At TGO Consulting we do a lot of law firms business analysis. Over time we have established an impressive set of reference data that literally covers the globe. We know there are significant differences between jurisdictions as it comes to rates, revenue/profit per lawyer and leverage. Regardless jurisdictions and size of the law firm we regularly come across firms where on average partners make more hours than the associates. From a business perspective we consider this an undesirable situation as it will choke the profitability of the firm.
Associates contribute to the profit It might feel counter-intuitive but even though associates are charged at a lower hourly rate than the partners, they do contribute more to the profit. All associates have a fixed costs base. These costs are composed of salaries, office space, support staff, subscriptions, etc. Every additional associate will come with these costs. So these costs will grow proportionally with the number of associates.
For every associate there is a client hourly rate. Law firms sell associates with a margin. Depending on the base number of annual billable hours, the mark-up typically varies between 3.4 and 4.7. For example an associate with an all-in cost of 100,000 will make 350,000 in billable hours for the firm. Thus the profit on this associate will be 250,000. Not bad for an 100,000 investment.
If the firm has a profit margin of 35% (market average), a partner would have to generate 715,000 to generate the same 250,000 in profit. Let’s assume the firm has a leverage of 3, so 3 associates for each partner, then 3 associates combined would generate 750,000 in profit even if the partner does not to any billable work. When the partner is doing most of the work and the associates are underutilized, their cost will remain the same thus rapidly eroding the profitability. In order to compensate for 3 associates, the partner would have to make an additional 2.2 million in revenue (on top of what the partner would normally be doing). This obviously would not be possible.
When partners are making more hours than the associates, this is a clear sign that something is wrong
Associates' quality of work It takes 6 years after university to become a fully qualified medical specialist. If that is the amount of time it takes to train a person to unsupervised perform surgery on a patient, why does it apparently take so much longer to train a lawyer? Senior associates should realistically be able to handle most of the matters without compromising quality in any way. Still in the hierarchy of law firms, only partners are supposed to have the required quality and expertise to be responsible. This assumption leads to an absurd situation when a lawyer is promoted partner. Until that day the lawyer needed to be supervised by someone who always knows better and after that day the lawyer is supposed to be all knowing.
Sometimes I hear partners complaining about the quality of the associates in the firm. They feel they will spend more time in explaining, supervising and correcting, than if they would do it themselves. If that would be the case, that would be a bad situation and a sure sign of poor management. Law firms need to educate and train associates as a structural part of their business model. If done right, associates should be perfectly capable of doing most of the work.
Partners should fill the pipeline The difference between a partner and a senior associate is not so much the knowledge and expertise. In order for an excellent senior associate to become a partner, practice development skills are needed. The main difference is that partners are responsible for bringing in new work. A lawyer who has an academic interest in the law and prefers to just skillfully handle legal matters, should probably not be made partner. Law firms today are very much a business. Partners are responsible for getting new work in. Partners should spend at least 20% of their time on client relations and new business. This is another strong argument why partners should not be making more billable hours than the average of all associates.
When working with clients we typically look at the ratio of average billable partner hours to average billable associate hours. This should be done on a firm level and on a practice level. When partners are making more hours than the associates, this is a clear sign that something is wrong. I would recommend to have a look at this ratio in your firm.