Origination Credit is a Mixed Bag

Origination Credit is a Mixed Bag

With increased competition among law firms, business development is a top priority. To maximize revenues, many—if not most—law firms incentivize rainmakers via compensation models which encourage business development. They track originations as a way to reward those who bring in the most business.

Historically, however, the most profitable U.S. law firms never tracked originations. They favor lockstep compensation over “eat what you kill” schemes. Increasingly, other major law firms also insist that they do not monitor origination credit. But, when you examine their partner compensation systems, originations definitely are an important factor in the calculations. The annual partner compensation survey conducted by Major, Lindsey & Africa shows that, over the past four years, originations tend to dominate the compensation calculations at most, if not all, law firms.

Encouraging robust business development remains an important business goal, but there are negative consequences to emphasizing origination credit. It often pits a partner’s own economic interests against the long-term interests of the firm with a detrimental effect on client service, associate retention, firm culture, diversity efforts, and succession planning.

Client service and associate retention

Partners at law firms that emphasize origination credit report that the question of sharing the credit often impacts their choice of which of their colleagues to take to client pitch meetings and who they ask to work on their clients’ projects. On the other hand, sometimes they must entice the lawyers best able to service the client’s needs with the promise of shared credit.

At most firms, partners are not expected to share origination credit with associates. Any excellent associate can be assigned work from a valued client while the partner who originated the work retains the credit. Once that associate is elected to partner, however, s/he now is a potential competitor for origination credit and the accompanying compensation. Consequently, a partner who doesn’t want to share credit with the new partner might reassign the work to other junior lawyers, even though there is no client-service reason to do so. In addition to this being highly inefficient for clients, it is devastating for newly-elected partner who loses workflow before having the chance to generate an independent client base. In some cases, this negatively impacts the junior partner’s future and may lead him or her to leave the firm down the road, resulting in a brain drain.

Also, when an associate brings in clients, the origination credit typically is awarded to a partner. Often the associate receives little more than a pat on the back with no guarantee of an extra bonus at the end of the year. This short-sighted behavior is counterproductive because those early business-developers are attractive candidates for competitors. They may leave and take the clients with them, which is disruptive to both the client and the firm. To counteract this, some law firms, but not many, reward associates who bring in business with a bonus equal to a small percentage of the collections on matters they originate. The object is to retain rising stars by incentivizing rainmaking behaviors early in their careers with an eye towards them developing into happy partners with large books of business for the benefit of the firm.

Firm culture

By tracking and rewarding business generation, firms—to their detriment—encourage internal competition and hoarding, while discouraging teamwork. Assigning origination credit isn’t purely objective and can result in a tug-of-war between partners. It can be difficult to agree on which attorney(s) are actually responsible for either bringing a new client into the firm or generating new matters from existing clients. Very rarely is the same lawyer responsible for all aspects of a client’s business. Some firms leave the division of credit up to negotiation between individual partners while other firms establish guidelines for sharing and resolving disputes.

To promote teamwork and collaboration within a system that utilizes origination credit, firms can award additional credits to partners who work with others to generate business. It is better to allocate origination by individual matter rather than by client where the “originator” receives credit in perpetuity for all work s/he or others bill to the client that s/he opened. Credit by matter encourages other partners, perhaps with other areas of expertise, to expand the relationship beyond the partner who originally brought the client to the firm and, therefore, results in more revenue for the firm as a whole.

Diversity efforts

Heavy reliance on origination credit can undermine diversity efforts because women partners and partners of color report that racking up originations is more difficult for them. They have less access to meaningful networking and mentoring opportunities than their non-minority male colleagues, who form more substantial relationships with their predominantly white male supervisors. Furthermore, studies of U.S. businesses and law firms reveal that, even when holding jobs of comparable influence and status, women receive less instrumental help from their networks than do men. Beyond that, women lawyers report being bullied or otherwise intimidated by male colleagues who aggressively and sometimes unjustifiably pursue credit allocation.

Female and minority attorneys also complain that they often are trotted out for client pitches but are excluded from receiving any credit for bringing in the client or doing the actual work. It often is difficult for women and minority attorneys to successfully appeal to firm management when there are conflicts over divvying up origination credit. Studies show that having little or no diversity on the relevant compensation or management committees, as currently is common in Biglaw, can lead to biased results and marginalization of the women and minority participants. To promote diversity and inclusion in the legal profession, corporate clients increasingly monitor how their outside law firms staff their matters and award origination credit, prompting law firms to take a closer look at these issues. For an in-depth discussion on the diversity issues, see: Joan C. Williams and Veta Richardson, New Millennium, Same Glass Ceiling? The Impact of Law Firm Compensation Systems on Women, 62 Hastings L.J. 597 (2011). Available at: http://repository.uchastings.edu/faculty_scholarship/821

Succession planning

Emphasizing origination credit when calculating partner compensation also can hinder the institutionalization of clients and impede the smooth succession of clients from one generation to the next. Senior lawyers may hang on to their clients and the related origination credits to maintain their compensation level, rather than sharing them with more junior partners. To reduce the hoarding of clients, law firms must structure incentives for senior lawyers to start transitioning those relationships. Some firms double up origination credits and the resulting compensation for a few years before partners retire. As the senior partner winds down, the firm awards origination credit to both the retiring partner and the younger partner who starts assuming client responsibility. In some cases, partners who are nearing retirement and are under pressure to share clients, but are not given financial incentive to do so, will jump to another firm and take their clients with them.

In cases where a departing lawyer leaves clients with the firm, those clients and the attendant origination credit often are passed along to attorneys whom the departing partner designates. This encourages more competition among the firm’s lawyers as they scramble to inherit the business. And, since there is a subconscious preference for people with common traits and experiences, and demographics are such that the retiring attorney probably is white and male, there is a high likelihood that so, too, will be the inheriting attorney—thus exacerbating the diversity inequity.

Mixed bag

Origination credit is a mixed bag. Awarding credit is a tried and true method of encouraging lawyers to go out and bring in business which is essential to the law firm’s survival, but it also has its downsides. Either firms must devise other ways to incentivize rainmaking, or they must develop policies to mitigate the negative impacts that reliance on origination credit can have on their clients’ interests and the firms’ fortunes, both now and into the future.

Valerie Fontaine
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