In a new series of blog posts, we will use Peer Monitor data to examine the characteristics of firms with consistent topline growth over the past few years.
There are many ways in which a law firm can measure its success. Total revenue and profits per partner are the two most common ways, even though neither truly tells the whole story.
When examining only total revenue or total profit, a comparison between law firms of varying size becomes an impossibility. Instead, when looking at profits per partner the issue becomes one of varying law firm structure, including but not limited to different levels of non-equity or income partners, or partner compensation variability.
For these reasons, a better way to compare performance firms of varying size and structure lies somewhere in the middle: revenue per lawyer (RPL). Revenue per lawyer is an effective measure of firm success for two main reasons: i) it is impossible to manipulate revenue or headcount numbers; and ii) it provides a gauge of at what cost clients are willing to “rent” the services of an average lawyer from a firm per year, in other words the lawyer’s overall value in the market.
Consistency is usually seen as an attribute that sets apart the good from the great. For many firms a good year that’s defined by top-line growth is often followed by a period stagnation, whether due to over-eager expansion, variable levels of demand, or any number of other deterrents to consistent growth.
There is an intrinsic difference between “nominal growth” and “real growth”. Take for example my height in middle school: I was always the shortest of my friends. I thought my days of looking up at my friends were over when one summer I sprouted up four inches between fifth and sixth grades. However, to my dismay, my friends had also grown just about four inches, too. While my nominal height had increased, when accounting for friend’s similarly timed growth spurts, I had not really grown comparatively at all and thus continued as the shortest of the group.
There are many ways in which a law firm can measure its success. Total revenue and profits per partner are the two most common ways, even though neither truly tells the whole story. For these reasons, a better way to compare performance firms of varying size and structure lies somewhere in the middle: revenue per lawyer.
Real growth in dollar value is similar to my growth spurt debacle. Real growth is achieved when growth exceeds the level of inflation in the corresponding time-period. For our purposes, an inflation rate of 2.1% was used for both 2016 and 2017 (taken from the Bureau of Labor Statistics Data on June 6).
Firms that are able to consistently find real growth in RPL (in the case of this analysis, in consecutive years) set themselves apart from their peers on the continuum of predictability of topline results. For this analysis, I have separated the firms currently tracked by Peer Monitor into groups reflecting their RPL growth from 2015 to 2017, relative to inflation.
Consistency of RPL
Firms which had RPL growth that outpaced inflation in both years will be referred to as “Both” firms. Firms who’s RPL growth did not outpace inflation in either year will be referred to as “Neither” firms. A third group, firms who had their RPL growth outpace inflation cumulatively over the past two years, however not consistently greater than inflation in both years will be referred to as our “Cumulative” firms. (It’s interesting to note that “Cumulative” firms had a compound annual growth of greater than 2.1% in their RPL from 2015-2017. However, on an annualized basis they did not outpace 2.1% in both years.)
Only about 11% of firms had RPL growth in both years which outpaced the inflation rate (2.1%), becoming our “Both” firms. On the opposite of the spectrum, roughly 32% of firms had RPL growth that outpaced inflation in neither year, making them our “Neither” firms. Interestingly, there are almost three-times more “Neither” firms than “Both” firms.
Finally, about 27% of firms comprised our “Cumulative” group, whose overall RPL grew faster than inflation from 2015-2017, despite lacking the annual consistency of the “Both” group.
In the upcoming blog posts in this series, we will further explore what sets apart our “Both” firms from “Neither” and “Cumulative” firms in their quest for consistent true top-line growth.