works together to create the relationship that results in the engagement, the origination designation could be shared -normally by up to four partners.
3. Term of Origination Credit
The Edge Survey showed that 70% of firms still regard originations as having no time limit, with a small percentage bringing the credit to an end or tailing it off after a number of years. There however appears to be no ‘best practice’ formula for determining the duration of the origination credit. The worry is that origination policies can cause hoarding of client relationships and matters, the establishment of historic origination credit annuities and divisive internal competition. For this reason a good practice is to subject the origination designation to regular review (every 3 years perhaps) to determine if the existing attribution is still appropriate. An alternative in some firms is for origination credit to be reduced but not eradicated over time and perhaps transferred to the partner who has become largely responsible for the client
4. Firm Clients
Clients with whom relationships were established long ago by former partners or who have been with the firm for many years are often referred to as ‘Firm Clients’ for whom no origination credit is assigned. On retirement, some firms will allow the designation to be transferred to another partner in appropriate cases (for example where the successor partner has an established relationship that is instrumental in securing the continuation of the client). With the increasing importance of tenders, RFPs and beauty parades, many firms are also deeming clients won by the firm through such processes as Firm Clients
5. Credit Amounts
A specific percentage amount is only critical in firms operating a formulaic profit sharing model. One issue in such firms is that recipient partners (who will get credit only for a proportions of the amount invoiced) may prioritise their own work over that tossed to them by others. However, where the objective data will be used as part of the overall data set to influence a discretionary or subjective assessment, a fairly standard starting point might be 20% for the originating partner
The originations practice in North America could be useful to firms this side of the pond. The increasing use of origination statistics as compelling elements of objective data can assist in an overall more subjective determination of compensation whether subjected to a scoring system or to a ‘rough justice’ assessment.