What percent of the hours you billed last week could have been billed by someone with a lower billing rate? If you answered less than 50 percent you’re in the minority of lawyers we’ve been polling. While, yes, the number is murky as it requires that there are lawyers available to do the work and clients won’t object, etc., the overall implication is clear: lawyers massively under-delegate.
In all other professions, people delegate vigorously. It’s how you get more done without doing it all yourself. For a variety of reasons lawyers don’t do it—the lawyer personality type, billable hours targets, etc. It’s all quite bizarre. We know that increasing delegation, or leverage as its unhelpfully termed in law firms, offers many advantages: clients get the work done by the lowest-cost lawyer capable of doing it, associates get better experience, and firm economics improve.
Despite the forces that align against it, leverage has been growing. Figure 1 looks at the Am Law 100 pyramid structure over the past two market cycles. With the growth of nonequity partners, it’s been progressing slowly from a bar bell toward a pyramid, with equity partner leverage (i.e. number of lawyers who are not equity partners per equity partner) growing from under 2.5 in 2000 to 3.6 in 2017. The increase is broad-based: 75 percent of Am Law 100 firms increased leverage from 2007 to 2017. Even at 3.6, the ratio is less than half of what you’d see in elite consulting firms.
Looking at how leverage grew through The Great Recession is particularly informative. Firms implicitly recognized that strong profit per partner (PPP) growth is not just an outcome of a successful strategy but is also an input to that success because strong PPP growth is critical to survival in the increasingly competitive market for highly commercially-capable partners. Sensing this pressure, firms turned to increasing leverage as a reliable driver of PPP growth. Indeed, it is through strongly increasing leverage that the Am Law 100 has been able to turn 2017 revenue per lawyer that is still 4 percent below the 2007 peak (inflation adjusted) into PPP that is 16 percent above its 2007 level, see Figure 2.
What would the ideal pyramid structure look like? Here are two ways to think about it. First, the ideal pyramid is one where no one is doing work that could be done by someone with a lower billing rate. If, for the sake of keeping the numbers simple, we assume that 50 percent of the work being done by lawyers today could be delegated then, as outlined in Figure 3, the cascade of hours would take a 4:1 leverage firm to 9:1. A second modeling approach gets you to a similar leverage level: if you assume that the natural tiers within a law firm pyramid are senior partner, equity partner, income partner, senior associate and associate, and that the normal operating leverage between each layer is 2:1 (e.g. two associates per senior associate, etc.) then the overall leverage ratio would be 9.3:1, see Figure 4.
Fifty percent is not a perfect quantification of how much work could be delegated today, and 2:1 operating leverage between tiers is not a law of physics. There’ll be variability by practice: litigation will run at higher leverage than regulatory counseling. Real-world pyramid structures will never be perfect, nor will work cascade down them smoothly. However, it’s hard to escape the inference that there is a lot more room for increased delegation and leverage.
There are many forces that align against increasing leverage. They can be overcome. A starting point is that partners be clear on what increasing leverage requires. It is not achieved, as some partners initially think, by adding associate hours on their matters, something they know to be difficult given the pushback they get from clients on ‘overstaffing.’ Rather it is about replacing partner hours with associate hours, keeping total hours close to constant, and bringing down total billings. It helps too to: track and report out on leverage as closely as firms track partner hours; to get profitability measurement right (i.e. not just realization, but the combined effect of realization and leverage); and to have structured discussions about increasing leverage among partners (so all can see leverage can be increased without departing from the group identity as great lawyers). Curiously, raising partner billing rates also plays a role: some partners like to keep their rates low as they know not all they do is true partner work; raising partner rates leans against this.
The overarching message is this: firms need to grow PPP to be competitive in the market for partner talent; increased leverage is a proven driver of PPP growth; today’s leverage levels are about half of what they could be; firms have proven they can raise leverage despite the forces that align against doing so. The implication: leverage increases have a lot further to go.
Hugh A. Simons, Ph.D. is formerly a senior partner at The Boston Consulting Group and chief operating officer at Ropes & Gray. He welcomes readers’ reactions at HASimons@Gmail.com.
Nicholas Bruch is a senior analyst at ALM Legal Intelligence. His experience includes advising law firms and law departments in developing and developed markets on issues related to strategy, business development, market intelligence and operations.