A common measure of leverage in a law firm is the number of employee fee earners per partner. The higher the number the higher the leverage. When fee earners are at full capacity generating fees, the bosses, i.e. the partners are making money. This leads to the question, what is high leverage in a law firm?
The latest AFR Partnership Survey provides some guidance.
According to the survey, MinterEllison, the firm with the largest number of employee fee earners, has a leverage of 3.8 fee earners for every partner. All partners at MinterEllison are equity partners.
Where partnerships are made up of both equity partners and salary partners, the leverage ratio could be calculated in two different ways: One way is to do the leverage calculation treating salary partners the same as equity partners. Another way is to include salary partners as employee fee earners, thus increasing the leverage ratio.
A top tier firm where the title ‘partner’ strictly means equity partner is Herbert Smith Freehills. In that firm, the leverage ratio is 6.2, which puts it at the top of the leverage scale according to the numbers from the AFR Partnership Survey.
At Australia’s largest law firm partnership, HWL Ebsworth, where around one-third of partners are non-equity salary partners, the leverage ratio is around 2.6. However, if only equity partners are included as partners, then the ratio increases to 4.4. That is 4.4 fee earners for every equity partner.
What conclusion can we draw from this data? In the world of top law firms, the pyramid is relatively small. Typical leverage ratios are in the range of 3 to 6 fee earners per equity partner. While the difference between 3 and 6 might appear insignificant, when you consider the potential for high billing fee earners in firms such as these, the difference in partner profits can be large with only a small difference in leverage.