Make More Rain : leverage, blog

Part Two of Leverage: Friend or Foe

Admin — Tue, 14 Apr 2009 20:02:00 GMT

In Leverage: Friend or Foe of Maximized Profits per Partner I discussed an approach that a firm could use to address the dropping demand for legal work. In short, this approach suggested that a firm could reduce their supply of legal work to match current demand by cutting heads in its most junior ranks, the ranks that produce the lowest $PP contribution. This is simply de-leveraging. By doing so, the firm would ensure sufficient utilization and would generate the highest possible $PP for existing partners . At the same time I also hinted at a second alternative that would enable a firm to deliver greater PP$ than simply de-leveraging.

Previously I had described the firm structure that delivered the highest possible $PP, which I called the Managerial Maximum. In essence, the Managerial Maximum is the highest amount of leverage that a firm can effectively manage. By having the maximum # of associates working (Sr., Jr., etc.) per partner, they are generating the maximum $PP contribution which results in the maximum $PP, assuming 100% utilization. Any deviation from this maximum leverage ratio will deliver lower $PP. (see example pyramid below)

But what should a firm do if demand for legal work decreases and they can no longer maintain 100% utilization? What most firms are doing in today’s environment is de-leveraging, which is taking them away from the Managerial Maximum. I propose that firms should not be making cuts exclusively to lower level associates as the current de-leveraging strategy espouses, ie. cutting off the bottom of the pyramid. Instead I suggest that firms cut the side of the pyramid off, “thinning”, which entails cutting partners and the appropriate ratio of non-equity associates/staff until they reach a point where their supply of legal work matches the demand for legal work. (See example pyramid below)

By adopting this approach to matching supply and demand a firm is also ensuring that the maximum leverage ratio is maintained, which will result in the maximum $PP possible. For a given amount of legal work, this approach will generate more $PP than will de-leveraging. However, it will require cutting into the partner ranks, which may be culturally and politically challenging.

Below is an example that shows the impact to $PP of the different ways a firm can react to a decline in demand.

In the Base Case, demand is 200,000 hours. This firm is fully leveraged and is delivering $4,350,000 PP$.

Now demand has dropped to 140,000 hours and the firm cannot maintain 100% utilization or the Managerial Maximum leverage. The firm can de-leverage, “thin” or a combination of the two in order to increase utilization and improve leverage.

Below is a table that shows the PP$ result of the various lawyer combinations the firm can choose depending if they decide to de-leverage or “thin”.

If the firm chooses to address the decline in demand solely with de-leveraging the PP$ will drop to $3,600,000, however, if they also adopt a “thinning” approach their PP$ can increase back up to the $4,350,000 they had delivered in the past. In a vacuum, my recommendation to this example firm would be to “thin” down to 6 partners as this would permit the firm to stay fully leveraged while matching hours demanded as close as possible to hours worked (ie. supplied).

Overall, there are two ways a firm can react when demand for legal work declines: 1) they can de-leverage or 2) they can “thin”. De-leveraging will deliver the maximum $PP for existing partners, “thinning” will deliver the maximum $PP possible. Note: I recognize the challenges of eliminating equity partners from a firm. This recommendation is strictly the result of objective considerations.

--Scott Nickerson

Scott is an analyst in the Redwood Think Tank.

Martindale-Hubbell Connected Launches Networking for Lawyers

Admin — Tue, 31 Mar 2009 21:27:00 GMT

Social networking has evolved significantly from pressing the flesh at boring seminars and dinner events to the online world of LinkedIn and other such sites, and at LexisNexis we’re proud to be a part of that world now. Today marks the launch of Martindale-Hubbell Connected.

At Redwood we have always endorsed the idea of business development from within – it’s easier, faster, and less expensive to bring in new business from existing clients than to pound the pavement in search of new clients, and given today’s economic client, this is even more important. However, the cost effectiveness of online networking can change that equation. The opportunity to connect online – in a private, authenticated network – with General Counsel and other legal professionals across the globe through existing trusted relationships is one key to the success of business development in a time of budgetary constraints.

From martindale.com -

Martindale-Hubbell Connected combines the largest global resource of legal contacts - more than one million lawyers and law firms around the world - with social networking technology to create a dynamic, authenticated network enabling corporate counsel and private practice attorneys to uncover new relationships and trusted referrals, share information and insights, and to identify their connection to firms, corporate legal departments or other lawyers.

To join Martindale-Hubbell Connected, lawyers can visit www.martindale.com/connected. We’ll see you over there soon!

