Redwood Analytics

Four times per year we host the Redwood Forum, which is a chance for Redwood users to get together online and talk about business intelligence, law firm management and finance, and the role our tools play in that space.   The following post is guest authored by Chris Katchuk.  In it he summarizes the discussion topic recently held on leverage, inspired by my colleague Bo Yancey's post from earlier this year, "A Different 2011 Scenario: Leverage Expands."

We have discovered that leverage and profits per partner have a direct correlation; therefore, we always try to keep a keen eye on the activity of leverage within the industry. 

Poll #1

This correlation is often most apparent when comparing firms of the same size (i.e., the firm that's utilizing leverage the most usually is the most profitable).  However, information acquired through Redwood Benchmarking and other public benchmarking figures tells us that many firms are deleveraging.  Coincidently, as these firms are deleveraging, profitability has decreased concurrently as well.

Poll #2

As one can see there is quite a mixed bag of answers for this question, however, as expected, no one anticipates hiring to be at historic levels in 2010. 

What We're Hearing

Why are we still talking about leverage? 

Leverage is still an important driver in profitability; however, another perspective illustrates many firms have decided that it is unfashionable to address, because leverage is not their end goal.  Firms are hearing from clients that they do not want their matters worked on by associates that may not have the desired amount of experience.  As a result, firms tell us that the traditional leverage model is broken and cannot examine partners vs. associates.  Also cited is the inability to push work down to the lowest level of associates because clients are no longer willing to accept that approach. 

Our Response

Where firms need to concentrate, especially in the realm of alternate fees, is on how to create value for their clients in the most efficient way possible.  Perhaps the negative perception of leverage stems from the opinion that time worked on matters increases when less experienced associates are working on them.  While that may be true, the upside is that the associate's compensation is significantly lower than the partners.  Additionally, this action frees up time for the partners so that they can concentrate on bringing in new business. 

Firms need to set up a system in order to ensure that their processes are efficient.  By focusing on efficiency, firms will be able to deliver high-quality work to clients at a lower cost to the firm.  The question that ultimately must be addressed is: how do firms maintain the level of value to their clients when they are not training their partners of tomorrow?  A firm cannot accomplish this if they refuse to push work down to less experienced associates. 

We also think the deleveraging that is occurring may be an attempt to combat the ballooning of associate compensation.  This may be effective in mitigating the effect of salaries; however, this is not a solution to correct rising salaries.  

Efficiency

Firms should look at matters worked for clients as a partnership with the client.  There are many scenarios in all areas of law that could allow for firms to be more efficient utilizing their client money.  When clients recognize this, they will be more willing to award firms with more and more work.  Open and candid discussions about work being done can directly correlate to the efficiency of work being performed. 

The headline:  Leverage needs to occur in order to train associates who will be the future partners of the firm, which will in turn allow current partners to concentrate on business development.