New leverage indicator provides a more complete understanding of firms’ human capital
Traditionally, law firms have used the fee-earner leverage (the ratio of non-partner fee-earners to partners) as a metric that summarises the firm’s leverage.
This key performance indicator (KPI) is important, given its usefulness when expressing a firms’ position in terms of complexity of work, seniority, value for clients and incentives for associates. Its importance is further stressed when it comes to benchmarking, as most management texts refer to it.
However, our firm feels this does not tell the whole story. Why? Because the same leverage can result from a multiplicity of seniority combinations, as it does not consider partners’ and lawyers’ seniority differences.
What does that mean? Consider this: do 200 junior partners to 300 junior associates have the same impact in terms of costs and pressure on a firm’s structure as 200 senior partners to 300 managing associates? Of course not, but with the traditional leverage ratio you will get the same result – 1.5 lawyers per partner.
To overcome this, we have developed a new leverage indicator for each professional level that combines seniority throughout the career path with HR costs.
The formula is based on a scale from zero for trainees to 10 for partners. Two steps need to be followed: first, calculation of the ’relative value’ for each professional level: this is a proportion of the average remuneration pack of each level with the average highest remuneration pack, using 10 as a cap.
Second, calculation of the ’leverage indicator’ for each level: this is the ’relative value’ of each professional level plus ’leverage indicator’ of the next lowest level, starting at zero for new trainees.
The firm’s overall leverage is found by using the average weight.
Also, it is possible to define the ’ideal leverage’ and measure the leverage of different practice areas or groups of lawyers – for example, partners and associates.
Although this metric can be defined for each law firm it can also be used as a benchmarking tool.
The metric is stable and you only need to redefine it when you make a substantial change to the firm’s career plan or revise the proportional value of each professional level.
The benefits of using this KPI for firms’ management are many: it combines career path and HR costs; it defines ’ideal leverages’ for the firm and practice areas, and compares these to their ’real leverages’; it promotes discussion about the positioning and HR structure during the process of leverage calculation; and it translates human capital into a few summarised KPIs.
It also helps to track leverages over the years and to reconstruct those for previous years.
When used along with the traditional leverage metric, this new KPI unveils a more complete interpretation of the human capital (structure and value), with direct linkage and application to law firm management as described, as well as having benefits in terms of HR planning, the leadership pipeline, succession planning, career management and recruitment within law firms.