The American Lawyer magazine published this week its annual statistics on the 100 largest American law firms. For the first time in a decade it included a new metric: profits per lawyer. The intention is to complement other metrics to gain a comprehensive picture of comparative performance. In particular, the measure is to sit beside the ubiquitous and yet mysterious, often tweaked, sometimes manufactured, and always self-reported profits per equity partner (PPP). PPL is meant to be harder to fudge and a better indicator of a firm’s health. But is it?
Per se, the introduction of the metric is a bit a yawner. PPL is to RPL what net income is to revenue. So there is not much new here; if you have been working with the AmLaw data in the past you will have been looking at PPL anyway.
But nevertheless, what is interesting is the intended push away from the plenipotentiary PPP. The latter has been the dominant number for so long that firms have had time to align their own PPP with the rest of the market. And that has led to an understatement of the performance variation in law firm land. PPL begins to highlight more accurately the different performance levels of firms. The range goes from $1.7million to $75,000. That looks—and is—much more dramatic than the PPP spread. Equally astonishing is the difference between the averages: $1.55million in PPP for the AmLaw 100 and yet only $340,000 in PPL.
[T]he [Profits per Lawyer (PPL)] measure is to sit beside the ubiquitous and yet mysterious, often tweaked, sometimes manufactured, and always self-reported profits per equity partner (PPP). PPL is meant to be harder to fudge and a better indicator of a firm’s health. But is it?
Isn’t $340,000 a good number? Well, let’s see. If you make the leap from PPP to PPL you might as well dare to jump one step further and call for PPE—profits per employee. While we don’t have accurate numbers, we are in the right ballpark when we double the number of lawyers to come up with the number of employees in each firm; it is a good enough proxy for now. Then law firm performances in terms of PPE range from $850,000 to $12,000 with $170,000 as the average for the 100 largest legal businesses in the United States.
And here is how that compares to the corporate world; take these three companies (and their 2014 statistics), based on their operating income and employee count: Facebook $678,000; Apple $535,000; and ExxonMobil $452,000.
Now bear in mind that law firm numbers are still considerably overstated. The corporates have already paid heavy salaries to their top 5% to 20% of employees and that has reduced operating income. In law firm land, partners don’t get paid like employees at all. Correcting for that difference makes law firms look a lot poorer in terms of PPE. In fact, a good number of the firms would be operating at loss, if they could. Do their shareholders know that or are they blinded by their own PPP?
Looking at firms’ performance through the PPL-lens gives rise to another interesting question: What part of the value-creation process should you be doing with your own lawyers/employees and what part should you be buying from suppliers? Apple doesn’t have millions of factory workers among its employees. Why should a law firm?
In a world of “more for less” and “less but better” firms will need to answer that question in a new way. But that will be the topic of a future post.