Leverage: The Secret to Increased Profitability

Leverage: The Secret to Increased Profitability

As most legal professionals have discovered, many of the cultural distinctions that have long separated law firms from the business world, when examined more closely, have turned out to be based upon myth rather than the realities of practicing law. One of these myths is that leverage does not significantly improve law firm profitability. Fueling the myth are skeptics that insist there is no correlation between leverage and firm profitability.

The traditional reasoning goes like this: Our most senior, experienced lawyers bill at the highest rates. Therefore, our profitability is maximized by generating more partner-level work, rather than increasing hours for associates. This viewpoint differs significantly from the model used by the business world, which seeks to generate value from large pools of employees and reserves highly paid executive and managerial positions for a relatively small group at the top tiers of the corporate ladder.

But the two models shouldn't diverge as much as they do. Law firms stand to benefit greatly from the realization that even if their relatively unleveraged approaches have been profitable, they can substantially increase profitability by improving leverage. Once management makes this leap, it's crucial to execute this strategy at a matter level.

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