Business of Law Firms
Looking at CMS's redundancies​

By Jake Rickman​

What do you need to know this week?

On 15 September, RollOnFriday reported that UK firm CMS announced it was making 19 associates in its corporate practice redundant, in what was one of the largest waves of redundancies to hit the City’s legal sector this year.

This week’s article in The Business of Law Firm series will look at some of the commercial considerations underlying CMS’s decision, and evaluate what it reveals about the key drivers of law firms as a business more generally.

Why is this important for your interviews?

Redundancies are always lamentable. But it is instructive to consider the business decisions that explain why they arise. This is because profitability is the fundamental factor nearly all law firm management bears in mind when considering hiring and retention.

A useful metric for a law firm’s management to gauge productivity and efficiency is revenue per lawyer (RPL). Put simply, RPL describes the total value of fees each lawyer brings the firm.

As a general rule, management expects their lawyers to generate an RPL equivalent to three times their salary. Sometimes called “the Rule of Thirds”, one-third of their billables pays for their salary, the other third pays for the firm’s overhead and expenses, and the final third goes to the firm’s partnerships.

Importantly, CMS’s redundancies have remained confined to its corporate department.

As The Lawyer notes, CMS’s corporate team is solidly positioned in the lower-to-mid-market, which describes corporate deals ranging between £100m-£1bn. This means it competes less directly with the likes of Ashurst and Macfarlanes and more Travers Smith.

Lower-value deals require a higher volume of deals to offset the fact that CMS lawyers are paid in the same ballpark at law firms like Ashurst and only a margin lower than many US firms.

As deal volumes have dropped, especially in the mid-market, management’s likely conclusion was that CMS had over-hired over the past few years and needed to cut positions to reflect the fact the average RPL had also fallen.

How is this topic relevant to law firms?

To generalise the position, American law firms which typically boast higher profits than UK law firms are known for “staffing lean deal teams”. If you are not familiar with this phrase, it describes practice groups where there are fewer associates per partner (you may also hear the phrase “under-leveraged” to describe the same).

Lean deal teams translate to higher RPL, especially where lean teams are staffed on big-ticket deals. For these reasons, associates in corporate groups at many law firms generate RPLs that exceed their base salary by more than three times.