Thursday, March 19, 2009
Economic Analysis of Balanced Hours vs. Layoffs
In our research, we learned an interesting bit of information from Jim Sandman, former managing partner of Arnold & Porter, about the realities of layoffs: not all billable hours get shifted from departing lawyers to remaining lawyers. He said:
The theory of layoffs is that you align capacity with available work by transferring the billable hours of those lawyers laid off to those who remain, filling up the available time of the survivors. But not everyone has the same skill set, and a material portion of the billable hours of those laid off never transfers. So of the 1500 billable hours a laid-off associate might have had, only 1200 might be retained and assumed by others. That’s a loss of 20 percent of the revenue that was generated by the laid-off associate.
His point makes PAR's economic analysis more compelling. PAR's analysis gives an example of a small practice group that would save $240,000 with reduced hours but only $211,000 with a layoff, but that example assumes that all of the hours the laid off attorney would have billed will be billed by the others in the department. If the practice group loses 300 of those hours, at a rate of $350 per hour, the practice group would net just $106,000 from the layoff. The practice group would still save the entire $240,000 if instead the non-partners in the group reduced their hours and compensation by 20% because the skill sets and client relationships needed to bill those 300 hours would still be retained by the firm.
On our website, we list some companies that are reducing employees' hours in lieu of layoffs. If you know of others, please contact us.