- Date
- 5 October 2022
Mini Series: Business of Law Firms
Leverage
By Jake Rickman |
What do you need to know this week?
Welcome to the fourteenth article in our series on the Business of Law Firms.
This week, we will look at some figures The Lawyer has pulled together related to leverage, which is described as a “technical, yet important, indicator for how well-resourced firms are.”
Essentially, leverage is a ratio that compares the number of partners available to work on a client matter against the number of associates.
The Lawyer looked at three firms in particular to give a cross-section of the UK legal market in 2022:
- Herbert Smith Freehills averaged 3.7 associates for every one partner (1:3.7)
- Addleshaw Goddard averaged 1:191.
- Gibson Dunn averaged 1:1.31.
Leverage is arguably the single most important statistic when it comes to measuring the operational efficiency of a law firm. Unlike financial figures, which, for example, measure revenue, profit, and the asset value of a firm, leverage gives us an insight into the balance of junior and senior talent working on a given matter.
Firms like Gibson Dunn with under-leveraged figures mean that clients will have more partners working on a deal. This in turn implies clients are likely to liaise with partners more frequently. Under-leverage also implies that law firms are likely to be more selective about the kinds of work they take on, because the work must be more complex and necessitate more partner time to justify the billable cost. For instance, a client is unlikely to want to pay £1,500/hr for a partner to review several hundred contracts which an associate could do as capably for £600/hr.
Firms with higher leverage can work on deals that require more activity in terms of volume because there are simply more associates available to manage lower-value aspects of a given deal. This is advantageous in a period where client demand is high, as over-leveraged firms can hoover up more work. The downside is that over-leveraged firms are less able to withstand a downturn in deal activity.
Why is this important for your interviews?
As a trainee applicant, understanding the use of leverage figures is important for two reasons:
- The figures reveal the kind of firm you will be working for, and therefore the timbre of mandates you will be staffed on. Lower leveraged firms mean leaner deal teams. You will be working more closely with partners but you will also shoulder more work because there are fewer associates available to process aspects of a given client matter. However, over-leveraged firms work on more diverse matters and the workload is more evenly spread.
As a general rule of thumb (though by no means universal) Magic and Silver Circle firms tend to be more over-leveraged compared to their US counterparts, which employ fewer associates. Of course, within a given firm, some teams will be more leveraged compared to others — so take these figures with a grain of salt!
- Leverage is an important business metric. You may be asked in an interview to discuss what leverage figures mean. If you can capably do so, you will demonstrate that you understand the financial and operational motivations behind the business of law firms.
