I spoke Friday at the ABA Techshow on profitability and the key drivers of partner income.  At the end, I posed some questions to the audience to facilitate discussion on the findings of the 2007 Law Firm Economic Survey.  One of the questions I asked was "why would firms have low associate utilization?"  A partner in the audience responded, "Partners don't trust them to do the work."

That is a common answer I hear from partners.   However, without fully utilized associates, firms can't leverage.  Leverage affects the growth of the firm and there was a strong correlation between leverage and income by respondents of the 2007 Survey.  The challenge for small to mid-size law firms is finding ways to increase associate utilization so that the firm positions itself to leverage.  If trust is an issue, then confront it.  Mentor associates so that you can trust them to do the work as you would.

An article written by Allison Wolf in her Lawyer Coach Blog titled The Fine Art Of Delegating was the basis of a post by Tom Collins in August, 2007 called Spinning Increases Law Firm Income.   Both Wolf and Collins stress that partners who aren't "spinning" work to associates need to face the reasons that prevent them from delegating - don't let the reasons be an obstacle. 

Wolf writes:

Delegation is one of the lawyer behaviors that need to be rewarded by compensation committees. For a law firm to be most profitable partners are required to spin work down to juniors. Savvy compensation committees look at the combination of billable hours and spin earnings when allocating partner income.

Collins adds:

[A] firm’s compensation plan is often the reason Why Partners Hoard Work. That, in turn, leads to poor leverage, underutilization of associates and high turnover.

On the issue of trust, Wolf writes:

Successful people surround themselves with talent. Your challenge is to help develop the juniors so that they do the work as well if not better than you do.

Formal mentoring programs are still rare in small and mid-size firms, yet the need is apparent based on the findings of the 2007 Survey and from what I hear from partners.  In a year where inflation may very well end up over 4%  (over 1% higher than the annual average the past 10 years), firms can't rely on rate increases alone to maintain income.  Develop programs to help associates manage more caseload.  Give partners an incentive to delegate and mentor.  Those who do will create the circumstances necessary to leverage and grow the firm, ultimately leading to sustainable increases to income.

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Measurement improves performance.  If you measure the following 5 key performance indicators, your profits per equity partner will increase.  These drivers are:

• Leverage
• Rate
• Realization
• Productivity
• Margin

Leverage in the above model is based on head count leverage.  Head count leverage is the ratio of equity partners to non-equity fee earners. 

Rate in the above model is based on the effective billable rate for all fee earners.  You get this by adding all fee earner rates and dividing the sum by the number of fee earners.

Realization in the above model is based on the amount of fees billed against what was worked.  You get this from dividing the sum of all fee earner hours billed by the sum of all fee earner hours worked.

Productivity in the above model is the sum of all fee earner billable hours divided by the total number of fee earners.

Margin is net income divided by total fee revenue.

Here is the scenario.  Your firm has 29 fee earners.  Eleven equity partners, eleven associates/non-equity partners/of counsel, and seven paralegals.  You have a total of 50 employees including equity partners.  Your effective billing rate is $275, your average fee earner productivity is 1,690 per year, your firm writes down or discounts an average of 10% of work performed (90% realization) and your cost per head is $140,903.   

Based on the above, profits per equity partner would be $462,255.  

 

 Now, let's play with the numbers.  First, we'll look at rate.  If we increase rate by 6.5% (which was the average rate increase predicted by respondents of the 2007 Law Firm Economic Survey by LexisNexis), factor in cost inflation (currently around 4.25%), total PEPP increases to $486,314, an change of $24,059.

Factoring inflation, the increase in income is not substantial.  However, it underlies the importance of increasing rates annually to avoid devaluing your rate due to inflation.  The secret to beating inflation, though, isn't rate;  It is productivity.  High productivity creates the gap (margin) between cost (which includes inflation) and revenue.  The higher your margin, the less inflation hurts you.  The lower your margin, the more inflation works against you.

So let's consider productivity.  If you increase billable production by 100 hours per fee earner per year (a meager 24 minutes per day based on a 50 week year), PEPP increases to $527,505, a change of $65,250 per partner!

 

This is one way to make a substantial increase in income with very little change in your workload.  In fact, you can likely make up the 24 minutes per day by just entering your time as you are doing the work.  Tools such as MyJuris Mobility take advantage of mobile devices such as Blackberry devices to recover nearly an hour per day of productive time. 

Finally, we'll consider leverage.  If you add two non-equity fee earners (assuming you have the business to necessitate such growth), PEPP increases to $512,686; a change of $50,431 per partner. 

Best performing firms, however, do well in several indicators.  If you were to combine the above, the results would be striking.  If you increased rate 6.5%, added 24 minutes a day to each fee earner's billable goal, and added two associates, you would increase income from $462,255 to $609,677, a change of $147,422 per partner.  The effect of compounding factors works to increase the effect of each indicator on income more than you would by increasing any of the indicators alone.

