The End of Leverage?
Paul Lippe's blog Welcome to the future: the 2011 scenario and the end of leverage in LegalWeek today is well worth a read. Drawing on a conversation on the evolving legal-spend habits of banks, he draws some conclusions that make critical reading for those thinking about their firm's business models once the recession subsides. Which should be every law firm leader, of course!
Here's a "byte" :
"A typical law firm bill in January 2011 will generate the same amount for partner work as it does today, but it will generate half the revenue for associate work. Consider a bill in July 2008 for $1,000,000, representing $450,000 of partner contribution, $500,000 of associate contribution, and $50,000 of 'other'; in January 2011, the bill for an essentially identical project will be $800,000, reflecting $450,000 of partner contribution, $250,000 of associate contribution, and $100,000 of 'other.'
Whether this is accounted for as hourly billing or 'value billing' is not particularly strategic, except that to measure differently will of course incentivise firms to be more thoughtful about how to structure work.
Where will those dollars go? Four places.
- Clients will just flat out spend less, drive harder bargains, and get more for their money.
- Some work will go to outsourcers, whether onshore or off.
- More work will go to contract lawyers or proto-associates not on any kind of partnership track.
- Some associate time will be replaced by technology."
Given that the modern law firm is built on the premise of leverage, this means that some fundamental rethinking of law firm economics is required, if the slack is not simply to be taken up by partners either earning less or working harder.
Remember David Maister's formula for determining equity partner profits:
So if you can't cut overheads any more (and if you can you probably should) and associate leverage is under pressure, then you have three basic choices left in order to maintain the same level of partner profits:
1. Sell more hours / work harder
2. Earn more fees per unit hour worked. Note this does not mean just pushing up the hourly rate. This tactic is sure to meet a predictable response from clients this year, anyway. "Rate" in this formula means the total amount of fees earned divided by the total number of hours worked. It is the actually realized hourly rate. So, this puts discussions about innovative billing practices and ditching the billable hour as a primary billing mechanism "front and centre" in strategy discussions.
3. Leverage in other ways .... with technology or outsourcing work to cheaper jurisdictions or to subcontractors that you can make a mark-up on but who consume less overhead than salaried employees.
If this is on your radar, and you're well up to speed with determining your options, then kudos to you .... you're thinking strategically and your firm will be the better for it. If you'd like to have a discussion with me about what your options might be, please email me or call me. This is too important to procrastinate.