It is often said that “life imitates baseball” and who is to say that it doesn’t?  Baseball has always been a game of statistics, metrics designed to gauge different aspects of performance. They may not tell the entire story, but they do provide empirical evidence to fuel bar room debates about who is better.

Why then is legal performance—especially and paradoxically at the high end—so remarkably devoid of metrics? How should law firms be measured, and why is Profit-Per-Partner (PPP) still the standard by which law firms are measured?

 

The Subjective Standards of Law Firm Evaluation

Law firms and individual lawyers have historically operated in a metric-barren landscape. When was the last time a trial lawyer’s won-lost record was discussed or even considered?

That is not to say, of course, that it is impossible to weed out superb lawyers and law firms from the herd. Clients, representative matters, peer group ratings, and professional background are all factors playing into reputation and “success.”

But there is one metric that lawyers, law firms, and, to some degree, clients focus on: Profit-Per-Partner (PPP). It has been the sine qua non upon which law firm performance has been based for 30 years.

How did this come about?  And more importantly, why is PPP still relevant in today’s market where, if anything, it is evidence of short-term “take the money and retire” strategy, not long-term investment in the firm and its clients.

 

The Early Days of Law as a Business

One can debate the precise date when corporate law firms became businesses, but by the early ‘80’s several law firms had morphed from single office, organically grown practices to multi-city operations often lacking social cohesion as well as alignment of economic interest between/among offices, practices groups, and partners. Some—like Skadden—thrived while others, notably Finley Kumble, imploded spectacularly.

Finley created a precedent that, though generally abhorred at the time, is the norm now: raiding rainmakers. In Finley’s world the rainmaker was king—and remains so today.  This was the forerunner to PPP.

It is no surprise, then, that in 1985, the American Lawyer unveiled its inaugural survey of profit per partner among what was then called the AmLaw50. This public trumpeting of what partners at those 50 firms earned quickly became the metric by which law firms measured their place in the legal pecking order.

Even then, PPP had its detractors.  Many thought it was vulgar for lawyers to flaunt their compensation publicly and others noted the ways PPP results could be skewed—leverage and multi-tiered partnerships are two key ways.

But perhaps the most significant limitation of PPP as a metric is that it measures firm success through the narrow lens of law firm partners– not the firm as a whole, much less its clients.

 

PPP As The Catalyst for The Law Firm Arms Race

PPP helped fuel a law firm arms race; the goal is to achieve the highest PPP. This was initially achieved by a wave of associate hires, the annual rite (right?) of increasing rates, a “reinvent the wheel” or “scorched earth approach to all client matters, and lateral hires.

Few complained because there was a trickle down of riches within the firm. Associates received client-subsidized training—often lasting several years—and outsized salaries. Partnership was an achievable brass ring, and clients rarely complained about—much less negotiated—bills.

Gordon Gecko, the memorable anti-hero of “Wall Street,” could have been describing BigLaw when he proclaimed: “Greed is good.” And what better way to measure greed than PPP?

 

Same Metric But a Different Time

Profit-Per-Partner remains the key law firm metric, but to preserve or to enhance it today, firms must change the way they had operated previously. In the post- 2008 world, clients balk at paying for young associates not “practice ready.” Matter staffing and billed hours are closely scrutinized. Legal services companies are siphoning off work formerly handled by law firms, and, though firm billing rates continue to climb, significant discounts are routine. RFP’s, increased competition, and more work being taken in-house also cut into law firm workflow and profitability.

The ascendency of in-house legal departments is telling, because lawyers there are measured by efficiency, client service, and other meaningful metrics that benefit the client. PPP has no relevance in-house, and, so, lawyers are evaluated by client-centric contributions, not by their ability to deliver clients and maximize firm profit.

How, then, do firms maintain—much less increase—PPP in this new legal environment?  There is no “one size fits all” answer, but some common measures include: de-equitizing or thinning service partner ranks, making equity partnership far more selective (the new “leverage”), trimming professional and administrative staffs, and—as always—hiring laterals with big books of business.

This begs the question: why does PPP remain relevant when it does not serve clients and, if anything, destabilizes law firms? It has become the Darwinian driver of law firm sustainability, at least in the short term.  And make no mistake: the price exacted by preserving PPP is a steep one. PPP serves a shrinking cadre of equity partners very well; it does not do the same for most everyone else in the firm for whom the expectation of long-term tenure there is no longer realistic. And what about PPP’s impact on clients intent on building long-term relationships with the firm? To sustain PPP today, most firms must embrace “the future is now” philosophy.

 

How Should a Law Firm Be Measured?

There are many different ways a law firm could be measured.  For starters, the key metrics should be from the client—not the equity partner—perspective.  Here’s my list:

  • Excellence in areas that relate to client business
  • Client retention
  • Lawyer retention
  • Innovation
  • Effective use of technology
  • Alignment of financial interest with clients
  • Flexible billing model
  • Collaboration with clients and others in legal supply chain
  • Efficiency
  • Mentorship and training
  • Diversity
  • Performance metrics– client surveys and internal
  • Job satisfaction
  • Pro Bono Program and Community Involvement

 

 Conclusion

It’s time for PPP to moth-balled as a law firm metric. A high PPP does not necessarily tell a good story for anyone except its partner beneficiaries and those rainmaker laterals in lower PPP firms looking for a bump.

Client metrics are what matter most. And if law firms do not embrace that notion—as in-house lawyers have—they may find themselves increasingly marginalized by other professional service providers for whom client satisfaction is the key metric. How relevant will PPP be then?

 

Insights

MarketView: IP Management Systems