April 26, 2005
Leverage, the basics
While at the ALA in San Francisco, I thumbed through some of the books for sale in the ALA book store on the exhibit floor for the annual ALA conference. It struck me that Maister in his book, Managing the Professional Service Firm, quickly moves to the issue of leverage. He does so for a good reason. No other single factor has as much influence on the personality of a law firm or the type of professional services in which it can profitable engage.
The definition of leverage is simple enough¾the ratio of non-equity fee earners to equity fee earner. Thus, a firm with a 3 to 1 leverage has three non-partner fee earners (associates and paralegals) for each partner. But understanding the whys and the implications on management is far more complex. The management implications of leverage is generally underestimated and frequently misunderstood.
Leverage in a law firm isn’t an independent variable. You don’t just wake up one morning and say, "I think we will have a 3 to 1 ratio". Leverage is influenced by the nature of the practice and influences the practices in which the law firm can profitable engage. Its role in the success or demise of a law firm is complex.
There are three basic types of practices with variations in between:
The trailblazing practice
The mature practice
The transactional practice
Actually they are different points on the same life cycle of a practice. By practice, I mean a style of cases or matters. Most law firms are engaged in multiple practices each at differ points on their life cycle.
The trail blazing practice requires the greatest creativity and brains. By its nature there is no, or little, accumulated experience. Without experience and accumulated knowledge, there is no road map to train and guide associates. This practice involves little or no leverage but also commands the highest fees from law firm clients.
The mature practice is one in which the firm and its competitors have had experience handling. Through that experience, the firm has accumulated reusable work product that can guide new projects and provide a starting point to be adapted to the particulars of new matters undertaken. The mature practice can take advantage of leverage. The more projects each partner oversees, the more per partner income is generated for the firm.
The transactional practice could also be called the over ripe mature practice. By now the mature practice has become so well defined that most of the work takes on a clerical character and leverage is at the highest level. Paralegals do much of the work under the supervision of associates who in turn report to a partner. Competition reduces prices to the lowest offered by the firm. The successful transactional practices are those that have converted their services to a well-defined and highly automated process. They are the low cost producers.
Each of the above practices can provide a handsome per partner income level if properly staffed and managed. Each requires different staffing and different management approaches. Staff incorrectly or manage inappropriately and the practice area is likely to fail.
In the coming days, we will examine each of these three practice types in greater detail with the objective of understanding the role and influence of leverage and other factors on per partner income and business continuity.
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Filed under Law Firm Bus Model, Leverage by Tom Collins