How successful is your law firm? A question that broad is bound to invite myriad answers, depending on when and to whom you pose it. The traditional terms by which lawyers have described their firms’ success have been financial, most recently through Profits Per Partner (PPP) and then, after non-equity partners were introduced into the mix, Profits per Equity Partner (PEP). The AmLaw 100 (2008 edition due next month) ranks US law firms primarily on PEP, as does a report on the 50 most profitable US firms just published in The Lawyer.
The noisy annual springtime rite of massive law firms shouldering past one another on the PEP rankings suggests that a more comprehensive approach to the question of law firm success metrics would be welcome. And there are now encouraging indications that a counter-trend is emerging, in which the profession buckles down to find a better way to measure just how well firms perform against their own expectations and those of their competitors.
First, let’s look at the problems with PEP as a meaningful guide to law firm success. It has its virtues, no question, primarily as a rough equivalent to corporate return on equity. But it is deeply unreliable as a single gauge of law firm profitability and success, since it ignores elements such as sustainability, efficiency, client and non-partner satisfaction, and corporate social responsibility, among others (not to mention the transparency and reliability of the figures themselves).
Two articles published last year by lawyers at UK law firms nicely eviscerate the value of PEP as a stand-alone metric, one by Allen & Overy partner Guy Beringer in March 2007 and the other by Philip Fletcher of Milbank Tweed in a May ’07 LegalWeek article. Together, they enumerate many of the critical success factors for which PEP doesn’t account.
Philip produces a comprehensive list of what PEP can’t cover: sustainability of revenue over time, the skewing influence of superstar fee earners or one-time revenue boosts, divergent accounting practices, currency differentials in foreign offices, debt levels, recruitment and retention efforts, pro bono work, and overall collegiality. PEP speaks little or not at all to these factors. For his part, Guy lists four reasons why PEP is not only inappropriate, but even dangerous for firms to follow:
First, it ignores the two audiences that determine the success or failure of a law firm: its clients and its people. Second, it tells you almost nothing about the underlying performance of a firm in terms of efficiency and sustainable profitability. Third, it is out of touch with a world which increasingly requires a demonstrable level of corporate responsibility and a broader contribution to the communities in which firms operate. Fourth, it is a calculation in which both the numerator and the denominator have become more impressionist than real. Continue Reading