Even if you only increased rate and productivity, you would increase PEPP by $90,733.  Click here to download a sample spreadsheet (you must be registered to this site to access the downloads page) and work the numbers yourself.  Use it to forecast your increases and measure your performance to reach your financial goals.  

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.

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Much is said regarding the importance of leverage for increasing per partner income.  However, changing headcount leverage is not an easy task.  There are HR considerations (do new attorneys fit in, do they have the right attitude, will they stay for the long term, etc) as well as existing habits (partners not sharing work).  However, based on the 2007 Law Firm Economic Survey from LexisNexis, if your partners can learn to share work, more immediate benefits are possible through billable hour leverage.

 

The way you get there is through increasing billable hour requirements.  Does this mean more work?  Hardly.  How about just providing blackberries for your fee earners and utilize tools like Juris' Mobility Connector?  According to a study from Ipsos Reed, blackberry users recover 54 minutes a day in productivity.  That improves productivity by roughly 196 hours per year per fee earner.

 

Next is to put your partners to work - non-billable work.  This year is a critical year for law firms.  If in fact we are headed towards an economic down cycle, there will be tighter budgets for clients and that means price pressure on law firms.  Relationships are key.  Lawyers need to market themselves as not only experts, but trusted counselors.  It can't be said enough that if your equity partners are not willing to get out of the office and maintain as well as create new relationships, non-equity partnership may be a better fit.

 

What to do with the work that is being left on the equity partner's desk?  Give it to associates (or non-equity partners).  Don't let them become idle!  The 2007 survey shows that there is a strong correlation between associate productivity and per partner income.  If you have associates already billing at or near 1,800 hours, then it is time to hire new associates.  If you want to push that number to 2,000 that is fine, but you don't need to work that hard to make your target profit.

 Assuming you have the workload to justify new hires (including taking the extra work from partners who are out building and maintaining relationships), increasing head count leverage is your best bet for increasing per-partner income. 

 

 

 

In the above scenario, based on 29 fee earners working 1,610 hours a year, profit per equity partner totals $284,398.  Below, just by adding two associates and increasing hours a mere 12 minutes a day (50 hours per year per fee earner), per equity partner profit increases nearly 20% to $340,418. 

 

 

Just think what the above would be if you gave fee earners blackberries and you recovered an hour per day from each of them utilizing tools like MyJuris Mobility.

 

Head count leverage is a valuable tool for increasing income but is dependent on workload.  If equity partners are not willing to pass work to associates and get out of the office to build and maintain relationships, your firm is leaving both scalability, money and eventually your own talent for other firms to take.

 

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.

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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 Productivity.

Productivity is the degree of value generated by fee earners. It is most commonly determined via billable hours, but you can track productivity in terms of fee generation whether via hourly billing or other fee arrangement. The concept is the same either way: attaining maximum productivity means getting the most output from your fee earners. In alternative fee arrangements, you can determine the productivity by breaking down each task by the time it takes to perform the task. Then productivity becomes how many tasks you can complete in a given time frame. One way or the other, you can only work so many hours in a day regardless of how you bill. Since most firms still primarily judge productivity in terms of the billable hour, this article will gauge productivity by billable hours. For some prior posts on productivity/ utilization, please look here, here, here, here, and here.

According to the 2007 Law Firm Economic Survey from LexisNexis, partners billed more hours than associates. Based on a 1,800 billable hour per year standard, top performing firms had associates with productivity numbers that were closer to their partners.

In the above charts, it is clear that partners are more productive than the associates. Considering that partners dictate what associates do, this is a disturbing indicator of a lack of workload sharing by partners of mid-sized firms. Further, for those who do utilize their associates, profits increase. Across the board, partners were within 10% of the 1,800 standard. However, the best performing firms (those in the 1st quartile), had both partner and associate productivity within 8% of each other. In the 2nd quartile, the disparity was a whopping 17% For the 3rd quartile, it was even worse: a 25% difference between the utilization of partners versus associates. For those in the worst performing quartile, the disparity was a little less at 18%, but partners were only as productive as the associates in the 1st quartile.

It is worse for paralegals, though you may argue that paralegals shouldn't be held to the same billable hour standard as associates. Even so, the higher performing firms still utilized their paralegals more than those with lower per partner income. It is clear that utilization is a path to higher profits.

Don't read too much into the above sentence. Again, there are only so many hours in a day and thus only so much productivity you can expect from fee earners. You still need to measure performance based on proper leverage, rate, etc. But you can improve short term profitability by increasing utilization alone.

Assuming the work is there, the best way to increase productivity is through incent. Provide incentives to partners to share work with associates. Provide incentives to associates to reach their billable goals. Provide incentives to utilize paralegals. Try many things and measure against production. If it works, keep doing it. If not, adjust.

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.

 

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