Why is leverage so undervalued as a contributor to law firms’ profitability? Like most managing partners, I think that making comparisons between firms based on their profits per equity partner, without taking account of how many people called partners (equity and other) they actually have, is like comparing chalk and cheese. But we must not allow that discussion to distract us from a more important one, which is about what firms need to do in order to improve their competitiveness and profitability.
The contribution to profit or revenue per lawyer is easy to understand. In trying to increase revenue per lawyer, most firms look first at getting more chargeable hours from their lawyers. Next, firms look at how they can increase their charge-out rates. Pounds per hour is a goodish proxy for the quality of advice and service that firms deliver to their clients. In a competitive environment, firms that can consistently charge more per hour than their competitors must be doing something better. Otherwise, the clients will not pay extra for the advice.