LEVERAGE: Friend or Foe of Maximized Profits per Partner?

Admin — Mon, 30 Mar 2009 15:21:00 GMT

There has been a significant amount of debate on the subject of leverage over the past few weeks, and there appears to be some passion around the concept. Articles have attempted to show that it does not work, while others tout its value. My belief is that regardless of economic conditions, more leverage is better than less leverage if the end goal is generating the maximum possible Profit Per Partner ($PP).

In order to discuss leverage, it is important to establish some groundwork, so that we can build examples to illustrate key points.

All examples discussed assume 100% utilization unless otherwise noted. There are many variables in the leverage equation, so in order to keep things orderly and understandable some of the variables, such as utilization, will be kept fixed until it makes sense to free them up.

Leverage is defined in several ways depending on who is discussing it. For this discussion we don’t get into specific leverage ratios, so a standard mathematical definition isn’t required, however, we do need to establish the upper and lower extremes of leverage.

The lower limit of leverage (ie. the least leveraged) is a firm that is made up of one partner and no associates. The maximum Profit per Partner ($PP) that can be generated in this case is however much the one partner can bring in.

In order to determine the upper limit of leverage (ie. the most leveraged a firm can be) we need to consider the main constraint that limits leverage, managerial effectiveness. There are other relevant constraints that limit leverage but for now we are assuming that we can find associates to hire and offices for them to sit in. Managerial effectiveness is simply the measure of how many people each level at a firm can manage effectively while still delivering on their other responsibilities. In our examples we are assuming a partner can effectively manage 3 Sr. Associates, and a Sr. Associate can effectively manage 1.3 Associates and 1.7 Jr. Associates. When a firm is structured so that each level is managing their effective maximum number of subordinates and they have in place all levels that are applicable (ie. Partner, Sr. Assoc., Assoc., Jr. Assoc.), the firm is considered fully leveraged and will be generating the maximum possible amount of $PP.

Why is this true? Because each incremental non-partner employee will bring in some incremental $PP given that their billing rate is higher than their cost rate and utilization is at 100%. This structure has the maximum number of employees bringing in their maximum $PP contribution, which generates maximum possible $PP. This is the upper limit of $PP, the upper limit of leverage and I refer to it as the “Managerial Maximum”. If firm structure was viewed in the shape of a pyramid (shown below), it would be the size and shape that maximizes $PP. There would be no other size or shape (ie. structure) that could deliver more $PP and in fact, most changes to the structure would negatively impact $PP.

Note: There are a variety of reasons why this theoretical “Managerial Maximum” may not ever be reached, but it provides a yardstick to measure other potential structures against. Regardless, given 100% utilization, more Leverage will generate greater $PP than will less Leverage.

The above pyramid displays the organizational structure that will generate the greatest $PP given sufficient hours demanded to deliver 100% utilization. But what happens when hours demanded declines and the firm can no longer maintain 100% utilization? This situation is what many firms today are facing and there are two conceptual approaches to how they can handle this. In both approaches, firms are attempting to better match their supply of legal work to the newly lowered demand for legal work.

Approach #1: De-leveraging

This is the approach that most firms have chosen during these down times. In de-leveraging, a firm pulls work back from some levels (and reduces headcount) in order to keep other levels fully utilized. In this example and in reality, it is usually the case that the higher on the pyramid a fee earner is, the more $PP per hour they are generating. That is, a Sr. Associate will generate more $PP for an hour worked than an Associate will, etc. Because this relationship exists, the optimal approach to leveraging is to always have work done by the highest level in the organization and only push it down to lower levels after higher levels have reached capacity. And when de-leveraging, the optimal approach is to pull work back from lower levels first in order to keep higher, more profitable levels fully utilized.

Note: This exercise is ignoring the impact of billing rates on demand for hours and the fact that legal work is not always fungible, but in the interest of gaining a conceptual understanding in a perfect world, this is how a firm would roll out and roll back leverage.

In the pyramid below, the color of the lowest level has been changed to indicate the removal of work and the reduction in headcount. This approach to leverage, both increasing and decreasing will generate the maximum $PP possible, for the hours demanded, for the group of existing Partners.

