How McDermott Tackled its Leverage Problem

Seven of out of the 10 most highly leveraged law firms have acknowledged cutting personnel, a sign of the problems that can be caused by too many associates and nonequity partners.

At one time having a high ratio of salaried lawyers to equity partners was considered a “basic tenet of profitability,” the American Lawyer reports. But now the “whole pyramid model is looking fragile,” the magazine reports.

The problems are caused when there isn’t enough work to support large numbers of highly paid associates. One expert, law professor William Henderson of Indiana University, has called high leverage and declining revenue per lawyer “a combustible combination.”

Some firms are responding with associate layoffs or with attempts to increase their equity partner ranks. But one law firm, McDermott Will & Emery, is trying another tack, according to the American Lawyer story.

It has created a separate track of staff lawyers who are paid less than regular associates. Jeffrey Stone, who heads the firm's trial department, says the program is working. The firm plans to double its size, the story says. "I think there's some sizzle to this idea," Stone told the publication.

The American Lawyer republished its May list of the most highly leveraged firms. The top five are: Cadwalader, Wickersham & Taft (with 8.49 lawyers per equity partner), White & Case (with 6.63), Orrick Herrington & Sutcliffe (6.26), Thelen (6.13), and Bingham McCutchen (5.95). McDermott is 67th on the list.

Cadwalader, White & Case and Orrick have all announced cutbacks, while Thelen is facing dissolution. Bingham McCutchen, however, was expecting revenue growth for 2008.

Related ABAJournal.com coverage:

McDermott’s Assoc. Tiers Twist: The B Team (November 2007)

Chicago Firm Creates 2 Tiers of Associates (October 2007)

Updated at 2:47 p.m. to add related coverage.