Legal News Analysis: Will Big Data Eat Profits-Per-Partner for Lunch?

Topics: Data Analytics, Law Firm Profitability, Law Firms

GAO

Metrics matter in Big Law firm management and profits-per-partner (PPP) persists as a preferred benchmark, if not hallmark, indicating to many observers a firm’s rank in the market and the quality of its legal services. But firms have learned to manage to the metric not by the metric, which taken alone does not correlate to efficient, quality legal services in a buyers’ market.

PPP will soon give way to Big Data for sophisticated consumers of legal services.

Sophisticated consumers don’t pick car mechanics or health care services based upon profit margin or income. Although financials are important to determine a relationship’s longevity, consumers seek objective evidence of experience, expertise and positive results. The process to pick a legal service provider should not be that different from choosing services in other industries with more available and verifiable data — but that’s not what the current legal market offers.

PPP — the total compensation to equity partners (net income) divided by the number of equity partners — has long been indicia of the wealth and therefore the health of law firms. But rather than deduce efficiency and quality of service from available metrics, the legal industry induces it from brand.

PPP & Efficiency

Essentially, PPP measures the quality of law firm brands, which in turn fosters high billable hours for equity partners or rainmakers, attracts lateral hires, and breeds new hires in top law schools. Yet little data links PPP to efficiency, quality or client satisfaction.

Brand bespeaks largess, but big translates to more conflicts of interest and increasingly difficult quality control. Large, national and international footprints make technology, practice areas and firm economics more difficult to efficiently manage. As firms cross borders they face complex regulatory schema and remuneration in multiple currencies, making it difficult to provide cost-efficient services to global companies.


Firms have learned to manage to the metric not by the metric, which taken alone does not correlate to efficient, quality legal services in a buyers’ market.


 

Even the primary reporter of PPP, The American Lawyer, would not disagree that the data point is a poor indicator of quality and efficient service. But profits are important in determining wealth and conveying worth. Among the Am Law 100, most firms have PPP of more than $1 million. These high profits give Big Law the ability to drive deep discounts for clients, allowing them to compete with small to midsize firms with lower rates, which can translate to efficiency but not quality.

Quality benchmarks exist in disparate data. Corporate Counsel, a sister publication to The American Lawyer, compiles an annual “Who Represents America’s Biggest Companies” list, which year-over-year can indicate where sophisticated clients are taking their business. Good results in legal services also are available from verdict and settlement results published by ALM Media and LexisNexis, and information services that compile and analyze data from Public Access to Court Electronic Records (PACER), such as Lex Machina. For laterals and young lawyers looking for action, the book Preventing Litigation: An Early Warning System to Get Value Out of Big Data by Nick Brestoff and William Inmon compiled the Litigation 100 and 500 lists from PACER data showing the top companies embroiled in litigation.

Other qualitative and quantitative benchmarks abound but need to be accumulated and compared. How do Big Law partners and associates adhere to ethical standards? What do large law firms give back to society in pro bono work? How do big firms build and develop relationships with law schools and legal service providers to manage supply chains for clients?

In a buyers’ market, Fortune 500 companies and sophisticated consumers will find qualitative and quantitative data points to compare services in request for proposals. For others, it is a matter of going beyond PPP and ferreting out Big Data indicating efficient, quality of service.