As I have explained the optimal approaches to leveraging and de-leveraging, I have been very careful to emphasize that optimal leveraging will maximize $PP for existing partners. Earlier in this blog I had presented a theory that the upper limit of $PP would be achieved only when a firm was leveraged to its “Managerial Maximum” and any deviation from this point would deliver lower $PP. Therefore the approach that most firms are taking, de-leveraging, is taking these firms further away from their “Managerial Maximum” and as a result they are leaving incremental $PP on the table. Later this week I will propose a strategy (Approach #2) that will permit firms to match their supply of legal work to existing demand while also chasing the more profitable “Managerial Maximum” and will permit them to recapture some of the $PP they left on the table when they de-leveraged. In the meanwhile, I welcome your comments.

--Scott Nickerson

Scott is an analyst in the Redwood Think Tank.

Strategic Leverage: Just as Important as Ever

Admin — Wed, 25 Feb 2009 20:54:00 GMT

It is part of my job to make sure I am up to speed on all the economic movements of firms here and abroad as this economic downturn has not trickled down but headed full- fledged into the legal industry. Each day I read article after article about associate and staff layoffs at firms of various sizes and peer status. In addition I attend conferences and listen to Managing Partners, CFOs, and other C-level staff address how to combat this downturn through various actions used to cut costs. At most conferences there has been an inevitable line of presentations on reducing overhead along with addressing the headcounts of staff and salaried timekeepers. If I have to hear about controlling space planning and technology expenditures anymore I think my head might spin.

I speak with CFOs all the time and the prevailing theme is that budgets have been cut so much recently that the line is very thin on providing appropriate support to the primary operations of the firm. I am not saying that these measures of analyzing overhead aren’t important. In fact I agree they are and should be done on a consistent basis, not just when there is an economic downturn.

Most consultants I have spoken with all agree, if you had no strategic plan in place before the recession you are probably too late. Since many firms fall into that category they have fallen into an immediate cost cutting tactical strategy that almost completely focuses on the easiest things to cut (staff, associates, technology, etc.) In some cases the staff and associate cuts are valid in that the recession has produced a prime opportunity to do what was probably overdue in eliminating poor performers. For other cases it is the perceived method of addressing what aims to be a possible rough year or two. Unfortunately I feel that this method of reducing costs is shortsighted and evasive of one of the key detriments to firm performance within an economic downturn, underperforming partners.

Let’s address the shortsighted nature first. In the early 90s the legal industry felt the effects of a recession that lead to mass layoffs of associates and staff. As time passed and the economy improved those firms found difficulty in re-staffing properly for the growing legal work they were receiving. Gone were the associates who were already trained and ready to be the next leaders of the firm leaving a re-tooling effort that could have been avoided. By purging large numbers of associates it mortgages the future of the law firm, leaving a void to fill when the economy turns. This, despite the fact that when it comes to strategic leverage, a well levered firm can be much more profitable.

Strategic Leverage

Below is an extremely simplified view of the effects of leverage. Assuming 100% utilization and 1800 budgeted hours the impact of a shift in the non-partner to partner ratio of 1:1 to 3:1 clearly would reduce revenue, a point that is often used to counter the initiative of leverage, but the key statistic for the legal industry, Profits per Partner, increases. This is generally due to the higher percentage return that associates bring in. Another component that is not even captured in the model is a likely reduction in overhead. This sort of analysis should be done by firms on a consistent basis regardless of economy to find the right mix. You obviously need partners for reasons that anyone reading this blog should be aware of but leveraging is a true way to improve firm profitability. That fact reinforces the shortsighted nature of the removal of staff and associates for cost cutting purposes. You just cannot cut and cut all the way down into profitability.

Addressing the Economic Slowdown through Underperforming Partners

This leads into the other concerning trend I have seen. The legal industry is not focusing enough effort on underperforming partners. As mentioned by my colleague Bo in his forward looking view of leverage last week, smart firms are the ones who will take this opportunity to deal with underperforming partners as well as associates. But we’re just not seeing it here in the US.

I have often wondered why that is the case, but from many discussions with managing partners, the prevailing theme seems to be a feeling that by disturbing the “glue” it would show weakness and perhaps cause unrest among the other Partners. At face value I can understand, but the examples are before us where turning a blind eye to underperforming partners have contributed to successful partners actually leaving firms and causing those firms to fall into decline. I think the point is that subjectively most partnerships have a general idea on who is performing and who is not within the ranks. Technology and consulting can bring data to back those beliefs, but if nothing is done about the underperformers, the over performers may develop resentment as their pocketbooks get hit.

