De-Leveraging ... Again?

A number of recent posts and articles are talking about the de-leveraging of BigLaw. Many of these predict that the other side of the recession will see BigLaw with less associates per partner. Say what? There's all this talk of alternative billing, leveraging technology and changing the way firms do business and somehow they are going to do this by shrinking the bottom-level of the inverted pyramid they live in ... again??? Karl Marx perhaps said it best when he noted that Capitalists (a.k.a. business owners) make money off the sweat of another's brow and not their own. Just like the de-leveraging cycle in the 80's, when hours go soft - Partners hoard. And they do this to their own detriment as the least profitable billable hours of the business are their own. They lose the best billable hours (a.k.a. leverage). Of course this behavior is highly motivated by the compensation systems. And we shouldn't really be surprised by the fact that history is repeating itself, since these compensation systems have not changed much since the 80's. "Fool me once - shame on you. Fool me twice - shame on me." Still I am dumb-founded. After seeing so much encouraging dialogue about alternative fees and the subsequent changing of the law firm business model, firms fall right back into their old habits. Although leverage is not the be-all and end-all of profitability, its still a core metric to use. It's a basic business practice to push labor tasks to their lowest cost source. It is past time for lawyers and firms to turn and look over the bow of the boat. They need to understand that the radical changes in the market will need to be reflected by corresponding changes in the law firm business model. Change ...? I see a theme developing

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Nick Holmes said...

Toby, whilst agreed that associates' labour produces profits, surely the point is that if there's not enough work there's not enough labour to leverage.

Toby Brown said...

In response to Nick's comment - my point is when there's not enough work, a business cuts the least profitable aspects of its staff, not those with the highest margins. If it made economic sense to have partners instead of associates, firms would have all partners. Instead their goals have been fewer partners per non-equity time keepers ... until recently. When the recession is over, these firms will not be well-structured and suffer even longer.

Greg Lambert said...

Well, to ad lib an old Tim Allen routine:
"Partners are a bunch of selfish pigs!!"
[Crowd goes wild in agreement]
"Too bad they own everything."
[Crowd laughs uncomfortably]
The oil industry did this with some of their young talent in the 80's, and companies like Halliburton and Schlumberger snatched them up. I know that's like comparing apples and oranges, but if I'm a corporation that outsources millions to outside firms, I might want to snatch up a few 4th years with talent and experience (and maybe pay them 60% of what they're making now.) Seems like there is some opportunities out there for those looking at acquiring talented legal professionals at a discounted rate.

Steve Matthews said...
This comment has been removed by the author.
Steve Matthews said...

Ah, but it is a balance. On one side, reducing leverage comes at the price of talent loss - associates, non-equity partners, and even staff. It may be a bad long term decision to gut your support, but if the work isn't there... the alternative to layoffs are: 1) firm debt or 2)gutting profits. Each of those comes with business risks too.

I really liked this post, Toby. You make a good argument for making cuts selectively and evenly across firm infrastructure. Are mistakes being repeated? Perhaps, but I can't recall another economic downturn when the 'sacred cow' of non-productive equity partners were being trimmed also.

PLK said...

I'm a partner in a boutique practice based in large measure on hourly billings.

We've upended the typical legal business model by paying all counsel on a billed and collected basis (this reduces overhead) and by encouraging all attorneys, including associates to bring in business by providing direct financial participation in the total billings received from such business.

The downside is that the partners give up margin. I also think this model can only work with the most entrepreneurial counsel.

The upside is the EVERYONE is vested in the business of the business of law. Something that's in short supply these days.

Anonymous said...

Change in the Business Model = Lower PPP = Unacceptable


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