What Is an Associate Worth?
What Is an Associate Worth?
Jan 22 2011, 02:49 PM
Joined: 17-July 09
Member No.: 125
Lawyers who understand how to grow a career can better assess the value they provide, and better reflect it in their performance.
The critical law firm cost factor for serving a client is staffing levels. Competitive conditions are forcing firms to reconsider handling a matter with two senior lawyers, each with high hourly rates and likely with personal assistants. Instead, more firms involve an associate or a paralegal and get by with one senior partner, or even use associates and paralegals exclusively, with proper partner oversight. The issues here relate directly to leverage – hiring and using associates as a cost-effective way to do billable work in a team setting while boosting partner profitability. Failure to use leverage increases costs of operation. Law firms with lagging profitability turn to associates to do more of the work, which instantly adjusts the staffing leverage.
Leverage is only effective when associates are effective and it is profitable for the firm to keep using them. While associates may not earn more than they cost the firm at the start of their careers, at some point that situation must change. The economics of hiring new law school graduates can no longer be taken for granted, given the time and expense of the process required to get them up to practice speed. Canada’s articling system, which is essentially an apprenticeship with a law firm, legal department, court or government department, is an attempt to deal with both the economics and expertise level of new lawyers. Only upon completion are young lawyers ready to practice, either where they articled, or with some other firm or organization. But while these young lawyers are more qualified to begin practice than the new hires right out of law school at the typical U.S. firm, the 18 months or so of articling preparation has a direct cost, and it still takes time to get the new lawyers up to speed.
What should firms expect from their young lawyers to justify keeping them? If there is enough work in the first place, in analyzing an associate’s worth to the firm, there is no formulaic expression that specifically depends on origination, billing or collection. To say that a lawyer is worth the amount of profit due to billing or the amount of profit due to business brought in does not take into account the subjective factors that should be considered. For example, does the lawyer’s combination of skill and attitude demonstrate potential for career growth beyond the immediate level of business? And skills mean both knowledge of the law and the ability to understand the business of law.
This latter point leads to analysis of the associate’s profitability, which is something different from worth to the firm. All associates can determine their own personal P & L (profit and loss) statement if they plug in the right numbers. This is what they need to know:
With this information associates can compute the net profit that they provide to the firm: Billings - [Associate's Total Compensation + Direct and Indirect Expenses] = Net Profit. The net is the profit available resulting from an associate's effort. Generally within three to years of hiring, new lawyers should become net profit contributors. The associate's responsibility is to do the work assigned in the most effective and efficient way possible and in the shortest amount of time. Fulfilling this responsibility in a way that produces net profits for the firm is essential for an associate to grow a career at a given firm. Note that associates generally will not know the realization rate (collection) for his/her billings. That is the firm’s responsibility since the associate has no control or even input into the collection process.
But what type of career will that be, in terms of the financial benefit that both the associate and the firm get from it? Not every player on an athletic team is expected to be a star; should every lawyer in a law firm expected to be a rainmaker? The question arises because not every associate who does good work can develop new work. If the associate is doing good work, if the law firm understands, sets and monitors the metrics (whether by number of hours, matters or revenue) the associates need to reach, and if the associate reaches the metrics … and both side accept the compensation being paid to the associate for this effort … then what is the problem? The associate is satisfied with the compensation, the law firm is getting quality work performed at a profit to the firm, and the clients are being well served. What’s wrong with this picture?
The problem, of course, is the law firm model itself, which sees such lawyers as “clogging up the middle.” They are good lawyers but not great rainmakers. They were originally brought into the firm to provide leverage, doing work at much lower cost than the partners who billed out that work at the higher cost partner rate. The associates remain, their compensation rises, then after the eighth or ninth year, they are either invited to join the partnership, or are asked to find employment elsewhere. Today they often are let go even before the partnership decision time.
Changing this dynamic requires planning. Every law firm is a business, and a business that does not have a clear idea of overall goals and specific strategies for its most important asset – the young lawyers who are the future of the firm – likely does not have much of a future. An excellent acronym, SMART, describes what’s required for an effective plan to grow the earnings development capabilities of associates:
A smart growth plan doesn’t have to be complicated. It can be as fundamental as identifying two or three desired outcomes for the associate within a given time period, defining the behaviors necessary to achieve those outcomes, then giving the associate the means to achieve results.
For any associate, the future depends on whether the individual himself or herself is committed to success, and whether their firm provides the means to succeed. Defining “success” in relative terms such as “more revenue” or “better marketing” sets a subjective standard that is difficult to discuss, let alone achieve.
The earlier associates begin taking specific steps in their smart growth plan, the sooner they can enhance their profit contribution. Firms should encourage associates to undertake fundamental business development activities apart from the work that partners assign to them. This can be as simple as communicating regularly with law school friends to develop referral sources. Or it can be a more organized effort, like getting associates out into the public eye by writing articles and attending lunch or bar association functions, particularly when these things are done with established older partners. Associates should also be encouraged to do “blawging” (either individually or on behalf of the firm), and to contribute to client news updates. To grow a career, irrespective of the size of the law firm, each associate must use such tools as these and establish the expertise necessary to put themselves before prospects and convince those prospects to become clients. That is the path to profitable career growth, for both associate and firm.
Our conversation thus far has been about career growth and profit contribution to the firm, not about becoming a partner. That may or may not happen in this scenario. More lawyers are questioning whether they want the risks involved; but, they still need to be a contributor to the firm and they still need to be appropriately compensated.
Once associates look at their careers as a series of structured business and professional development targets, the dynamic changes. It’s no longer a matter of guessing what the partners want them to do or wondering if the firm will retain them – it becomes a process of understanding what they ought to do and setting out to achieve it. Lawyers who understand how to grow a career can better assess the value they provide, and better reflect it in their performance. These are the associates that are profitable, and that every firm wants to keep.
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