Law Firm Profitability: Leveraging Associates & Paralegals
THE NEWSLETTER FOR LEGAL OFFICE MANAGERS
LAW OFFICE ADMINISTRATOR
Volume XVII / Number 5 MAY 2008
(Reprinted with permission of Ardmore Publishing Company)
Leverage The Work For More Income And More Profit
But It May Take Some Partner Prodding
Want to improve the profits? Get the partners to stop hogging the work. There’s more money to be had by funnelling work to the associates, says practice management consultant ROBERT HENDERSON of RJH Consulting in Jackson Hole, WY.
It’s called leveraging. It means using the firm’s resources so as to magnify the profits, specifically, funnelling work to the associates to the point that they move from being a cost centre to a profit centre.
Time For Business Building
From the perspective of both partner and associate, leveraging is a sensible thing to do, Henderson says.
On the partner level, sending work down to the associates gives the partners more time for business generating. And a business generation is part of their job.
On the associate level, it makes it possible for the firm to get the highest possible return on its investment.
The same applies to the paralegals. The firm can and should make money from their work in the same way.
The Associate Cost Center
In the early stage of their career, associates are a tremendous cost to a firm, Henderson says. And that cost doesn’t go away quickly. Most associates don’t start showing a profit until their third year.
By their fifth year, however, one-third of the money they bring in should be profit. When one of them misses the mark, the firm needs to evaluate whether that associate is partnership material.
Suppose Associate A’s annual salary and benefits come to $125,000. Added to that is A’s share of the annual overhead – rent, utilities, office supplies, secretarial services, and so on. As a general rule, an attorney’s overhead is equal to the salary and benefits, or in this case, another $125,000.
That means Associate A has to bring in $250,000 for the firm to break even.
To reach the goal of one-third salary, one-third expenses, and one-third profit, that associate needs to have a profit margin of $125,000. That’s only possible if the partners give that associate $375,000 worth of work.
More Money For The Same Hours
Leveraging makes it possible for the partners to bring in more money billing no more and often fewer hours than they are currently billing.
Henderson gives this example. Suppose Partner A charges $300 an hour for 10 hours of work and brings in $3,000.
Change that so five of those hours get passed down to an associate. The partner now brings in only $1,500. And the associate, at a rate of, say, $150, brings in $750.
The total is $2,250, but that’s not an overall loss. That partner can use those five hours to bill on an another matter, which will give the firm an additional $1,500. Add that to the $2,250, and the firm sees $3,750 – all without the partner having to bill an additional hour.
Even better, however, that partner can spend those five hours bringing in a new client. For the partners, he says, the job is “not only doing the work but also bringing it in the door.”
Not An Easy Change To Make
To make leveraging work, the firm needs to encourage it, Henderson says, and the most immediate way to do that is to keep from becoming partner-heavy.
There need to be as many associates as there are partners, if not more. It’s usually at that point that a firm can become more profitable. He points out that it’s not unheard of for one partner “to bring in enough business to keep a number of associates busy and productive.”
Equally important for successful leveraging is associate retention. When an associate leaves before ever showing a profit, the firm has not only lost a significant investment but along with it the opportunity pass down a profit-generating amount of work.
Recognizing that there is “a lot of movement” in the associate world, he says, the key to retention is to stay abreast of the satisfaction level. Often associates leave because a firm requires huge amounts of billable hours to the extent that the work becomes a grind.
Keep tabs on whether the associates are getting proper mentoring, have somebody to go to with questions and concerns, have the types of opportunities they want, and see themselves as having a future with the firm. Those elements affect satisfaction as heavily as if not more than the compensation.
Successful leveraging calls further for a partner compensation system that rewards passing work down, which essentially means compensation based in significant part on business origination. By contrast, sharing the profits equally “is the least likely way to motivate leveraging.
Along with that, there has to be some education on the why and how of leveraging, Henderson says.
The partners have to understand the financial gain leveraging can create for themselves individually and for the firm as a whole. In many cases, that means they need to get past the fiction that the only way to ensure job security is to hoard the work.
They also need to understand that because the associates’ salaries are essentially static, the more billable hours the associates can produce beyond the breakeven point is pure profit – for themselves.
For the old-timers, the change can be a “tough sell.” Too often “they don’t grasp how they can benefit by bringing in the work and turning it over to others.”
But explaining it to new partners as they come in can gradually change the overall attitude.