March 20, 2007
Billable Hours vs. Head Count Leverage in Law Firms
The question of leverage is becoming more complicated given the increasing use of part-time lawyers and those working flexible schedules. Likewise, a pure head count approach where a firm underutilizes non-partner lawyers produces a misleading result.
William Johnston and Kristin Stark of Hildebrandt International address the leverage and underutilization issue in their paper titled Are We Approaching a Profitability Plateau?
“While partner/associate leverage is widely regarded as one of the drivers of economic performance (much like realization, productivity, etc.), leverage of billable hours is more important and should be given greater attention than leverage based on body count. Leverage is often stated as the ratio of non-equity lawyers to equity partners; economic leverage focuses on the total billable hours each group works. A surprising number of firms, including some of the largest firms in the country, have solid leverage based on body count, but only mediocre leverage when based on billable hours. These firms should reevaluate their use of leverage. Leverage is only positive when you can keep the timekeepers busy. After all, having a high associate-to-partner ratio is fairly meaningless if the associates are underutilized. Firms where 'body count' leverage far exceeds billable hour leverage typically have a large number of lawyers who neither work very hard as a working attorney nor generate significant business for the firm. Successful firms have the courage to take action when lawyers under perform, including counseling lawyers out of the firm.”
To see what the authors are talking about, compute your firm’s body count leverage and then compute the ratio of non-partner billable hours to partner hours. To illustrate, the related numbers for a composite of all survived firms as determined by the 2006 Juris Law Firm Economic Survey were as follows:
Partners: 12
Associates: 12
Leverage based on Body Count 1:1
Partner hours: 19,956
Associate hours: 17,724
Leverage based on hours: 0.89:1
While the body count leverage is 1 to 1, associates' hours were 89 percent of those produced by a partner, reaffirming the chronic underutilization of associates in midrange firms.
Morepartnerincome differs with the Hildebrandt team when it comes to corrective steps. Conditions on the ground may, in some cases, warrant thinning the law firm ranks of under-producing lawyers. However, spotty cases of attorneys who are inclined not to “work very hard” cannot account for across-the-board low body count leverage and even lower hourly leverage among 75 percent of midsized law firms. The blame rests not on lazy lawyers, but on law firm partners who hoard work at the expense of delegation and business development. Chopping heads is a short-term fix to stop the blood flow. The long-term solution is improved scheduling and delegation coupled with increased partner emphasis on business development, recruiting, and association development.
Back to the issue of measuring leverage, the issue of relying on body count leverage alone raised by the Hildebrandt authors illustrates why sound management requires a balanced approach in using law firm performance metrics. Leverage, utilization, price, realization, and margin must all be considered. Top performing law firms score highly in all metric categories. When it comes to measuring leverage, part-time and flex schedule attorneys add an additional complication. One simplifying technique is to use non-equity equivalents in computing traditional body count leverage. Two half-time associates equal one non-equity equivalent, for example. When using equivalents, the fractional measure should be based on compensation not on the billable hours that part-timers generate. If a flex hour attorney is costing you two-thirds of a comparable associate, they are two-thirds of a non-equity equivalent, even if they are producing at the annual level of 500 or 1500 hours.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
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Filed under Leverage by Tom Collins
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