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The Key Number Is Net Income per Lawyer

  Legal Business  -   POSTED: 2007/03/16 15:13

The only number that is down for Stevens & Lee's 2006 financial performance is its hours billed, as the firm posted double-digit increases in revenue and profit.

The firm saw a 10.3 percent increase in gross revenue, from $102 million in 2005 to $112.5 million in 2006.

The revenue per lawyer grew by 14.8 percent, from $610,000 in 2005 to $700,000 in 2006. The profits per equity partner increased by 16 percent, from $655,000 in 2005 to $760,000 in 2006.

Stevens & Lee has a small non-equity tier, with 13 of the 161 attorneys in 2006 falling into that category. Managing partner Joseph M. Harenza said only about five of those attorneys are income partners, while the others are senior counsel or something similar. Of the attorneys, 99 were equity partners, dropping from 103 in 2005. The average compensation for all partners rose from $635,000 in 2005 to $700,000 in 2006.

Harenza attributes the firm's overall growth to an increase in revenue through a focus on specialized legal work and a simple cost-containment strategy. He said this is the 10th straight year the Reading, Pa.-based firm has seen improved financial results.

The statistic the firm places the most emphasis on, Harenza said, is one The American Lawyer does not calculate for its Am Law survey.

The firm calls it the net income per lawyer, and calculates the number by subtracting expenses from the total revenue with the exception of attorney compensation, Harenza said. The firm reported that number at $557,000, compared to 2005's net income per lawyer of $479,000.

Altman Weil consultant Bill Brennan said his firm looks to RPL and the net income per lawyer as the two most important indicators of a firm's financial health.

Stevens & Lee reported a 69 percent return on the dollar to its partners and an 80 percent return to its lawyers for 2006.

Of the $112.5 million in gross revenue, $75.5 million went to equity partner compensation and another $3 million went to non-equity partners.

There are about 40 nonlawyer professionals in the firm that are paid as employees, Harenza said.

Brennan said the percent return on the dollar for partners could often be a very misleading number because the fewer equity partners there are, the higher the return is for each of them. That isn't the case with Stevens & Lee, which has a much lower leverage than many Am Law 200 firms with about 0.62 non-equity attorneys to every equity partner. For all intents and purposes, non-equity partners and of counsel are counted as associates when calculating leverage.

Harenza said Stevens & Lee's model is different than several other firms when it comes to increasing revenue and profits. His firm, he said, focuses on upping revenue per lawyer and lowering expense per lawyer and then doles out the remaining profits to each attorney tier. Other firms, he said, take what revenue they have left and figure out which attorney fits into which tier.

Harenza said the firm would be able to put its PPP over $1 million if it moved to a 2-to-1 leverage, and up to $1.25 million at a 3-to-1 leverage. Brennan said there is validity to that argument because if the lower paid partners were made associates, the average of the higher paid equity partners would naturally increase.

"Many law firms 'manage' their profits per partner statistic by defining who is an equity partner," he said.

Unsophisticated readers of the Am Law 100, he said, could be easily deceived by that statistic.

A big part of why Stevens & Lee has been able to remain so profitable with low leverage traditionally had to do with its choice of locale. Based in Reading, the firm has offices in places like Pennsylvania's Lancaster, Scranton, Valley Forge and Wilkes-Barre. Harenza said location is no longer the only factor in cost containment.

In the last few years, the firm has opened offices in more expensive markets like Princeton, N.J., Philadelphia and New York City.

Harenza said the expense per attorney in 2003, before the Princeton and New York offices opened, was about $96,000. After the launch of the Princeton office, the cost went up to $101,000, and up even further to $120,000 once the New York office was opened, he said.

In order to combat those rising costs, Harenza said he continues to invest in technology to lower the need for support staff and continues to strive for higher-end work to increase revenue.

Harenza said the firm saves on expenses by centralizing its marketing and technology teams into one office as opposed to having a representative from each group in every office, as many large firms do.

He said large firms with offices all over the world are going to start moving in the direction of centralized support functions.

Stevens & Lee is spending money on technology training in order to reduce costs in the long run, and is working on the demographics of the firm. Harenza said the firm is seeing some of the more senior attorneys migrate out and has a need for first- and second-year associates and fifth- to eighth-year associates.

Harenza said he is trying to make every lawyer specialize in an industry segment and possibly in a sub-specialty with the hopes of commanding higher rates.

"My job is to get higher yield and rates from clients," he said.

Although the firm's geographic locations have been a draw for clients because of lower rates, Harenza wants to increase those rates through higher-end work, and says he has the room to do it. The firm's rates are currently substantially lower than those of Philadelphia and, particularly, New York firms, he said.

More than just looking to increase the rates he charges now, Harenza wants to handle specialty work that automatically commands higher fees and he thinks clients are willing to pay for that specialization.

Stevens & Lee works off a pyramid chart that breaks legal work into three sections: commodity work, experiential work and unique or specialized work. As clients have consolidated, the rates for everyday, commodity work have become more price-sensitive, Harenza said. That phenomenon has even pushed some of the more sophisticated experiential work into the commodity section of the pyramid, he said.

The ultimate goal for Stevens & Lee is to achieve as much of that 5 percent of the legal work that is at the top of the pyramid, he said.

"What I'm trying to do is move this entire business, business by business, up that curve," he said.

In 2005, Stevens & Lee saw a 12.7 percent increase in gross revenue over 2004's financial performance, a 9 percent increase in revenue per lawyer and an 8.3 percent increase in profits per equity partner.

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