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LOS ANGELES � Law firm leaders throughout California identify increasing leverage as a key strategy in their business model. Leaders at Sheppard, Mullin, Richter & Hampton and Gibson, Dunn & Crutcher, to name a couple, are looking at ideas for ramping up their leverage. “I’d like to increase incrementally our leverage,” said Sheppard Chairman Guy Halgren. “I am confident that we could support higher than 2-to-1 leverage because our young attorneys are extremely busy.” Some consultants and a few law firm leaders, though, think associate-to-partner leverage may be overrated as a means of increasing a firm’s profitability. In fact, Thomas Morrison, managing director of Citigroup’s law firm group for the West Coast, says his company’s recent study shows a correlation between high profitability and lowerleverage. In the current California market, Morrison says, demand for legal services is too low to support a high-leverage model, which he classifies as 3-to-1 and higher. The key to maximizing profit per partner is optimizing associate use without having excess manpower, Morrison said. “It’s a strategic balancing act,” he said. “Increasing leverage over the last five years hasn’t been profitable.” A 2005 Citigroup study of 146 firms nationwide showed that leverage dropped by 3.5 percent in 2004 for the 30 most profitable firms � and Morrison anticipates another similar decline this year. Firms with lower leverage, such as Gibson, Dunn (2.1-to-1) and Irell & Manella (1.6-to-1), are often listed among the state’s most profitable firms on the American Lawyer’s Am Law 200, he pointed out. “One of the reasons these folks outperformed is because they reduced leverage,” Morrison said.
Firm Leverage Profits/Partner
Gibson, Dunn & Crutcher 2.1:1 $1.515 million
Paul, Hastings, Janofsky & Walker 3.1:1 $1.75 million
Sheppard, Mullin, Richter & Hampton 1.7:1 $685,000
Irell & Manella 1.6:1 $1.53 million

Source: American Lawyer’s Am Law 200

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