The Law Firm “Reverse Leverage” Problem. LegalShift’s Views…

Recently a client asked LegalShift if we are seeing a lower percentage of associates to shareholders in law firms, and if so, why we thought that was happening.  LegalShift’s insights are outlined below:

The reverse leverage situation for law firm partners and shareholders is caused by a combination of economics and behavior.  Changing economics are causing the issue while behavior in the form of partner self-preservation is the parry.  The behavior that ensues results in lower value and higher costs for law department clients.   This is a trend that is the opposite to what corporate law departments are requesting and requiring from their law firms.  Thus the quandary that LegalShift sees.

The general volume of work at many law firms has dropped.  In order for partners to stay busy, in many cases, they are taking on the direct work that could be performed by less junior partners and associates.  In some cases, we have seen partners take on even paralegal-type work.  The reality is that partners are pushing down work – so that they create the opposite of what we prescribe, and what we learned from our law firm strategy partner, Altman Weil – the model of  “Right task, Right skill”.

To drive efficiency in any organization, including law firms, the goal is to have the lowest level resource, with the right skills, perform the task.  This lowers cost of delivery and enhances efficiency.

While law firm compensation measures for partners/shareholders are changing, there are still many firms that measure their partners based on hours and revenues vs. profits (net income).  This is true on both the macro level as well as the matter level.  As long as law firms continue to defer measurement of profitability, I believe we will continue  to experience the reverse leverage.

The economic issue is, what we see, is a “top line” revenue problem.   Partners need to be selling and billing higher level work – and they need to sell more to keep themselves busy.   A senior partner billing high priced work – commensurate to their client value is the goal.  The law firm wants that – and quite frankly, the buyer, the client legal department, wants that as well.

While volumes of law firm work on decreasing (and will likely continue for some time), individual partners are not always replacing quality work and revenues.  Where partners are billing high value at high effective rates, there is no problem.  Matter of fact, that is the top of the food chain.  It is those lawyers that are not filling their revenue coffers, where the problems lie.  Instead of spending time and investing in selling more, we see more typical behavior focused on “working more or working harder”.  Tactically, this is better than a partner billing no revenues, but it is not sustainable for the lawyer (self-preservation) or firm.  Working more on lower value tasks and billing more time (even at lower rates) makes partners feel like they are working the problem but the reality is that they are lowering efficiency and profitability for themselves and for their firm.

Until we stop the behavior  by measuring profit/shareholder profitability and tying compensation to those measures, we think we will continue to see the continuing growth of reverse leverage.  Firms are increasingly aware that the reverse leverage model is a disservice to the client, the firm and quite frankly, ultimately to that lawyer.

Dan Safran is President/CEO at LegalShift, LLC.  His is former EVP at Project Leadership Associates heading its Legal Vertical as well as its Managing Consulting practices.  Prior to this, Dan was President of Project Leadership Consulting and has held a variety of President/EVP/COO and Global CIO roles over his 32 years of work experience in both the legal and corporate business sectors.  Dan spent the first nine years of his consulting career at Arthur Andersen/Andersen Consulting (now, Accenture).   Dan can be reached directly at (312) 560-8932 or at dsafran@legalshift.com.