Make More Rain : leverage, compensation

Putting a Price on Training

MichelleStPierre — Thu, 30 Jul 2009 17:54:00 GMT

I'm sure that many of our readers may disagree with my colleague Brian's statement yesterday that salary is not the only driving factor impacting a young lawyer's decision to join a law firm. I'm not a lawyer, and I didn't go to law school, nor did I carry a huge amount of debt upon my graduation from college, but I was fortunate enough to graduate with an Economics degree and a minor in Finance when the job market was considerably more robust than it is today. I entertained no fewer than six job offers out of college, from Wall Street Investment banks to commercial banks. And it's the absolute truth when I tell you that I took the job with one of the lowest salaries because they offered a perk that no other company came close to matching...

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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.

Billable Hours vs. Head Count Leverage in Law Firms

Admin — Tue, 20 Mar 2007 17:02:23 GMT

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.

Leverage Rules When It Comes to Partner Earnings

Admin — Tue, 22 Aug 2006 17:49:17 GMT

A picture says a thousand words. The above chart based on a soon to be released Juris, Inc. survey of 2005 law firm financial performance confirms, once again, the important role that leverage plays in determining law firm partner earnings. The first quartile represents the top 25 percent of midsized law firms as measured by per-partner income. The first quartile earned more than twice the per-partner income of the next highest group. That top segment of law firms earned more than eight times that of the lowest quartile.

By now, the impact of leverage in determining per-partner earnings is well known and understood. So, it is surprising that 75 percent of midsized law firms are not successively implementing the strategy.

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.

Law Firms Should Not Fire Those Clients, Yet.

Admin — Mon, 21 Aug 2006 17:19:00 GMT

From the prospective of the midsized law firm, I agree with Ed Poll: “Don’t fire your clients—You need them!” Ed was reacting to Wesemann’s post about firing clients. Wesemann particularly emphasized the inherent unprofitability of small clients.

Wesemann cites the long-revered 80/20 rule in supporting his position that small clients are a drain rather than a contributor to partner earnings. He writes:

“In virtually every law firm 80% of the firm's revenues come from 20% or fewer of its clients. Or, conversely, if a law firm fired 80% of its clients it would only lose 20% of its revenue or less. Consider the impact on overhead expenses of eliminating 80% of the client base and focusing the firm's attention and service resources on the top 20% of its clients.”

Poll counters with, “So long as the work being done for clients is profitable or can effectively be used as a training ground for new lawyers, there is reason to continue to retain this business.”

As a person who lives on the edge (short tail) of the normal curve, I understand well the buying power of the 20 percent of the population being written off by retailers. The whole foundation of the 80/20 rule is being shaken by the emerging realities of The Long Tail. Given the economic long tail attributes arising from technology and communication advances, we could see the emergence of firms that specialize in only small clients. It can be done.

But there is another side of this and it has to do with 1) the forward inertia of client volume; 2) the need to advance the development of associates; and, 3) available capacity.

First, about inertia: “An object in motion tends to continue in the same direction until acted on by an outside force.” Clients generate clients. Growth generates growth. While law firms do not obey the universal laws of motion, momentum is momentum. Take that away at your risk!

Regarding the development of associates, it is the lack of it that is the number one reason associates leave one firm for another. Reducing volume reduces the opportunities for on-the-job learning by associates.

Third, midsized law firms have both the current available capacity and the need to bring in more associates to increase leverage to a more efficient level. Their very survival as firms depends on a successful “farm team” approach where young lawyers learn the full-rounded skills of a legal professional and have the opportunity to become future leaders of the firm.

A soon to be released survey of midsized firms by Juris, Inc. found the following pattern of billable hours.

The chart clearly tells the available capacity story. Attorney hours in midsized firms are well behind those reported by mega firms. Across all quartiles of per-partner income, underutilized associates bill fewer hours than partners. In addition, midsized firms lag significantly behind the top 200 firms in leverage.

Ed Wesemann’s comments are likely to be good advice for law firms in a full capacity situation with a sound leverage level. And we all know that small clients introduce conflicts that may prevent a firm from taking on large client opportunities. However, Ed Poll’s warning is sound—think very hard before you start firing clients.

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.

Managing Partner Forum Keynote Interview

Admin — Mon, 15 May 2006 17:20:54 GMT

This podcast is a first for morepartnerincome™. It is fitting for it to be a father and son act. Stephen Collins is President of Juris, Inc. and your’s truly, Tom Collins, is the father.

Click on the above for my 15 minute interview with Stephen Collins, the keynote speaker at the May 9, 2006 Managing Partner Forum held in Atlanta Ga.

Stephen discusses the financial performance of midsized law firms and their opportunity to materially increase per partner income. What is holding law firms back? Stephen shares his thoughts on the subject.

Stephen also served as the facilitator for the forum’s small firm Managing Partner Idea Exchange. In the interview, he talks about the issues on the minds of managing partners in this exchange group for firms with 50 or fewer attorneys.

To learn more about the forums go to http://www.managingpartnerforum.org.

To view podcast facilities go to studio photo.

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.

Eight Key Result Areas for Law Firms

Admin — Fri, 12 May 2006 17:35:47 GMT

Peter Drucker identified the eight areas that every business must address through its objectives and control systems. The eight key result areas are:

1. Customer Satisfaction

2. Productivity

3. Innovation

4. Resources

5. Management Development and Performance

6. Employee Attitude and Performance

7. Public Responsibility

8. Profitability

The excellent law firm will set key result goals for each of these areas. It will develop strategies and tactics to achieve its goals. It it will develop methods for measuring actual results against the goals with an objective of making additional changes as needed to achieve and maintain its goals.

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.