Within recent weeks we have seen several firms release partners in the UK. Linklaters just announced a reduction in their partnership as has Addleshaw Goddard. The Times Online recently spoke with Nigel Boardman one of the UK law firm Slaughter and May’s top partners. He had several great quotes that illustrate this need to address underperforming partners, “I don’t think it follows that a downturn in work means that you cut your associates…If you have to cut, cut your partner profits and even your partners…good lawyers are hard to find.” Mr. Boardman is addressing that thinning the junior ranks will leave firms without qualified talent as the years go by and that is not a good long term strategy.

Profitability of law firm is driven by several factors, but the seemingly elephant in the room (cutting underperforming partners) seems to be a factor that firms have difficulty addressing. It could date to years gone by when partners were considered untouchable. Yet the recessions of the past have changed that as has the changing model of the law firm. This recession is weighing on the legal industry and those firms that finally address partners and practice areas that have not been performing to firm standards and make the move to strategically shift their firm for the long term are going to come out ahead when the economy turns the corner.

--Russ Haskin

Russ Haskin is Director of Consulting for Redwood Analytics/Lexis Nexis.

A Different 2011 Scenario: Leverage Expands

Admin — Sat, 21 Feb 2009 01:01:00 GMT

Over at the AmLawDaily, Paul Lippe recently caught our attention here at Redwood Analytics with his sensational headline, ("Welcome to the Future: The 2011 Scenario and the End of Leverage,") but we're having trouble connecting the dots to get to Mr. Lippe's vision for the future of the legal industry.

Mr. Lippe's assertion: Leverage will be less prevalent, because the market value of associate work will be less than it is today. While partner contribution may be essentially the same as today, the declining value of the work of non-partners and other fee earners will reduce overall revenue for work between today and two years hence by as much as 20 percent.

We're not convinced that firms will devalue leverage for two reasons:

Mr. Lippe's hypothesis assumes that the legal work of 2011 will be identical to the legal work of 2008. We disagree.
What is described as the "end of leverage" is in actuality an extension of leverage. The current supply/demand dynamic between purchasers and providers of legal services does not mean the end of leverage. If anything, an expectation of reduced pricing power argues for more efficient planning and staffing of matters and a closer look at the structure of practice groups and law firms.

The Work of the Future

Whether Mr. Lippe is correct about the relative value of a piece of work today and in three years is largely irrelevant. For starters, today's premium work is tomorrow's commodity work. This is the case in most industries, and we don't believe the legal industry is an exception. While partners will appropriately be compensated for their "deep expertise, and judgment about the client, the law and best practices....." pricing power is as much about the type of law as the lawyer. This is at least in part a function of supply and demand, and will impact associate pricing right along with the partners for whom they are working.

We're hard pressed to believe that the nature of legal work will be static over the next three years, and that there won't be new types of work, new areas in which there will be an opportunity to become an expert, and areas of law in which the demand for expertise will return pricing power to the lawyer and the law firm.

Leverage Continues to be the Answer

Mr. Lippe points to four places that dollars will go instead of into the pockets of law firms:

1. "Clients will just flat-out spend less, drive harder bargains and get more for their money."

Clients driving harder bargains will force law firms to produce efficient work. That means good work at the lowest cost. Alternative pricing and deep discounting does not argue for a de-emphasis of leverage as a driver of profitability. While most firms are cutting headcount through associates and staff, we believe that the smarter firms are the ones who are taking this opportunity to deal with underperforming partners as well.

2. "Some work will go to outsourcers, whether onshore or off."

How is this not leverage? This form of leverage will continue to expand, and we acknowledge that there is work currently done by large full service firms that will be handled much more efficiently by other providers. We refer again to the fact that legal work is not static in nature. There is certainly work that is handled today by paralegals that was handled by associates 10 or 20 years ago.

3. "More work will go to contract lawyers or proto-associates not on any kind of partnership track."

This form of leverage too will continue to expand.

4. "Some associate time will get replaced by technology."

Nothing new here. No question, legal work will continue to evolve and technology will help firms become more efficient. This is the ultimate form of leverage.

Mr. Lippe asserts that "associate time is a pricing mechanism, not an indicator of value." While we don't disagree, it seems fairly clear that all fee earner time is a pricing mechanism within an hourly billing system, and that the market itself is the indicator of value. For Mr. Lippe and other proponents of the argument that law firms are on the brink of "the end of leverage" we're very interested to learn how firms will maintain, or grow, profitability without the use of leverage. While there may be a small decline in overall leverage ratios of large firms over the next year or two, we believe this will be the result of firms being slow to make hard decisions about partners. This, surely, must be temporary. At Redwood, we've studied the drivers of profitability across hundreds of firms, and found that leverage is far and away the second biggest driver of firm profitability (behind revenue per lawyer). We just don't see leverage diminishing in importance, regardless of economic factors or advances in technology. These things aren't new.

