May 9th, 2016 by Jim Cotterman
Changes in leverage are positively correlated with partner profits (as are the other four profit levers - utilization, pricing, realization and margin). Increase leverage and partner profits increase, if all else remains the same. David Maister wrote about the profit model over 30 years ago (See Profitability: Beating the Downward Trend, The American Lawyer. July August 1984), including the interdependency of the profit levers. From that conceptual framework came the understanding that practices had optimal business models where the levers for profitability are managed appropriately to that business model. Too much, too little, the wrong kind of leverage all hurt profitability. Not new, but tends to get lost in the discussion.
For example, a compliance practice is leveraged differently from a high end advisory practice. A traditional insurance defense practice is leveraged differently from a traditional corporate practice. The same is also true regarding the other profit levers. For example, the profit drivers for an insurance defense firm were traditionally their high leverage, utilization, and realization. While the profit drivers for a corporate practice were traditionally good leverage and utilization with above average pricing.
What is current and changing is the business model. Practices that enjoyed leverage from reviewing documents for due diligence or discovery are finding that piece of their business model under assault by specialty service providers and technology. Clients are less willing to pay for process and more willing to pay for judgement, experience and expertise. Technology has, and particularly looking forward at artificial intelligence, the potential (and I suspect the promise) of major change in how law firms serve their clients. The watchwords for leverage today should be flexibility and adaptability. Firm’s must respond to changing and differing client buying preferences while at the same time investigating, implementing and “leveraging” technology - all in an environment of rapid technological change. The future should be quite interesting.