7/27/09

Leverage is Good

Some recent comments disparaging leverage inspired me to pick up the gauntlet. Much like Dennis and Tom's recent podcast on "What Technology is Dead Today" I expect the title and discussion promoting leverage may bring some attention. In Patrick Lamb's post on the subject he chastises Lexis for promoting good leverage in an ad campaign. Patrick thinks this is ridiculous and "out of touch." The Lexis ad states that with good leverage "even though billings shrink - profit per partner goes up." Patrick closes by commenting "what does this ad say to clients ....?" Normally I am very much on the same page as Patrick, but will take the opposite podium on this one. First, let's bring the two statements above together, which is to say - What do lower billings say to clients? As a client I want my law firm to be pushing work to its lowest cost source. Why would I pay partner rates for associate level work? Especially in traditional hourly billing arrangements, smart leverage benefits clients. The price of the 20 hours of time the client buys goes down. This is a win-win deal. Adding alternative fee arrangements (AFAs) to the mix ups the ante on leverage. Under AFAs law firms are more financially motivated to be efficient (and effective). Numerous articles and posts on AFAs state that the real trick for lawyers using AFAs will be effectively managing to a budget. What this means is using smart leverage. The ugly side of leverage as always been the pyramid-scheme aspect of it. A firm cannot keep adding to the base of the pyramid when all entrants are expected to rise to the top. That type of leverage is dead. Look at Microsoft, IBM, etc. These companies are leveraged to the hilt. They don't have a quarter of their employees serving as owner-managers. Their employees are ... employees. Though employees own stock, they do not have input into management decisions. Besides, I don't want Bill Gates programming code for me. I can only imagine what his hourly rate would be. Firms that will succeed going forward will be those who understand that effective leverage means lower costs for clients and better profitability for the firm. At the same time they will retire the pyramid scheme that should have died a while back. Let the games begin!

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