As for the current demand imbalance between law firms and clients: as a wise man once said, "this too shall pass."

--Bo Yancey

Bo Yancey is the Director of Professional Services at Redwood Analytics. He leads a team of consultants who provide practical advice to law firm leaders interested in using analytics to manage the business of law.

Watch This Space

Admin — Fri, 20 Feb 2009 00:35:00 GMT

Keep watching MorePartnerIncome.net, now sponsored by Redwood Analytics as part of LexixNexis, as we bring you more of the thoughtful content you've come to expect on the financial management of the law firm. We welcome your comments and ideas, and look forward to offering insightful financial management techniques and business practices for law firms.

How Law Firms Can Increase Income By $100k Per Partner In 1 Year

Admin — Mon, 25 Feb 2008 08:00:13 GMT

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.

Changing Law Firm Leverage

Admin — Tue, 12 Feb 2008 08:00:01 GMT

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.

Law Firm Business Model - Leverage

Admin — Thu, 24 Jan 2008 08:00:13 GMT

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.

Law Firm Business Model - Measuring Rate

Admin — Mon, 21 Jan 2008 08:00:01 GMT

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 rate.

For a primer, look at some prior posts related to rate here, here, here, here, and here. The importance of tracking rate shouldn't surprise anyone. However, I run into firm after firm who either don't increase rates annually or don't track effective rate. How can you improve performance if you don't measure it?

Source: Timothy McMahon (http://www.inflationdata.com)

The above chart shows the trend in inflation since 1990. Failure to increase rates annually at the rate of inflation during the 1990's wouldn't have as much of an effect on profits considering the economic boom the US experienced along with low inflation. That changed in 2002 and there has been a steady increase in inflation for the past 6 years. In fact, as of December, 2007, the consumer price index (which includes the price for food and oil) was at 4%. If you are not increasing your rate at least by the percentage of inflation, you are working for less money every year. It isn't known where inflation will be at the end of this year, and some are forecasting that this year will see some lower inflation, but the point isn't to predict lower profits when inflation is higher or higher profits when inflation is lower - it is to keep up with the rate of inflation and be certain your rate increases take it into consideration so that you are immune to the index altogether.

Inflation is a starting point - other factors such as relative expertise in a given area of law can also factor into rate. In your retention agreements, you can provide cost predictability to your clients by treating it like one would a long-term lease. You factor price increases into the agreement so that they know the percentage increase each year. In volatile times (such as the last few years), it may be better to treat it more like a mortage, setting a range of increase that won't go beyond a certain ceiling. Then annual increases can meet margin goals as well as inflation.

Measure the effective blended rate consistently so that you know if the rate is going up and down throughout the year. Why is this important? Assuming that your firm has established rate goals for the year, the blended rate (the combined average of all fee earners' rates) should be known. If the rate is decreasing, then something is wrong. The most likely culprit is pre-bill or post-bill adjustments. If your attorneys are devaluing their work, there needs to be a reason - otherwise, you will be sending a signal to the client that you are over charging them and adjusting to make it more fair. This is not the way to make it easier to raise rates in the future. Further, if you are trying to meet a financial objective, write downs and mark offs go directly to the bottom line and put you behind in reaching your financial goals.

The effective rate is calculated after the invoice is paid. It gives you the actual value of your services. In the report below, productivity, realization, and rate are tracked. The image below it is a blow up of the rate section of the report. In it you can see the value of the hours worked at your standard rate, your actual or negotiated rate, the billed rate after mark down but before invoice discounts, the billed rate after discounts, and the collected rate after post-bill adjustments. It is broken down both by both worked hours and billed hours.

In the above, you can instantly see that the time keeper is writing up his negotiated rate at pre-bill edit to conform with his desired standard rate. One way you achieve this (ethically) is by the use of firm-wide standards for the cost of a task. You must determine the time it takes generally to do the task and then price it accordingly. If you have efficient attorneys that can do the task in less time than the standard, he/she may write up the bill to conform (likewise, if it takes longer, you must write it down). This way an efficient attorney may mark up his time and thus increase his effective rate. For those who advocate value billing, here it is at work. The better value goes to either the efficient attorney or the client of the inefficient attorney. Tracking effective blended rate regularly will allow you to determine whether your attorneys are being efficient in their processes and if they are on track to reach the financial goals or not. If they are not, you can act on it well before it becomes an uncorrectable problem.

