Law firm economics and culture are rarely mentioned in the same breath. Nevertheless, your law firm’s culture directly impacts profits per partner.
Culture defines economics
How is culture related to law firm economics? Culture is a blend between the:
- Work-life balance offered to a firm’s associates
- Financial and professional upside offered to lawyers who exceed their objectives
Does your firm have “good culture”? If managing partners consistently provide associates the work-life balance they anticipated when joining the firm, and financial/professional upside to those who achieve their objectives, then good culture will be embodied by a low rate of turnover.
Low turnover drives better law firm economics
If your associates are achieving their productivity goals on a regular basis, then your firm should have higher profits per partner. That assumes of course, that you have linked productivity objectives with your compensation strategy and law firm’s financial goals. If you haven’t done that, then culture may turn toxic and you will struggle to maximize your law firm’s economics.
Work-life balance & associate attorneys
Good law firm management teams know that setting expectations is a critical step toward achieving the desired level of productivity from their lawyers.
Cultural issues often stem from certain associates “working too hard”, then quitting. Quitting is infectious, and can plague a law firm by either driving down the productivity of remaining team members or leading to additional resignations. Both impact profits per partner.
“Working too hard” might be the root cause one attorney exiting your law firm, but often, it’s a symptom of a larger problem: associates working longer hours than they anticipated.
Setting clear objectives
If an associate joins your firm with the expectation that she will be billing 33hrs per week, then good culture can be maintained while she is generally billing around 33hrs per week. If the associate finds herself with a workload that requires 40 billable hours to keep her clients and partners happy, then your law firm’s culture will start to develop problems.
Because your associate is consistently billing more than what she anticipated. The grind of billing 40hrs per week often involves 50+ hours in the office after accounting for administrative responsibilities, breaks, lunch, professional development and other downtime. Add to that external meetings, marketing events, professional networking, and a 40hr mandate can quickly consume an associate attorney’s every waking hour.
Money alone won’t solve this. Financial and professional advancement can offer a solution to this problem, but only if the associate chooses to go down that path. Associates who find themselves working excess hours due to poor demand-planning by law firm management will often become disenfranchised.
Work-life balance that maximizes law firm economics
Some managing partners operate under the assumption that more billings each week equate to higher profits per partner. Others assume that profits per partner are maximized as associates approach 40 billable hours per week.
For the vast majority of law firms, this isn’t the case.
When viewed through our economic framework, every law firm has a unique relationship between revenues, costs, and the number of lawyers. A key step in maximizing law firm economics is to clearly define two business goals:
- Desired profits per partner over the next 2-3 years
- Work-life balance the firm provides its associates
Notice that the second goal isn’t, “Work-life balance that supports the desired level of profits per partner“.
Your total number of associates should be optimized to allow attorneys to enjoy the work-life balance they anticipate. The optimal number of associates is a key business driver of improving profits per partner.
The illustration below simplifies this concept. The top figures represent a range of billable hour objectives for each associate. The bottom figures represent the PPP generated by the work-life balance of the law firm.
To prevent associate turnover, law firms need to provide an acceptable work-life balance, while offering their associates financial and professional upside should they choose to work harder.
What if work-life balance doesn’t generate the desired level of PPP?
What if the law firm depicted in our chart desired a culture in which associates bill 33hrs, but profits per partner are $350k? It can be done. You can achieve higher profits per partner without sacrificing work-life balance if you:
- Hire the optimal number of additional associates
- Invest in technology platforms to allow your associates to be productive
- Have a marketing strategy that keeps your associates sufficiently engaged
- Empower partners with a powerful set of analytics that allow them to efficiently manage productivity
If the law firm above (which is comprised of five associates) hired just one additional lawyer, they would have the capacity to generate their goal of $350k in profits per partner without sacrificing a single hour of work-life balance.
Is it really this simple?
Yes. Provided, that the managing partner:
- Knows the precise financial drivers of her law firm’s economics
- Uses the strategies that will keep 100% of her associates sufficiently productive
- Is empowered by analytics that drive the desired level of PPP
- Provides her associates with financial and professional upside should they choose to exceed their objectives
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