Why earn a mere $1 million a year as a lawyer when there is so much more to make? Mark Herrman,, Chief Counsel at Aon wrote in the AbovetheLaw blog that there would be an “imminant capitulation” of big firms who generate their million-a-partner in profits but will never reach the $3 million per partner profits that the truly rich firms earn.
His writing generated high interest, as you might expect.
I then predicted that the merely rich firms would soon begin to capitulate; the firms wouldn’t close up shop, but they’d quietly stop paying the going rate to new associates, compress the pay scale for associates after the first year, stop trying to match market bonuses, increase financial demands on partners, and otherwise give up. The super-rich firms would hold the field alone.
Many readers considered what he said was occurring in the law business already, with compressed pay scales and a failure to match the pay scale for associates among many of the firms.
Many agreed that the super-rich firms were putting increased pressure on the merely rich.
Others of you were less opinionated and more curious. One of you asked, for example, how the super-rich firms manage to achieve their super-richness: “How many hours, at what rates and with what leverage, must these firms extract to yield $3 million in profits per partner? I’ve done the arithmetic, and it seems basically impossible to achieve that level of profitability based on billable hours alone. Surely the super-rich firms are charging premiums, or success fees, or some such thing. They’re not achieving those levels of profitability based on billed hours alone, are they?”
Mark Herrman’s research lead to his doing some arithmatic to show how to earn that seemingly elusive $3 million per partner.
Here’s how you bring in $3 million per year in profits per partner: Charge an average hourly rate of $500 for associates, and have the associates bill 2200 hours per year. After accounting for the associate’s salary (call it an average of $200K), bonus (call it $40K), and overhead (call it $250K), each associate generates $560K in profit. Maintain leverage of 3.5 associates per partner. That 3.5 times $560K generates almost $2M in profit for each partner.
I pride myself on being as curious as the next guy, so I poked around on your behalf. I learned (from someone who surely knows) the arithmetic.
Have partners bill 1750 hours each at an average rate of $950 per hour. After accounting for overhead (maybe $350K each), each partner contributes another $1.3M to the bottom line. Add the $2M to the $1.3M, and you’re a $3M per year profits-per-partner firm.
Nothing to it, right?
(My insider also told me: “It goes without saying that you can’t maintain a super-rich firm unless you keep only high-performing individuals working in high-value practices. These firms must ruthlessly discard any practice or individual that can’t pull its weight.” But that’s hardly a secret.)
Finally, one of you begged to differ with my entire premise: “Firms don’t capitulate to the super-rich by giving up on the hopeless attempt to emulate them. Firms capitulate by trying to be (or act) super-rich in the first place.”
All of which may be inspirational or just plain depressing for the average rich, merely rich or even poor lawyer.