At the same time, the above time keeper may be increasing his rate unethically, which may lead to undesirable consequences (firm reputation as well as ethical violations may be the result). Without regular reporting on the above, you won't have the information to know which is occurring.

Price increase is one factor to consider in increasing effective blended rate. It isn't the only factor. Many firms, especially those who work in corporate defense litigation, have traded high rates for volume. In practice areas where there is not a lot of price flexibility and the rate is usually heavily discounted to get the business, the key is to have an efficient workflow process and be very wary of mark downs. In some firms, the rate can absorb an inefficient operation. In corporate defense, you may not have that luxury. On top of that, more and more corporate clients are levying restrictive billing guidelines that can seriously affect effective rate. Not only can non-compliance with client billing guidelines delay payment, it can lead to nonpayment of certain tasks altogether.

Improving workflow efficiency is the easiest way to increase effective rate. However, expectation of reciprocity from a client who expects you to provide quality service at a reduced rate wouldn't hurt. Why is it that a client can expect you to lower rate for their volume when you are not guaranteed any volume from them? In my opinion, not only would I work to increase rate, I would tie the frequency and level of the increase on the volume the client provides. If the client is willing to guarantee a certain percentage of their work for a given year, I would be more willing to hold rates steady or only increase them by the annual rate of inflation. Don't be afraid to treat your corporate clients like a corporation. They are treating you like a business. Although restrictive, billing guidelines provide a measure of cost certainty by the tracking of costs associated with a task. They know what it costs for you to do your work. You better know it too - and make sure you are making a profit from the work you do.

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.

Law Firm Leverage, the Lost Opportunity

Admin — Mon, 01 Oct 2007 17:13:00 GMT

The message is the same year after year and on both sides of the Ocean. Altman Weil’s latest Law Firm Economic Survey shows the continued wide performance gap that separate the best performing firms from the rest of the pack. James Cotterman, an Altman Weil principle was quoted as saying “This performance gap is driven primarily by higher billing rates and better leverage……”

What is stopping 75% of law firms from successfully implementing a sound leverage strategy? Better yet, what can they do to start capitalizing on the leverage opportunity? The answer is implied in the following paragraph that appeared in The Online Member’s Magazine of the Law Society of Scotland in March 2003:

”Some of the more successful firms are starting to abandon individual fee targets because they can easily be counterproductive. They have moved on instead to looking at team targets, either for fees or more usefully for profitability. Within each team they may look at chargeable hours or other performance measures. Too much emphasis on individual figures can result in partners and other fee-earners hanging on to work, not passing it to more suitably qualified colleagues or to more junior fee-earners. It is difficult to fully reap the benefits of gearing whilst focusing too much on individual fee targets – especially if they are related to bonus schemes.”

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.

Role of Leverage in the Law Practice Business Model

Admin — Wed, 05 Sep 2007 17:43:24 GMT

Leverage refers to the use of non-equity fee earners, mostly associates and paralegals, to expand the capability of the firm and thereby increase the income that can be earned by the equity partners. Without leverage, per-partner income is limited to what the partners can bill for their own work. Leverage is achieved by using non-partner fee earners working under the partner’s supervision. Leverage is expressed as a ratio-- for example, if there are two associates for each partner, the ratio is 2-to-1. Leverage is one of five key performance drivers determining the earnings of law firm partners—Leverage, Rate, Utilization, Realization and Margin.

The above mathematical expression illustrating how the five factors impact partner income was first published by David Maister. It is easier to understand when viewed in a more traditional financial statement format:

In the above table, twelve partners share the results of 42 legal professionals (12 partners and 30 non-partner fee earners). The leverage is 2.5 (30 non-partners divided by 12 partners)

The importance of leverage as a driver of per-partner income is illustrated by the following chart taken from the Juris Law Firm Economic Survey for 2005.

The chart divides surveyed law firms into quartiles based on income per partner. The first quartile represents the top performing 25 percent. Those firms earned more than twice the per-partner income of the next highest group.

