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Lawyer-to-Partner Gearing or Leverage. Yes or No?

Lawyer-to-Partner Gearing or Leverage. Yes or No?

The concept of lawyer-to-partner gearing or leverage – the number of lawyers a firm employs for every partner – continues to go through changes. It is not uncommon to hear partners say things like “My clients want partners on their jobs“, “My type of work is too complex for non-partners“, “I simply don’t have the time to manage lawyers; I have legal work to do“, and so on. You’re equally as likely to hear partners in some firms speaking out very strongly in favour of gearing. In most jurisdictions it is common to find firms in both camps.

However, over the past ten years or so we have seen a steady decline in average gearing levels in the world’s largest legal market, the USA. At one point a few years back, the average gearing amongst AMLAW 200 firms dropped to .6 lawyers on average per partner. In a majority of these firms it appears that non-partner lawyers operate as an available pool of associates: i.e., they are not allocated to a particular partner. We understood the arguments of those law firms to be that due to high starting salaries of associates, it simply was not economically viable for them to gear up. Unfortunately, I believe this development in the US market has had a direct impact on the flow of traditional legal work away from traditional legal service providers to non-law firms. More on this, below.

By contrast, in the Australasian market, it is not uncommon to find average gearing figures of 4 to 6 lawyers per partner. More often than not, lawyers are also allocated to particular partners – albeit not exclusively so. Surveys of clients in these jurisdictions, and general counsel in large organisations in particular, point to a good level of client satisfaction as to the service they are getting from firms. Generally there has not been the move away from using law firms for legal work towards alternative suppliers.

So where does that leave us? There are arguments in favour of and against gearing, depending on the circumstances, the culture of a firm, and local market conditions. On balance, however, I would argue that the benefits of gearing, subject to some prerequisites, far outweigh the negatives. I would even go so far as to say it is a strategic necessity for the large majority of firms, save in absolutely exceptional circumstances.

First, what are some of the arguments against gearing?

Whatever the merits of these arguments, trends to lower gearing have limited the ability of law firms to service the needs of their clients. Take a simple example: picture a firm with a gearing of one lawyer per partner. What this means is that for that partner to service a wide range of client needs, he or she can only offer a support lawyer with one level of expertise, one level of experience, and at one charge-out rate. This limits the range of work that can be done for that client. Clients will be tempted to look elsewhere, even outside the traditional profession.

While it is clear that factors other than gearing have also played a part, clients have moved a large slice of their work (in the USA the shift is understood to be as high as 50%) to non-traditional legal services suppliers; i.e., non-law firms. These alternative suppliers have eagerly taken up this opportunity, supplying service at different experience-points and price-points.

Before considering some of the arguments in favour of gearing it is important to consider some prerequisites for qualitative gearing to work successfully:

In considering the advantages of a qualitatively geared firm, let us assume a firm with average gearing of, say, three lawyers (junior, mid-level and senior) to one partner.

I have worked in, managed, run and worked with numerous firms over the past 30 years which have successfully converted from extremely low gearing levels to highly qualitatively geared structures –with success, including financial. I have no doubt that, properly done, this strategy can lead to significant benefits for a firm, for its clients, for partners and also for lawyers at their different stages of development.

Perhaps it is time to gear up!