Low leverage: Is it a low road to ruin for law firms? (Edge International)

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Lawyers in other countries carefully monitor the U.S. legal market, sometimes regarding it as a trendsetter and even a model. In recent years, however, a U.S.-led trend towards lower average levels of leverage could have serious-long term consequences for that market and any others that follow it. This has implications for the legal profession, for firms, for partners, and importantly, for clients.

What is leverage and why does it matter?

Leverage (or gearing) means the average ratio between associates (in this context, all non-partner lawyer fee earners) and partners (total partners, including both equity and non-equity). On this basis, associate-to-partner gearing in the top 200 U.S. firms was just below 1 to 1 in 2010. In other words, on average these firms employed less than one lawyer for every partner. So far in 2011, leverage has “improved” to slightly more than 1.4 to 1 for the top 200 firms. For the nearly 80,000 U.S. law firms outside this elite group, however, leverage drops down to even lower averages (in many cases, as low as 0.5 to 1).

Firms with higher associate-to-partner leverage invariably justify this strategy on the basis that properly managed, it translates to higher equity-partner incomes. This is usually correct, albeit only if the lawyers are high-calibre, productive, well-utilized, well-managed, and kept busy with high-quality work within a framework of good systems and procedures. However, I think this issue goes much further than simple profitability and income.

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