Law Firm Business Model - Leverage

The 5 key performance indicators all law firms should measure are:

• Rate
• Realization
• Utilization/ Productivity
• Leverage
• Margin

This week each day I will focus on one of the above. Today the focus is on leverage.

Head count leverage is by far the most difficult indicator to change. Hiring new associates involves much risk, plus you not only need to have the workload, you have to have partners who are willing to share that workload. Some previous posts related to leverage are What Is Leverage?, Best Law Firm Practices for Increasing Leverage, Handling Complexities of Law Firm Leverage, Billable Hours vs. Head Count Leverage In Law Firms, and Leverage Can Help and Hurt Law Firms.

 

The two types of leverage that will be the subject of this article are head count leverage and billable hour leverage. Head count leverage is the ratio of all non-equity partner fee earners to equity partners. Billable hour leverage is the total sum of all non-equity partner fee earner billable hours divided by the total billable hours of equity partners. The goal is to increase leverage if your partners have reached or exceeded the target billable hour threshold per year. What that number is varies from firm to firm, but in the 2007 Law Firm Economic Survey by LexisNexis , we used a baseline of 1,800 billable hours. I consider 2,000 hours (40 hours per week based on a 50 week work year) as the maximum reasonable output that one should expect from a fee earner. Of that, 4 hours per week can be reasonably dedicated to non-billable activities. As so many who argue for alternative fee arrangements, there are only so many hours an individual may work. After reaching this threshold, it is imperative that work is passed to another fee earner if you want to increase income over the long term (ie, firm growth). Increasing the headcount of non-equity fee earners to handle accretive work (as opposed to absorbing work that could be handled by others) is central in making leverage work to increase income.

 

According to the 2007 LexisNexis survey, partners are still billing more than associates but continue to project that they will pass work on and reduce their own workload. It appears talking about it is easier than doing it.

 

Head count leverage is obviously risky if you don't have full utilization of your existing fee earners. If you add staff before full utilization, you are merely absorbing someone else's work - a sure way to lower profits. Plans to increase head count leverage are discussed in years, not months. First and foremost there must be a need. Otherwise, it isn't going to benefit the firm. Still, if used correctly, increasing leverage will increase partner income. The best performing firms in the 2007 LexisNexis survey also had the highest head count leverage.

 

 

The best performing firms also had the highest billable hour leverage. This is where firms can make immediate changes and get results measured in months. The key is measuring fee earner productivity. In mid-size firms, partners typically outwork the associates. In order to benefit from leverage (whether it be head count or billable hour leverage), associated must be fully utilized. Before I go any further, let me clarify what I mean by "fully utilized". It doesn't mean "work the suckers until they keel over". It means determining what the maximum amount of billable hours should be (governed by firm culture and reasonable expectations) and don't hire a single person until associates reach that threshold consistently. The whining about associates being overworked may be true in biglaw, but it doesn't appear to exist in mid-sized firms. In mid-size firms, partners are the overworked ones and most don't complain. Finding young associates who have proper work ethic is more the concern (as one managing partner told me recently, "we can't find associates that want to work!") but that is a topic for another article.

 

What are some ways to increase billable hour leverage?

• Increase paralegal hours or don't retain them. Paralegals are chronically underutilized. If you don't intend on using them, don't hire them. If you only have 600 hours of billable work for a paralegal and your associates are billing 1,300 hours, the paralegal is lowering both productivity and effective rate.
• Introduce partner caps on billable hours. This is one I expect will be well-received by work hoarders. The idea is to set a maximum annual billable hour requirement - once reached, all further work must go to client development and all billable work must be shifted to available resources. This is a drastic measure and should be instituted only to initiate change when other attempts at shifting workload have failed. It is not feasible over the long term and in firms that have a lockstep compensation system it isn't a good idea period. However, excessive workload is an important requirement to increasing leverage. Client development is key to bringing in more work and partners are in the best position to do rainmaking activities. Whatever it takes to get partners to act like owners of a company (not a confederation of sole proprietors) is worth trying.
• Mentoring activities. Mentoring is a nonbillable but crucial activity. Encouraging mentoring will force partners to do things besides bill time - things that will ultimately make the firm more competitive and profitable. Mentoring is an art not used enough and associates who are properly mentored are in a better position to succeed and develop into good future partners. The work that would have been done by the partner will then get shifted to the associate. Partners should focus on doing work that demands the highest rate so that there isn't as much of a profit hit when implementing mentorship programs.
• Change the criteria for achieving partnership status. Do away with lockstep compensation and similar paths to partnership. In its place create compensation plans based not only on billable work but firm citizenship. Introduce non-equity partnership programs that provide a place for excellent associates who may not be good owners (ie, don't have the drive or talent for client development and management - ie, grinders).
• Change your compensation plan to reward not only billable activities, but non-billable activities. Make shifting workload with mentoring a measurable performance indicator for compensation purposes.

It takes planning to make leverage work to improve profits. Determine where you want to be in terms of fee earner headcount. Look at where you are today in terms of client development. Look at where you are in utilizing your non-equity fee earners. Make your objectives clear and measurable. Track them - and hold everyone accountable for the success of the plan.

Morepartnerincome.com is sponsored by Juris®. For information about Juris products and services for increasing law firm performance and partner income contact Juris National Sales Center:

877/377-3740, e-mail info@juris.com or go to www.Juris.com.

 

Related posts

• Law Firm Business Model: Margin
• Law Firm Business Model - Realization
• Law Firm Business Model - Measuring Rate
• Billable Hours vs. Head Count Leverage in Law Firms
• Best Law Firm Practices for Increasing Utilization