Steve Brill, the initial publisher of The American Lawyer, some 30 years ago invented the AmLaw 100 and began reporting comparative financial figures for that group of firms. Surprisingly enough, firms submitted that information for him to publish, showing definitively how much money lawyers make on the backs of their clients.
Why do private law partnerships, who are under no regulatory or other compunction to do so, publicize their personal financial information? Is it just sheer competitive cussedness? Does the “status” of being in the AmLaw 100, primarily a gross revenues barometer, actually improve marketing success? Does a client check who has the highest Profits Per Partner (PPP) before hiring a firm? Or is the “market” firms are courting primarily new law school graduates and potential lateral hires, whom they can point toward “data” that shows “Here is where you make the biggest bucks.” Perhaps it is just another example of herd mentality: once a group of law firms signed on to report, other firms couldn’t abide being left out.
Yet this disclosure practice seems as likely to backfire as help, particularly in this climate. It used to be that high end real estate and flashy interior decorating were thought to be the indicators of a firm that made too much money and therefore must be charging clients too much. These days, touting the highest industry profits is rarely applauded—see the response to the profitability of Goldman Sachs. Why would those announcing the highest law firm profits get a different reception? A recent Lexis/Nexus survey found that 58% of in-house general corporate counsel believe their outside lawyers are simply making too much money–no doubt further emboldening them in their demands for reduced hourly rates and alternative fee arrangements.
Whatever the reasons firms decided to publish this information, the data itself is usually highly suspect. Firms often manipulate their finances in order to report the best possible numbers. There are no GAAPs on this unmandated reporting, no audited statements, no footnotes or explanations, no requirements to disclose material information, so in determining PPP, for example, income is moved, equity partners are de-equitized, accounting years are redefined, and PPP magically rises, all without changing the reality of profits.
Which has produced some interesting results. For example, the difficult year of 2009 saw generally decreased revenues and wholesale elimination of timekeepers, yet many firms nonetheless reported increased profits, and without any note of their having significantly ramped down their operations, a negative indicator for future performance. Further, results reported in one media outlet for a number of firms do not always correspond with the results reported in others.
"No More PPP"
So it is of great interest that Ralph Baxter, chairman of Orrick, Herrington & Sutcliff, announced on May 12, 2010 that Orrick will no longer publicly report Profits Per Partner. According to the announcement:
"When law firms first started reporting the Profits Per Equity Partner metric in the 1980’s, partnership structures were more traditional; partner roles and contributions were less varied, and the legal business much simpler. Today, firms have made significant changes to their partnerships and business models. These changes, among others, mean that Profit Per Equity Partner data actually provides little insight while maintaining an aura of undeserved transparency."
The American Lawyer’s A-List, which measures the top 20 firms based on a mix of associate satisfaction, diversity and pro bono contribution, and revenue per lawyer, exemplifies the direction in which Orrick is moving its law firm scorecard.
"Today, more than ever, the Profit Per Equity Partner metric simply does not tell the market how profitable a firm is, how efficiently it is run, how well it serves its clients, how well it treats its people, or how committed a firm is to pro bono work, its community, and diversity," said Baxter. "Clients and others have made it clear that the metric actually creates the impression that firms manage to the metric to make themselves look good, rather than managing for their clients, their people, and a sound long-term strategy. "
While many firms have been wary of Orrick’s decision, most consultants’ reactions, as recently reported, have been uniformly favorable:
- “In a rational world, firms would either keep their financial numbers private or would disclose information according to a uniform and regulated set of accounting guidelines, backed up by an accountant’s certification.” Jerry Kowalski, founder of legal consulting firm Kowalski & Associates
- “1 think one of the most misleading of all public financial figures of law firms is in fact PPP.” Gary Klein, founder of legal recruiting firm Klein Landau & Romm Inc.
- “The weaknesses of the profits per partner model ‘hit home’ during the recession, when law firms in the midst of unprecedented layoffs also posted excellent PPP results.” Toni Whittier of Whittier Legal Consulting
Of course, the next question is what, if any, metric should replace PPP. Evidently Orrick is working on a law firm equivalent of “earnings per share.” One easy alternative that is already being calculated at many firms is Revenue Per Lawyer (RPL), a figure that takes into account gross revenue minus expenses, divided by the number of full-time lawyers at a firm.
Considering the changes in the legal industry, additional metrics like rates of growth in revenue, operational efficiency, lateral hires, major representations, alternative fees and, especially, client satisfaction could all be informative. But assigning numerical values to these “soft” measures can be a challenge.
We expect that rates of client satisfaction, an index that attests to the overall ultimate value of legal services, will become a more touted metric. Checking in with your clients offers the additional advantage of simply being good business—something 80% of corporate general counsel say they expect and only 20% of law firms do.
We have the technical and interpersonal capability to help you design and implement a protocol for insuring that clients are contacted at the appropriate time via an appropriate method with expert followup and analysis to produce high client satisfaction ratings, as well as high client satisfaction.