Effective use of leverage requires prior experience in order for the supervising professional to efficiently instruct, train and mentor the less experienced assigned professional staff. Thus, the opportunity a firm has for leverage will vary with the type and maturity of practice. As a practice area emerges, there are no precedents, no forms, no prior experience, and no accumulated work product. Solutions in such emerging areas have to break new ground. These growth areas typically command the highest fees and clients seek out the law firm because of the firm’s reputation for creativity and for having a smart professional team. Professional work in these trailblazing areas is performed with very little or no leverage. Firms accumulate experience as a practice area matures. They develop work product and increase their ability to use less experienced staff for an increasing portion of the work. Clients seek out these firms because of their successful prior experience handling similar cases. Competition drives prices down. Leverage becomes a more important strategy for achieving a competitive per-partner level. As the practice continues to mature, it will evolve into its transactional phase where the work becomes routine. Prices decline to their lowest level. High leverage combined with high utilization becomes necessary for sound financial performance.

Today most midrange firms are involved in mature and transactional practice areas. Partners have to handle multiple cases or matters at a time. The more effective the partners are at using associates and paralegals to do the work, the higher the firm’s per-partner income will be. Firms that are less efficient at using associates and paralegals will have a lower partner Income. Inefficient acquisition and/or use of leverage in a mature practice area threaten the very continuity of the firm.

Considering the role of leverage in driving partner income, it is surprising that 75 percent of midsized law firms have not successively implementing the strategy. Where AmLaw 200 firms have about three associates for every partner, midsized firms average only a 1-1 ratio. Most do not adequately utilize the small leverage they do have. Partners are logging more billable hours than their associates. Rather than bringing in new business or training others, they are piling up their own billable hours. The result is what you would expect. Midsized firm partners make less income than their counterparts in larger law firms.

The two most noticeable, but related, controllable factors contributing to low leverage are:

Compensation plans that reward partners for doing their own work, and

Partners devoting too little time to new business development

Like the other five variables in the Law Practice Business Model, leverage is too important to leave to an accident of events. It is a strategic issue. The firm partners need to understand the right leverage level for their firm based on its opportunities and income goals of its partners. To find out what can be done, use surveys or benchmarking services like Juris Insight to find out leverage levels being achieved by top performing comparable firms. Second, decide the competitive per-partner income appropriate for your firm. Work with the Law Practice Model to find the achievable mix of price, volume, leverage and margin that will produce your goal level of income.

The list below is a reminder of steps that you can take, among others, to increase leverage and improve per-partner income.

Increase the portion of time partners devote to business development—set individual goals, measure performance and hold people accountable.
Change the firm’s compensation plan to (a) favor supervision versus hoarding of work and (b) replace continuing origination credit with more immediate short term rewards for new business
Centralize the scheduling of non-partner legal talent to eliminate the hoarding of idle resources and to emphasize professional development through work assignments
Improve recruiting to hire more associates and paralegals. Increase lateral hiring to add experienced associates
Reduce the number of partners through retirement and attrition
Lengthen the path to partnership. Raise partnership criteria.
Create or expand layers (titles) of permanent leverage— paralegals, staff associate, senior associate, executive associate, senior council, non-equity partners, etc.
Invest in better business systems to provide business intelligence information. Managing leverage like other key performance indicators takes planning, setting goals, measuring performance and holding people accountable. For that, you need the right tools.

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.

Spinning Increases Law Firm Income

Admin — Fri, 31 Aug 2007 17:24:00 GMT

Allison Wolf’s post, the fine art of delegation, is an insightful interview with Adam Pekarsky about the influence of leverage and delegation on partner income. “Spin” is the term Fraser Milner Casgrain LLP uses for work ones pushes down in the organization.

According to Wolf, Pekarsky put it this way: “If partners don’t delegate the lower level work then it’s like driving a formula one race car around a Safeway parking lot.”

Too many law firm partners hoard work to the detriment of long term growth in per-partner income. Wolf makes it clear:

A lawyer who spins down the work keeps the most interesting, highly paid work for his/herself.

The lawyer who spins doesn’t have to write down bills and gets paid at a higher rate.

Another clear message is that partner compensation should emphasize the sum of partner production and spin.

I would expand on Wolf’s message by adding that 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.

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.

Role of Realization in the Law Practice Business Model

Admin — Thu, 30 Aug 2007 17:47:19 GMT

It is easy to talk about the Law Practice Business Model but not so easy to come up with representative variables to accurately predict the future or to test the impact on partner income from various changes in those variables.

Realization is no exception. There isn’t just one realization number. Computing any of them in a law firm is challenging. Realization refers to the percent of the law firm’s fee revenue remaining (realized) after the effect of forces that lower it from that which would have been realized if the firm had fully billed for all work and had done so at the firm’s standard or targeted prices. While realization is concerned with the reduction in fee revenue, it is expressed in the positive—the percent remaining. For example, if revenue losses of 8 percent occur, then the realization is 92 percent.

