It used to be “gospel” that law firm profitability depended heavily on leveraging a high ratio of associates to partners. Then, during the recession, many firms reduced their associate ranks—and even now, many are still hiring fewer new associates than they used to. So what does this mean for the concept of leverage?
Does the lowering of partner-to-associate ratios signal that leverage is no longer important? Absolutely not—in fact, in today’s competitive legal environment, it’s more important than ever. In the face of client demands and other market pressures, however, firms have had to redefine what constitutes leverage.
What firms of all sizes have realized is that they must produce quality work, improve efficiency and provide even better client service—but also lower their costs at the same time. Maintaining a high ratio of associates who require several years of development before they are profitable—the traditional approach to leverage—works against this goal. So firms have redefined leverage to include more components than associates.
Other Components Added to the Formula
One of the most obvious components of the “new leverage” is temporary or contract lawyers, who offer a flexible and lower-cost form of leverage than hiring additional associates. There are many experienced and qualified lawyers today who either cannot find full-time employment or who prefer to work on a part-time or temporary basis. Consequently, many firms, mostly BigLaw ones, have substantially increased their roster of contract lawyers. In fact, some have hired staffing agencies to provide these lawyers as the need arises. Some of those agencies are reporting a 40 percent increase in their business. And the Posse List, an online clearinghouse for temporary lawyers, reports upwards of a 60 percent increase in document review postings this year.
In addition, although rarely included in calculating leverage in the past, paralegals have always been a component of it. They can be particularly productive in certain practice areas such as litigation, estate planning, family law and contract law, In fact, I have known some paralegals who draft more comprehensive and clearer documents than the partners they work with.
Another component in large and midsize firms is the growing number of process and project management specialists. These are usually not lawyers, or at least not practicing lawyers in the traditional sense. Instead, they are highly trained administrative personnel who manage matters and cases, generally more efficiently than firm lawyers are able to do. Furthermore, they not only save lawyers time, thereby reducing billable or nonbillable hours for them, but in the process they also help to improve work quality and client service within firms.
Another benefit these administrative specialists can provide is guidance in budgeting for matters. This can be extremely valuable in preparing RFP responses and especially when a client is seeking an alternate fee arrangement.
Outsourcing and Partnering with Other Providers
This new leverage also includes other components besides non-associate personnel working inside the firm. An obvious element in that regard is outsourcing, which in recent years has increased substantially. One indication of this is the quantity of outsourcing firms that now exist beyond and other low-cost regions, with a number of these firms having opened offices in the in the past two years. And a newer element in outsourcing is the growing number of virtual law practices that can partner with firms (as discussed elsewhere in this issue).
Other outside-the-firm components of leverage include legal research and legal process companies, document management firms and software-as-a-service (SaaS) content providers. Some of these perform functions that, only a few years ago, were always handled by associates—and often required extensive review by a partner, too.
And then there are the companies that specialize in e-discovery. E-discovery is one of the most rapidly increasing expenses for a law firm, although historically it was conducted internally. But now there are an increasing number of e-discovery providers with specialized software systems for handling large quantities of electronic documents. They partner with their law firm clients in arrangements that can save a firm considerable investments in end-user licenses and the cost of updating its systems—and, of course, it’s another form of leverage.
What has gone unsaid in the preceding is that this new leverage is not restricted to law firms. Many corporate legal departments, faced with senior management directives to reduce expenses, have increasingly been utilizing these added components for leverage, too. They are also requiring outside law firms to follow suit if they want to obtain some of the company’s legal work. Ah, nothing like client pressure to make firms change.