Rather than a single metric, realization consists of several that measures the following:

Pricing Realization: Lost revenue due to negotiated rates or fee arrangement
Billing Realization: Lost revenue due to write downs before the bill gets out the door
Collection Realization: Lost revenue due to write offs, adjustments, and uncollected amounts after the client was billed
Overall Realization: The overall lost revenue due to all the above

In building a model, one can start with the firm’s “Standard” Blended Rate and use the Overall Realization metric to arrive at Realized Fees, or the model could use the firm’s “Effective” Blended Rate and Collection Realization to arrive at Realized Fees. A complex model could include all of the interviewing metrics.

From a practical standpoint, it is easiest to work with the effective rate and collection realization. It is very difficult to accurately measure standard blended rate and most law firm systems lack the capability to identify pricing or billing realization. Thus, when law firm leaders discuss realization, most are referring to collection realization. Even though collection realization is the easiest to measure, doing so accurately is still a challenge. It sounds simple:

Just divide what you collect by what you bill

There is a problem. Because of timing differences, what the firm collects in a given period (month, quarter, year) doesn’t match what was billed in that period. For example, most collections in any particular month will be for amounts billed in several prior months. Virtually none will be for current month’s bills.

Due to the difficulty of measuring collection realization, law firms often use a simplified technique that, at best, only provides an approximation of the actual metric. The simplified approach for computing collection realization is illustrated by the Excel® worksheet shown below. In this example, collection realization is computed by using the amounts collected and the amounts billed for the most recent 12 months. Using twelve months of information minimizes the distortion due to the mismatch between bills collected and the bills being issued. However, the resulting metric will suffer from the distorting effects of the firm’s revenue growth trend. Firms with significant growth in revenue will understate realization because collections with always lag behind the growth curve. Likewise, firms with a declining revenue line will appear to be doing better than they really are. While short of perfect, in most cases, this approach will prove an adequate tool for modeling the law firm’s performance and alerting law firm leaders to a collection problem.

If you want an accurate picture of what is really happening, compute the Rolling Realization of collected bills. This approach mines your financial database for the most current twelve months, extracting only fully paid bills for the realization computation. Uncollected bills and partially paid bills are excluded from the computation. While still backward-looking, the results reflect the real realization numbers.

Across the board, most midrange law firms fail to collect a material portion of their work product. Law firms typically only realize 85 percent to 90 percent of what they bill clients. The answer to improved realization is management. First and foremost, you have to have the information you need to manage, and that should come from your law office business system. While measuring the firm’s collection realization is important for modeling, predicting the future and planning, law firm leaders will need more than a firm-wide metric to improve financial performance. They will need actionable information. The managing partner will want to drill down to realization by matter, client, working attorney, billing attorney, originating attorney, practice class, For those kinds of capabilities, the law firm will need a law firm business system with a Business Intelligence component like Active Information from Juris.

I have attached the Excel worksheet for collection realization shown above. If you want more information about Juris Active Information and its ability to tract Rolling Realization contact the Juris National Sales Center at 877/377-3740.

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.

Handling Complexities of Law Firm Leverage

Admin — Wed, 30 May 2007 17:26:16 GMT

To understand how the economics of your particular law firm are changing as related to staff leverage, compute and track more than one leverage number:

Snapshot leverage: The snapshot metric consistently measures the ratio of associates to partners at the same time of year to determine the direction of movement in leverage, i.e., calendar quarter, end of year. For this purpose, the only adjustment should be to convert “part-time” associates to full-time equivalents.
Performance leverage: The performance metric converts all counts from the end of period numbers to full-time equivalents for the period. For example, a new associate hired at mid-year and in training for three months would be .25 percent of a full-time associate for the year, whereas under the snapshot measure, the associate would count in full.
Hours leverage: Hours leverage, like the snapshot metric, is a period computation. In this case, the ratio being computed is the ratio of associate hours to partner hours. This computation is self-adjusting for part-time and recently hired fee earners and also is impacted by utilization. Underutilization lowers the ratio and improved utilization increases leverage without any increase in operating cost.

Why is leverage an important management tool? Without leverage, partner income is limited to the income-producing “work” capacity of the partners. Leverage increases partner income by shifting a portion of the income-producing capacity from the work done by the partner to the work that the partner can achieve through “delegation and supervision” of others.

Morepartnerincome.com is sponsored by Juris, Inc. 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.